Brexit and the pandemic: a double whammy for UK manufacturers
While the recent news of potential Covid-19 vaccines is encouraging, the spectre of Brexit coupled with the ongoing pandemic is placing huge pressure on manufacturing businesses up and down the country.
Many of these businesses do not have adequate plans in place to deal with the implications of Brexit. This is partially because of the pandemic and partially because of the confused and sometimes contradictory messages coming from the UK government on the path they should take to prepare for the divorce from the EU. In the coming months businesses should look to their supply chain, cash flow and start to think about investing in their workforce.
One of the main areas of concern for manufacturing businesses when it comes to Brexit is managing their supply chain. Indeed, a disrupted supply chain could be catastrophic to a business. According to our recent MHA Manufacturing and Engineering report, supply chains have held up fairly well during the pandemic, but the risks presented by Brexit are on a different scale.
After Brexit – be it a deal or no deal outcome - the risk of goods being delayed at ports and not being exported/imported in time due to procedural failures, or International Commercial Terms (Incoterms), is a worrying one. Businesses would be wise to employ a customs agent who can help them ensure they have the correct paperwork and understand all aspects of Incoterms.
With so many businesses under pressure due to the pandemic, there is also a heightened risk suppliers will cease trading. In this situation, where an alternative supplier needs to be found, businesses should stress test any risks the new supplier may face, including whether they would withstand increased demand for supplies, and how well they are prepared to deal with the Covid-19 situation.
Cash flow and VAT
Cash is king is an often repeated mantra, but for a good reason.
Businesses should be extra vigilant and follow good cash flow practices in preparation for Brexit, especially with the added pressure of the pandemic. They should consider applying for relevant support loans, such as the Bounce Back Loans, CBILS and CLBILS, while they are still available. These measures seem to have achieved their aim of keeping money circulating around the economy. UK manufacturing businesses are not generally reporting significant financial hardship and signs point to the fact that they have learnt their lessons from the last recession and have tried to protect cash flow and cash resources. However, now it is not the time to be complacent.
Projected cash flows, stress tested for lost or delayed delivery, sales or payments should be a given, but other measures such as taking advantage of the government’s relaxation of the guarantee requirement for a duty deferment account should also take a more prominent place as the 31 December date comes ever so closer.
When it comes to VAT, failure to understand customs and VAT obligations of importing into the EU can result in irrecoverable Import VAT. At an average of 20%, this will have a serious impact on cash flow, and a manufacturer’s bottom line.
VAT rules are complex to navigate. As a general rule, VAT is due on a supply of goods based on where the goods are located at the time of sale and who your customer is.
If a manufacturing company holds stock in the EU, it is obliged to be registered for VAT in that country. Therefore sales teams must understand which VAT rate to quote when negotiating any sale. Once the sale has been made, the cross border nature of the sale must be planned for. Within the EU, businesses need their customers’ VAT number to generate a VAT free sale and movement of goods from the stock location.
The skills gap and how this can be solved has been an enduring issue for UK manufacturers and the changes to free movement of labour which Brexit will bring about have exacerbated this situation. There has been increased focus on apprenticeships to train a strong manufacturing workforce in the UK but there is still some way to go. Advances in technology have changed the type of labour needed, but the skills gap persists and continues to sound a warning to businesses. The current environment might however actually be the opportunity to make a significant investment in the workforce, to ensure they are prepared for the oncoming digital transformation when the economy gets back on its feet.
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To discuss this and how we can help your manufacturing business, please get in touch with a member of our specialist team.