Fashion exporters heaved a huge sigh of relief at the end of 2020 when it was announced that the UK and EU had reached an 11th hour trade agreement before the end of the Brexit transition period on 31 December 2020.
However, those expecting the deal meant trade could carry on in the same friction-free, tariff-free manner as before were in for something of a shock on 1 January 2021 when shipments were stuck at borders due to incorrect paperwork or recipients being issued with unexpected additional costs in order to receive their parcels.
With British brands shipping SS21 stock to their B2B customers and trying to maximise e-commerce opportunities internationally to their B2C customers while stores remain closed, any hold-ups and additional costs are not only unwelcome but could potentially destabilise businesses completely.
One month on, it’s clear that the problems were more than just teething trouble. With shock tales of retailers deciding it’s potentially easier to write off stock they are struggling to get across the border and burn it, we asked experts in exporting and logistics to explain the issues and offer up some solutions to battle-weary fashion exporters.
What are the key issues?
Adam Mansell, CEO of the UKFT, outlines them.
- Rules of origin
There are very detailed rules of origin in the agreement. Very simply unless the product in made in UK/EU using UK/EU materials then there is a tariff to pay. 12% for clothing 8% for fabric. Rules of origin are complex but this basic scenario holds true. In the past we could import from Bangladesh duty free and then re-export to France with no duty. Now duty is payable on that re-export. If a pair of trouser is made in the UK but with Indian fabric, duty is payable on exports to the EU
- Import VAT
Import VAT is now due on all sales into the EU (and vice versa). If companies are VAT registered, they can claim this back but they have to claim back from each country so a very long process and can tie up cash. Small businesses who are not VAT registered cannot reclaim VAT.
- Shipping terms
Depending on your shipping terms your B2C consumers in Europe may receive their order plus an invoice from the courier for the duty, VAT and other import costs. Customers are refusing to accept the goods or pay the extras. The brands are refusing to take back the delivery as they will have to pay the courier to return it. Normal returns may also attract duty and definitely require paperwork.
Courier companies are all charging a Brexit surcharge. It can be as much as 3x more expensive to send to the EU now compared to December 2020. Courier companies are also incorrectly interpreting the new rules meaning they are refusing to ship some products.
- Red tape
The red tape around trade has grown from virtually nothing to hugely complex forms. Border officials are underprepared. Companies will adapt to the new red tape. What they will be unable to cope with is the extra costs. Those are here to stay.
What do the logistics experts say?
EV Cargo Global Forwarding chief executive officer Clyde Buntrock
“We are seeing an unprecedented spike in enquiries for setting up distribution platforms in Europe, specifically Benelux and Northern Germany and also provision of customs warehousing in the UK.
“The customs and duty changes on top of the huge shift to online accelerated through COVID-19 means the rule books are being rewritten.
“During 2020 we have also seen growth in our European operations through more directed shipped business from Asia into Europe and we predict this is going to continue well into 2021 and beyond.
“If you haven’t already invested in your European infrastructure, you are already behind the curve.
“The new rules for origin criteria in particular are presenting a number of challenges.
“One of the best examples would be UK retailers who import goods from Asia, paying customs duty for goods arriving from countries such as China, where there are no preference agreements and say Bangladesh, where there are preference arrangements with both the UK and European Union, so no import duty is paid.
“These goods are generally imported into general stock in the UK from where they are sold to businesses and consumers both in the UK and beyond.
“Until 31 December 2020, goods could be delivered within the EU, without any customs declaration or duty charges, so a delivery from say Milton Keynes to Paris, was no different to making a delivery from Milton Keynes to Glasgow.
“Deliveries to the EU are now required to be declared to both UK and an EU customs authority and maybe subject to customs duty, payable on the import value into the EU. For garments, this is often 12% of the value.
“There are additional costs incurred for the customs declaration process both in the UK and in the destination country.”
To minimise the impact of double duty, EV Cargo is recommending to clients that they might consider a number of options for deliveries outside the UK which include:
- Direct deliveries from Asia to the European Union, so eliminating double duty costs. In the above scenario, goods from China would only incur EU customs duty and shipments from Bangladesh could be imported into the EU free of duty using EU preference arrangements
- Importing goods into a customs warehouse in the UK, where UK duty and VAT can be suspended, with any EU duty due on the goods delivery in the EU member state
- Goods can be imported into a temporary storage facility on arrival in the UK, with the UK elements cleared as normal, while the orders for delivery to the EU can be shipped directly from the temporary storage facility without paying UK duty and VAT, so maintaining any origin status. In this scenario, the goods from China would be subject to duty in the EU, while the goods from Bangladesh would maintain their origin status without payment of duty.
