Who knew that Percy Pig would become the poster child for Brexit trade disruption? Few people outside of loyal Marks & Spencer grocery shoppers had ever heard of the confectionery brand before January and even fewer knew or cared that it was manufactured in Germany before being shipped to a warehouse in Scotland for onward distribution to shops throughout Britain and Ireland.
And just about nobody seemed to know that the arrival of an EU-manufactured sweets shipment in the UK could make it liable for customs duty when it was exported to another EU country. But this was not some administrative oversight that had arisen as a result of the breakneck pace at which the Trade & Co-operation Agreement (TCA) was hammered out. It was quite deliberate.
“The Percy Pig issue is not an omission,” says KPMG tax partner Glenn Reynolds. “It’s not an unintended consequence – it is part of the trade deal. UK supply chains are not supposed to be seamless any more because Britain is now outside the customs union. Trade is not supposed to be frictionless. The status quo was a streamlined distribution system based in the UK but that won’t work any more.”
What’s at issue here is a trade regulation known as rules of origin. While the TCA allows for quota- and tariff-free trade in goods between the EU and the UK, that only applies to goods originating in the two partners. If the goods concerned contain more than specified proportions of materials originating from outside of the country concerned, they are deemed not to originate in that country and will be subject to customs duties at World Trade Organisation (WTO) rates.
And things get quite complex with goods shipped from the EU to the UK for further processing before being exported again. “The classic example is cornflakes from Spain being shipped to the UK and repackaged before onward shipping to Ireland,” according to Reynolds’s colleague at KPMG, Niall Savage. “Under the new rules of origin, they are subject to tariffs on the way into Ireland as they lose their EU status and don’t gain UK status as the level of work done on them in the UK isn’t sufficiently high. The new rules also affect UK retailers importing clothes, home furnishings, and so, from China and re-exporting them to the EU, which will now potentially incur additional customs charges.”
Exiting markets
He says UK retailers are considering strategic options and may exit certain markets if supply chain solutions cannot be found. “This provides potential competitive advantages to EU manufacturers and retailers,” he adds.
Many people were caught by surprise by these new supply-chain complexities, partly due to the fanfare that greeted the TCA, according to Michael Nolan, managing director of customs clearance agent Declaron. “A huge part of the problem was everyone wanted to talk about the success of reaching a deal,” he says. “At least the hauliers and the trade associations were saying it wasn’t a get-out-of-jail-free card. People did sit back a bit though.”
Declaron director and BDO partner Carol Lynch says there are solutions to allow Percy Pig to cross borders without the burden of customs duty but that these have to be thought out in advance. “When EU products go to the UK, they lose their EU origin and effectively become stateless. WTO duty rates come into play. There are a few solutions. One of them is to use a bonded warehouse in the UK, but that can be expensive. Another is returned goods relief.”
The TCA provides that where products originating in one party are exported to a third country, then returns to the original party can retain their origin status as long as the returned products are the same as those exported and have not undergone any operation other that what was necessary to preserve it in good condition.
“This allows you to reimport goods without payment of customs duties where those goods were and can be proven to have been originally exported from the EU are in the same state as when they were exported,” Lynch adds.
It sounds simple but there are catches. “You need to set up audit systems to get goods to qualify for returned goods relief,” she says. “You will have to provide proof of export and proof that the goods have not been altered, for example.”
Long-term problems
The sheer volume of trade between the two islands has led to many of the early supply chain issues but there are longer-term implications to be considered, according to Mazars VAT director Alan McManus. “Goods coming through the UK or via the land bridge run a double duty risk,” he notes. “There are also possible VAT at point of import issues. Importers will need to look closely at the terms of the delivery documentation and understand who is responsible for getting goods delivered along the chain. In the long term this will lead to companies looking at alternate supply chains. It may be practical to ship dry goods direct from the Continent, but with fresh goods like Dutch flowers it may not be practical to bring them on the long sea route so they may have to transit the UK in a sealed container without being opened.”
Sourcing directly from European suppliers and avoiding the UK land bridge will increasingly feature in supply chain strategies, according to Mick Curran, chief executive of the Chartered Institute of Logistics and Transport. “The land bridge involves four ports and all you need is one delay and your 40 tonnes of shellfish in the back of the truck is spoiled. We will see a lot of companies changing to lo-lo (lift on, lift off) instead of ro-ro (roll on, roll off) freight on direct sailings to mainland Europe. It can be cheaper because you don’t have trucks and drivers sitting idle on a ferry for days. Also, smaller more fuel-efficient container ships can carry as much freight as a much larger ferry. You are taking a risk with the land bridge, it will only make sense for short shelf life fresh goods.”
People are already reshaping supply chains, he adds. The large FMCG (fast-moving consumer goods) retailers just changed their algorithms. They are ordering earlier to build in the possibility of delays. It’s working and we are not seeing many shortages on the shelves.”
Serious implications
While Percy Pig may have generated some hilarity in certain quarters, the supply chain disruptions caused by Brexit have had very serious implications for Irish manufacturers such as Wilker Auto Conversions of Clara, Co Offaly, which recently announced a temporary production shutdown due to component shortages.
“A lot of Irish companies are relying on British suppliers for components for products that they sell all over the world,” says Enterprise Ireland regional director Giles O’Neill. “That seamless supply is no longer guaranteed, and companies will need to overcome that challenge.”
The days of frictionless trade with the UK are gone and companies searching for seamless supply chains will probably have to look beyond our nearest neighbour in future.