How P2P automation can improve post-Brexit compliance for CPG companies
Brexit has slowed the supply chain — from production to distribution, and beyond. For many CPG companies, P2P automation is the only way to ensure post-Brexit compliance and financial survival.
Why paper-based accounts payable processes won’t work in a post-Brexit economy
As a result of the post-Brexit UK-EU trade deal that took effect 1 January 2021, multinational organisations based in the United Kingdom — or that conduct business in England, Wales or Scotland — have had to reconsider their regulatory compliance and cross-border operations. While the UK government has introduced a number of measures aimed at easing the impact on administrative processes and cash flow, Brexit has slowed the supply chain from production to distribution and beyond. For consumer packaged goods (CPG) companies, organisational health depends on adaptability to significant customs and VAT changes. The most effective way to ensure your compliance — and increase your efficiency and cash flow — is to automate your accounts payable (AP) processes.
What Brexit and the post-Brexit trade agreement mean for CPG customs and compliance
On 23 January 2020, the EU Withdrawal Bill became law, outlining a transition period that ended on 31 December 2020. As of 1 January 2021, the UK operates independently of EU laws and requirements, and under a unique free trade agreement with the EU, known as the Trade and Cooperation Agreement (TCA). CPG companies are now tasked with keeping up with the changes, and:
- Ensuring their vendors are prepared
- Tracking imports, exports, and associated taxes and fees
- Complying with new country/VAT mandates
- Paying suppliers on time
Following are the changes now impacting CPG organisations importing and exporting to and from the UK.
The UK has a customs border with EU countries, with full customs controls. Additionally, the UK and EU now trade under the TCA.
As moving goods between the UK and EU is now considered importing and exporting, this means that customs and tariffs (as well as VAT) may be payable on imports. For AP departments at CPG companies, this will require customs declarations, and an understanding of previously unnecessary commodity and customs procedure codes. You’ll also need to know how the TCA applies to your business.
The TCA, preferential treatment, and Most Favoured Nation rules
Also referred to as duty, tariffs are a form of import tax applied by the country to which the import is made and calculated at customs based on the commodity code. Following Brexit, the UK Global Tariff (UKGT) replaced the EU’s Common Customs Tariff in the UK, applicable to all imports from countries with which the UK does not have a free trade agreement.
However, under a ‘preferential treatment’ clause in the TCA, for any product that previously moved freely during the UK’s membership in the Common Market, there aren’t any customs duties or limits to the quantity that can be imported or exported between the UK and EU. There are, however, new customs formalities and documentation requirements.
To qualify for this preferential treatment, the TCA’s ‘rules of origin’ must be met. According to the rules of origin, your goods (or the materials used to make them) must originate in the UK or EU — and must be accompanied by a supplier’s declaration or equivalent document providing ‘importers knowledge’ of the origin.
If preferential treatment is not used, the World Trade Organisation’s Most Favoured Nation (MFN) rules apply, which dictate that goods coming into the UK may have customs duties applied according to the UK Global Tariff, and goods exported from the UK to the EU might have the EU’s Common External Tariff applied by the EU country to which they’re sent. In addition, there may also be quotes limiting the quantity that you can trade.
To determine which option is best for your CPG business, consider the cost of the customs tariffs you’d incur, and whether you might be restricted by a quota; if you follow the MFN rules, you have more freedom to choose where you source products or the materials used to make them.
Exporting: an overview
For those exporting to the EU who have been authorised by HMRC, the simplified declaration procedure allows you to initially submit a pre-shipment advice declaration for certain exported goods and provide the rest of the customs export information at a later date.
You can also simplify export paperwork requirements using the entry in declarant’s records (EIDR) procedure for goods that don’t need a pre-departure declaration.
If you choose not to leverage a customs intermediary, you’ll need to register for and use the National Export System (NES) to electronically submit your export declarations; or, for a fee, you can use your own import/export software to access a Community System Provider (CSP) with a Customs Handling of Import and Export Freight (CHIEF) registration.
Depending on what you export, licences and other rules may also be required before you can trade.
Currently, customs declarations require software that can integrate into the government’s CHIEF system, and must include your Economic Operator Registration and Identification (EORI) number, commodity code, customs procedure code (CPC), the value of goods for customs purposes, the weight or size of goods, and the country of origin.
