No deal Brexit- in the food and drink sector

1st November, 2018

Point of origin – preparing for a no deal Brexit in the food and drink sector

By Mark Bishop

Key points

In the event of a no deal Brexit:

  • A paper declaration (Form C88) will be required for any good imported into the UK (including from within the EU) and electronic export declarations will be required for almost all goods transported out of the UK
  • An average tariff of 22% will be applied to food items imported from the EU
  • From 29 March 2019 all food manufacturers will need to understand how to determine and report the ‘origin’ status of produce sent to the EU
  • HMRC will offer a range of duty deferment and suspension methods and allow import VAT to be paid through the VAT return rather than on (or soon after) entry
  • Access to TRACES will end and will be replaced with a new FSA notification system
  • There will be changes to labelling, logos and Geographical Indication.

 

As March 2019 draws closer, the eventual outcome and direction of Brexit remains shrouded in uncertainty. The government’s lead Brexit proposal, also referred to as the Chequers agreement, is currently a “Facilitated Customs Arrangement” that would establish a Free Trade Area and mutual zero tariffs on EU trade. However, there remains a significant chance of no deal being reached.

For the food and drink sector, this poses a particularly high risk to supply chain management. In a world of ‘just-in-time’ deliveries, any unanticipated delay could cause havoc, while changes to compliance requirements may find businesses caught out.

BDO’s Food and Drink Survey 2018 found that 2% of respondents predicted Brexit would have a positive impact on the short term trading performance of their business. In contrast 31% believe Brexit will result in a negative impact on trading performance within a year. This implies that the majority of businesses in the sector either believe they will not be affected or have not given the question thought.

Whatever your position on Brexit, the food and drink sector businesses should be scrutinising their supply chains to identify potential delays, issues and costs as a matter of urgency. In the event of a no deal scenario, the UK will fall back on “Third Country” duty rates. In 2017, the British Retail Consortium calculated that imports of food from the EU which do not currently attract duty, could face an average tariff of 22%.

DEFRA figures from 2016 showed that only 28% of the UK’s Food and Non-Alcoholic drink production for the non-domestic market was exported outside of the customs union. 72% was sent to fellow EU member states and as such were treated as a “dispatch” rather than an export for VAT purposes. Unless the government succeeds with its proposal for a free trade area, there will be a range of new compliance requirements and administrative burdens.

Customs declarations are documents that allow authorities to track the entry and exit of an item to a given customs territory. In the event of no deal, a paper declaration (Form C88) will be required for any goods imported into the UK (including from within the EU) and an electronic export declaration will be required for almost all goods transported out of the UK.

A no deal outcome will also mean that from 29 March 2019 all food manufacturers will need to understand how to determine the ‘origin’ status of their produce sent to the EU, a requirement currently only applicable to non-EU exports. This is because the origin status is used to evidence that a particular product is party to a preferential (reduced or nil) rate of duty and determines whether the goods are subject to a trade measure.

Specific rules determine a minimum amount of processing that must be performed on a product for it to be classified as ‘originating from the UK’. This is often coupled with tests which examine the relative value and origin status of the component parts of a given product. Origin is a highly complex area of compliance and businesses with no exposure to these considerations should seek to educate themselves. The first step is understanding your supply chain and being able to map who your suppliers and customers are, where your raw materials have been derived from and where exactly your finished products go. Contracts should be reviewed and, if beneficial, renegotiated based on the new risk and responsibility considerations that Brexit brings.

Businesses in the sector should also keep up to date with the range of Industry Specific Notices published by HMRC in contemplation of a ‘no deal’. Using the term EU in origin labelling will no longer be correct for food or ingredients from the UK. For pre-packed products sold in the UK, the label would need to include the name and a UK address of the responsible food business operator. Furthermore, a food business in the UK selling pre-packaged food in France can currently provide the address of the business in the UK. In a ‘no deal’, the business would need to provide an address for the responsible business or importer into the EU, in one of the remaining EU member states.

For producers and processors of organic goods, UK organic operators would not be permitted to use the EU organic logo. UK businesses would only be able to export to the EU if they were certified by an organic control body recognised and approved by the EU to operate in the UK. For food products that enjoy Geographical Indication (GI) protection, a new UK logo for GI products is planned whether or not a Brexit deal is signed. It is anticipated that the EU will continue to recognise UK GI Status, but where this is not the case, application to the European Commission as a ‘third country’ producer may be required.

The UK will decide which food imports will be considered ‘high risk’. If the UK leaves without a Brexit deal, access to the EU import notification system, TRACES, will likely cease. This means importers to the UK from the rest of the world will no longer be able to use TRACES to notify the UK about high risk goods (i.e. products of animal origin and specific high-risk foods). Such goods will need to be checked as they enter the UK and a replacement notification system administered by the Food Standards Agency and DEFRA will be used instead.

Businesses that have never traded outside the EU should also consider if and when they should apply for Duty and VAT deferment, which can delay the payments to aid cash flow. This requires applying for a Comprehensive Customs Guarantee to provide security against the deferred liability. Relevant special procedures should also be identified, as these may suspend duty on some items. In the event of no-deal, businesses may find some relief from HMRC’s intention to allow import VAT (where applicable, as lots of food items are zero rated) to be paid through the VAT return rather than on (or soon after) entry. In summary, there are a range of factors to consider and the sector as a whole would do well to make sure that the coming months are time well spent.

Customs Declaration Service (CDS) – Update

Further to our article in the PKF Francis Clark Summer 2018 Food & Drink Newsletter, HMRC have announced that CDS – the replacement for the existing CHIEF system responsible for recording import and export entries, will come on-line for most importers from November 2018. Exporters will follow later in March 2019 when the additional functionality required is delivered.

 

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