Political uncertainty in the UK impacts retail industry
Recent political uncertainty and a lack of clarity about the UK’s intended exit from the EU, have made it difficult for retailers to effectively plan for life beyond Brexit. However, consumer confidence aside, some retailers who failed to hedge their currency exposure have already seen an increase in the cost of goods purchased from overseas. Other retailers who hedged for 12 months are also seeing their agreements come to an end and a general reluctance to increase prices means that margins for those buying from overseas, are being squeezed.
Supply Chain mapping needs to be high on the retail agenda. When the UK exits the EU, in the absence of any other agreed arrangements, World Trade Organisation (WTO) tariffs will apply to imports and exports between the UK and the EU. WTO tariffs will also apply to imports and exports between the UK and non EU countries with whom the EU currently has free trade agreements. This is likely to lead to increased administration and costs. Retailers need to consider their contractual obligations, the added costs and potential time delays in transit.
For VAT purposes, assuming the UK leaves the single market, goods supplied to UK retailers would become imports and so would need import VAT to be paid at customs before the goods can be released. This could potentially create a significant cash flow disadvantage for retailers importing expensive goods, as this VAT will only be recoverable on the next VAT return.
The impact of customs duty could also be a major concern for UK retailers. If an agreement cannot be reached for the UK to be part of a customs union with the EU, then customs duty may be charged on the import of goods from the EU, which is not recoverable, so would be an actual additional cost for UK retailers. Likewise for UK retailers selling to the EU, the goods may attract duty in the recipient country, potentially deterring EU customers from purchasing from the UK.
Despite the uncertainty surrounding trade relations, tariffs and VAT, retailers are having to plan and consider for all the potential changes that may lie ahead. Some companies are considering the creation of an EU hub to ensure that they maintain access to the free market, whilst others are throwing their net further afield and exploring the possibility of extending their supply chain beyond the EU to more price competitive countries. For some companies, moving their sourcing back to the UK may be the most appropriate move, although this will obviously be dependent on the availability of the same quality of product in the UK.
If yoy would like any further information please get in touch with Alison Conley, Partner and Head of Retail and Consumer Sector Group.