While it came down to the wire, Boris Johnson and his team did manage to deliver a Brexit deal. Retail Week goes behind the sloganeering to see what has changed for retail and what that will mean going forward

  • Zero-tariff deal welcomed but retailers to face extra red tape and paperwork on importing and exporting goods
  • Food retailers scrambling to find suppliers in Ireland and Northern Ireland to avoid checks in Irish Sea
  • VAT and customs duty as bad as no-deal outcome for fashion retailers
  • Changes to rules of origin could see some products face tariffs at border regardless

In a year where the sector had been hammered by coronavirus, this was a Christmas reprieve that businesses and sectors across the UK had hoped for: a £660bn free-trade deal with the UK’s closest and formerly largest trading partner on Christmas Eve. 

Boris Johnson called it a “deal that will allow UK goods and components to be sold without tariffs and without quotas in the EU market”.

However, behind the prime minister’s assertions that the deal means the UK can “have its cake and eat it”, scrutiny shows that inevitably retailers of all kinds that do any business with the EU or with countries outside the EU that had free-trade agreements with the bloc yet to be rolled over will need to adapt to new regulations and layers of red tape that weren’t there before. 

For BRC policy advisor and William Bain, the fact the new deal ensures zero tariffs on imports and exports is welcome. However, he is still concerned about elements of the deal that were not agreed prior to the announcement. 

“A deal was always better than a no-deal, so three cheers for that. However, it goes without saying that there are some elements of the agreement which aren’t what we would have liked,” Bain said.

Extra paperwork

The fact the deal does not mean goods crossing the UK/EU border will face extra tax, as would have been the result of a no-deal, has been met with almost universal relief in the retail sector. 

Calais lorries

Retailers have been concerned about delays crossing the British/French border

In an update on its Christmas trading on Tuesday, Next chief executive Lord Wolfson said: “Following the announcement of the free-trade deal between the UK and EU, we do not anticipate any increase in customs duty costs in the year ahead.”

There had also been mounting fears in the industry, exacerbated by the closure of the border with France in mid-December following the emergence of the new Covid strain in the UK, that a no-deal Brexit would lead to huge delays in supply chains at ports and a shortage of stock on shelves. 

The deal keeping the borders open has mitigated that, as Wolfson added: “We do not anticipate that Brexit will have a material impact on our ability to import and export stock in the year ahead.”

Morrisons chief executive David Potts said while the retailer has not experienced any major disruptions to imports from the EU over the last few days, some lines had been affected. 

“We’ve got around 81 items that we’d rather have in Britain than over in mainland Europe. But I think that’s just where a local haulier in France didn’t fancy it, or something. So we are not really concerned about that. It’s things like a few cans of fruit, some pasta,” he said.

Northern Ireland is now effectively still in the customs union and the single market and, as a result, operating on different trading terms from the rest of the country

However, Potts pointed out that due to the time of the year, with grocers having stocked up pre-Christmas, historically the haulage routes between the UK and mainland Europe are much quieter than usual. “Any delays on the back of paperwork and processes post-December 31, I think are yet to be felt or yet to be visible,” he added.

Even so, moving products across borders has changed. By virtue of leaving the EU’s single market and customs union, the deal ensures more red tape for those operating supply chains. 

Traders in England, Wales and Scotland will need to make customs declarations, while some products like food and plants will also need special licences and certificates or to be labelled in specific ways. 

Also, while the process has been delayed for six months, in the summer the EU will begin carrying out checks on these new processes at the border, which will lead to some delays. 

One executive of a major health and beauty retailer said while there would be some added administrative costs exporting and importing across borders these would be relatively minor. 

PwC director of indirect tax Paul Hammond says the last-minute nature of the deal has made it more expensive for retailers. “You can make sure goods can move across the border but will need to accept their will be additional frictional cost which you can deal with in the first quarter.”

Fellow PwC executive Michael Simpkins says the consultancy saw a ”surge in interest” in its customs broking services at the tail end of 2020, particuarly from mid-tier private companies. ”A lot of these companies thought they could do it themselves and have been through a pain curve and realise the complexity of what is actually required and discover they need to access certain systems to make it happen. They have realised they’ve left it late in the day so now are reaching out to a customs broker and experts. 

The Northern Ireland question

Perhaps the key difference between Johnson’s Brexit deal and the one previous prime minister Theresa May agreed with the EU revolved around Northern Ireland. 

Brexit lorry

The grace period for border checks in Northern Ireland ends in the summer

Whereas May had tried to keep the UK in the single market and customs union to avoid a hard border in Ireland, Johnson’s compromise to take the rest of the UK out of both was to draw a border in the Irish Sea between the rest of the UK and Northern Ireland. 

Northern Ireland is now effectively still in the customs union and the single market and, as a result, operating on different trading terms from the rest of the country. 

This has put a number of food manufacturers in particular in a bind about supplying their Northern Ireland businesses with produce from the other nations. The process has overnight become more time consuming and more expensive.

As a result, many food retailers are now looking to source more in both the Republic and Northern Ireland. 

For the first time, UK pureplay and multichannel retailers face paying import VAT and customs duties for selling into the EU

This has manifested itself most visibly with around 100 Spar SKUs appearing on the shelves of Sainsbury’s stores in Northern Ireland. 