Eventually, this will be replaced with the Customs Declaration Service (CDS) that’s already in use for goods shipping to or from Northern Ireland.
If you’re based in Northern Ireland, you may need an EORI, too, and perhaps even a second XI-series EORI. In fact, you may need up to three different types of EORI, depending on the location and nature of your business.
Deferred customs declarations and simplified declarations for imports
Until 30 June 2021, importers in England, Wales, and Scotland can elect to defer customs declarations and payments for up to 175 days after the import date. To do so, you must apply for a duty deferment account and be authorised to use the Simplified Customs Declaration process, or Customs Freight Simplified Procedure (CFSP).
Once authorised, you can either make an entry in your own commercial records or submit a simplified customs declaration before import. Then, up to six months after the import date, you must send HMRC a supplementary customs declaration and pay any customs dues (and VAT fees).
Beginning 1 July 2021, deferments will no longer be available, but you’ll still be able to use the Simplified Customs Declaration process.
The commercial terms of trade (or Incoterms) in your contracts related to importing goods can help you understand who is now responsible for any customs duties, import VAT, or additional transportation and insurance costs, as well as determine when risk and liability pass from the seller to the buyer with customs borders.
Consult with the organisations you use to transport goods across borders as soon as possible to learn what they now require, and when. You may be required, for instance, to use a specific border inspect post or prenotification of the movement of goods.
Your importing and exporting checklist
The way Value-Added Tax, or VAT, is paid and collected has changed for businesses importing goods to the UK. However, while administrative requirements are different because of the new postponed VAT system, there should be negligible cash flow impact due to measures implemented by the UK government.
Postponed VAT for goods imports
Post-Brexit, businesses registered for VAT that import goods valued in excess of £135 into England, Wales or Scotland can use a system called postponed VAT accounting, through which they account for the import VAT on their VAT return, rather than paying it immediately. This is designed to remove the impact to cash flow when importing.
Postponed VAT accounting is optional, unless you’ve deferred custom declarations and payments. Also, for imports less than £135, you still need to account for VAT using the new e-commerce rules — even if your products aren’t traded via e-commerce.
VAT on imports valued at £135 or less
For overseas goods valued at £135 or lower arriving into Great Britain from outside the UK, the following rules now apply:
- Low Value Consignment Relief (LVCR) for imports valued at less than £15 is no longer available
- Online marketplaces (OMPs) involved in facilitating the sale are responsible for collecting and accounting for the VAT on that exchange
- VAT on imports with a consignment value of £135 or less have VAT applied at the point of sale, instead of as import VAT at customs
- For B2C transactions, the UK VAT is charged and collected by the seller; for B2B transactions, the VAT is reverse charged to the customer
VAT on exports
As of 1 January 2021, exports from the UK to EU countries are now treated like those to non-EU countries: zero-rated for UK VAT, regardless of whether you’re exporting B2C or B2B. Of course, this does not mean that you can simply ignore VAT; rather, you must include your exports as part of your VAT accounting, and apply a 0% VAT rate.
Also, if you sell B2C to the EU, you might need to register for EU VAT and appoint fiscal representatives, depending on the requirements of the country or countries in which you sell.
Your VAT checklist
Turning post-Brexit obstacles into opportunity with P2P automation
With the customs and VAT changes — and resulting supply chain slowdowns — caused by Brexit, the need for improved visibility, efficiency and compliance has never been greater. Nevertheless, to this day most CPG firms continue to rely on manual AP processes that cost more, take longer, offer less visibility, and do not support regional tax reporting regulations. This represents a great opportunity to outperform your competitors.
With an e-invoicing solution, everything is automated, including:
- Receipt and validation of invoices
- Extraction of header and line-item information
- Matching invoices with purchase orders
- Matching invoices with proof-of-delivery documents
- Routing and tracking of invoices for approvals
- Posting of approved invoice data to an ERP or GL system
Tungsten Network: the digital foundation for world-class performance
We at Tungsten Network aim to be the world’s most trusted business transaction network, by using data intelligently to strengthen the global supply chain. We process invoices for 74% of the FTSE 100 and 71% of the Fortune 500, enabling suppliers to submit tax compliant e-invoices in 54 countries, and last year processed transactions worth more than £164 billion for organisations such as Henkel, Kellogg’s, and Mondelēz International.
Through Total AP, Tungsten Network is the digital foundation for world-class performance.