Peter MacSwiney CEO of ASM (provides Customs computer software for freight forwarders)
“The first problem is that the VAT has changed so in theory, anything that comes from Europe or the rest of the world should be zero rated for VAT on export and VAT should be charged when it comes into the country, so you have to do a customs entry and pay VAT, which obviously isn’t going to go down too well for customers who are just ordering a few T-shirts.
“If the goods are worth less than £135 and the supplier registers for VAT in the UK they can then charge at the point of sale, meaning that customers can avoid paying VAT again but it still needs a customs entry to some extent.
“The second problem comes if the stuff has to be returned. If it comes, say from Italy, as soon as it enters the UK, it loses its union status, it is no longer an EU good, it has left the territory of the community. So, if, a customer wants to return an item, again say to Italy, firstly, they can’t get their VAT back if it was paid on import and secondly, when it gets back to Italy, they have to import it as Italian Returned Goods and prove that they exported it.
“So, it’s a real palaver and there appears to be no discussions about simplification.
“The really worrying bit is that European suppliers don’t really appear to have the faintest idea of how to deal with the problem.
“There are really two choices really, set up in the UK, or don’t supply. It’s pretty stark really.
“Hugo Boss, for example, has had to stop shipping to Northern Ireland for six weeks. When you get companies of that sort of size that haven’t quite worked out what they are going to do, the extent of the problem is laid bare.”
Jim Hartshorne, MD Retail & Consumer UK&I for DHL Supply Chain
“The key challenges we’re seeing for UK firms exporting to the EU are around adapting to the new customs and paperwork requirements.
“While we’ve all prepared as much as we could in advance, there will inevitably be a period of adjustment as businesses and shipping agents alike come to terms with the new trading conditions.
“We’ve been in regular contact with the government and the EU throughout, which has helped us keep abreast of the changes and advise our customers.
“Keeping the channels of communication open with trade bodies, partners, and your logistics provider will be crucial to UK firms in the coming months.
“I’m optimistic about the long-term picture for the fashion industry, and as the new requirements become more familiar, I’m confident that exporting goods to the EU will flow smoothly.”
What exactly are the changes in our trade agreement with the EU?
- New checks and procedures have been introduced at borders, including safety checks and customs declarations, that require additional costs and are causing some disruption.
- Customs Declarations are now required for all goods moving to Europe and from Europe. Businesses which have not opted to use the delayed declaration arrangement for imports, must ensure they have arrangements in place to ensure that goods are declared to Customs.
- UK firms must now certify the origin of their exports to qualify for tariff-free access to the EU.
- There are limits on what proportions of goods can be assembled from parts made overseas to qualify for tariff-free access. This applies to both imports and exports.
CHANGES TO VAT REGULATIONS
- The Low Value Consignment Relief for goods under the value of £15 has been removed.
- VAT on imports with a consignment value of £135 or lower, now have VAT applied at the point of sale, rather than applied as import VAT at customs.
- For B2C transactions this UK VAT will be charged and collected by the seller but for B2B transactions the VAT will be reverse charged to the customer.
- Businesses that receive goods of £135 or less must now account for the VAT as part of the reverse charge procedure, declaring the VAT on their next VAT Return.
- Postponed VAT Accounting for VAT Registered businesses in the UK has been introduced and applies to any shipments valued at greater than £135.
VAT ON EXPORTS
- Exports to EU countries are treated like those to non-EU countries, or zero-rated for UK VAT.
- Zero-rating goods for VAT means that no UK VAT is payable but companies still have to include the exports as part of their VAT accounting and consider any requirements for VAT in the recipient country.
What must UK businesses ensure they now have?
- A UK Economic Operators Registration and Identification (EORI) number.
- Access to a duty deferment account.
- Access to a business that can submit declarations on their behalf (generally a customs agent) to ensure that the appropriate customs declarations are made.
If all of this sounds like a nightmare, unfortunately it is rather. However some British fashion brands are beginning to work through the issues. See the second feature in our series Brexit, Borders and Bureaucracy to learn “how British fashion brands are coping”.
Additional reporting: Tom Bottomley