A spokeswoman for the retailer said: “A small number of our products are temporarily unavailable for our customers in Northern Ireland while border arrangements are confirmed. 

“We were prepared for this and so our customers will find a wide range of alternative products in our stores in the meantime and we are working hard to get back to our full, usual range soon.”

In the days since this article was first published, the supply issues facing supermarkets getting produce onto shelves in Northern Ireland has only grown. Customers in the region of supermarkets such as Tesco, Sainsbury’s and Asda have been complaining about empty shelves at local branches, which the government has put down to many hauliers and drivers not having the correct paperwork in place after January 1. 

Sainsbury’s chief executive Simon Roberts says that issues around increased redtape were excarbated by the closure of the French border in December, although the situation was improving. However, he noted that the lateness with which the Brexit deal was struck has inevitably lead to some confusion and issues as well. 

“The flow of goods from Europe into the UK after the port situation has progressively improved, and is in decent shape at the moment. We’re getting products across into Northern Ireland, and the vast majority of our products are available on sale for customers now in our 13 stores in Northern Ireland.

“The late resolution of the Brexit situation, meant we were working right up to the last minute to make sure that the Northern Ireland situation was in hand. On top of the port disruption, which was significant for a few days, but in the end it didn’t manifest into significant availability issues”.

For Bain, bigger tests for food retailers which operate in Northern Ireland may well come in three or six months time, when the grace period for border checks on food products ends.

“For the initial period, you’re probably looking at 1% of trucks being opened up as they go into Northern Ireland – but there is a review on April 1 to decide whether health checks on produce will be required.

“After that three months period, if it does move to full compliance on export health certificates, the issue of cost around those will become a significant one,” he said.

VAT on ecommerce 

Another big difference is that for the first time, UK pureplay and multichannel retailers face paying import VAT and customs duties for selling into the EU. 

Having left the EU, UK retailers selling into the bloc will also not be able to fall back on distance selling EU VAT thresholds, set up to encourage trade between near neighbours. 

While there are options open to UK retailers, they either involve registering for VAT in each country they sell into, which is an added administrative burden, or passing those costs on to wholesalers and customers. 

For example, retailers importing a t-shirt from China for £10 wholesale, would pay £1.20 in terms of customs duty on that product. Now, if they then wanted to sell that t-shirt back into the EU from the UK to the customer for £30, they would pay that 12% customs duty but on the £30 price. 

As one fashion chief financial officer explained: “You inflate the duty charge based on your selling price into the EU.”

While there are certain thresholds under which certain items won’t be charged VAT, and plans are in the works to simplify the system in July, for the time being at least the CFO said fashion retailers looking to sell into the EU from the UK are in a tough position.

“For lower-value sales, you don’t charge duty, but any higher value sales above the threshold you have to charge duty on to the customer or absorb it. With VAT, either we register with every country in the EU or we write off five or six months of irrecoverable VAT. 

“This is almost the equivalent of no deal for fashion retail. There are no differences between this deal and no deal,” he said. 

Rules of origin 

Another big change for certain parts of the retail sector comes around the rules of origin. 

In a nutshell, this means that for products to not be hit with tariffs under the deal they will have to be either wholly obtained within either the UK or EU or substantially transformed. In other words, they must be made in Britain or turned into a completely new product. 

However, this could cause confusion. Hammond questions: “If you import fruit and vegetable and manufacture them into a food product in the UK, was the UK it’s place of origin?”

Brexit talks

Source: Number 10

Brexit negotiations went down to the wire on Christmas Eve

Bain said this will disproportionately affect fashion and apparel retailers: “The rules are problematic; they offer much less flexibility than we had hoped for. Clothing and textiles involve the accumulation of different fibres or different parts of a good from different countries, different processing going on in different countries,” he says. 

“There are some concerns about what it means for the just-in-time supply chains on many fashion items.”

For retailers affected by these changes, the agreement offers some leeway, with rules of origin paperwork not needing to be in place until December 31, 2021. However, that does not mean that some items will not still be hit with tariffs if they do not meet the criteria in the deal, which could, in turn, lead to items being sold at a loss. 

For Retail Remedy managing director and former Asda executive Phil Dorrell, changes in rules of origin could also impact “customers’ ability to buy and the loss of promotional activity” on fresh produce items such as citrus fruits and leafy greens that either can’t be grown in the UK at all or only grow seasonally.

The fashion CFO said most clothes sold in the UK will enter in a finished form, so the risk of paying on imports will be relatively low. However, the complexity comes for retailers bringing clothes in from outside the UK, to sell back into the EU. 

On top of all of these changes, and others, to the trading relationship between the UK and EU, Bain and others are keen to emphasise that the coming months and years will see further changes. 

Despite the claims of “getting Brexit done”, negotiations will continue. The deal itself can be exited in the next four years or will need to be reapproved in five. Also, numerous grace periods and extensions are still being negotiated over the coming weeks and months – any and all of which will have repercussions for retailers. 

While the deal has undoubtedly given the UK, the sector and customers some feelings of closure and confidence, it is still clear that the changes that occurred on January 1 will continue to be felt for years and decades to come.