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What retail can learn from Next’s no-deal Brexit plan

Next is the first fashion retailer to make public the preparations it has made in the event of a no-deal Brexit.

The high street bellwether said that although departing the European Union without a free trade agreement and managed transition period is not its preferred outcome, it is well prepared to ensure business continues as usual.

Recognising there would be minimal additional administrative costs, Next said as long as ports and customs procedures are ready for any changes – and tariff rates are adjusted to make sure consumer prices can stay the same – then it does not envisage any serious impediments to future business.

Drapers examines the key findings from Next’s no-deal Brexit plan.

 

Tariffs

Next looked ahead to the opportunity the UK has to potentially lower overall tax rates with countries such as China, and said the UK already has workable trading arrangements with many of the countries Next does a significant amount of business through.

Currently, Next imports 53% of its total stock from countries benefiting from the Generalised System of Preferences (GSP). The GSP is a tariff system that provides exemptions from the more general rules of the World Trade Organization when trading with developing countries.

The government has indicated that it will replicate these rates for countries with which the UK already shares such agreements, while further noting it intends to seek continuity in respect of the UK’s current trade relationships with the EU.

Next imports 10% of its current stock from the EU and Turkey, which is in a customs union with the EU.

In the worst case scenario, Next assumed that the UK would revert to rates at an average cost of 11.8% on clothing and footwear if it leaves the EU without a free trade agreement.

In such a situation, it is likely the UK would continue to trade with countries such as France, Germany and Bulgaria on the reciprocal basis that neither levies fees against the other on imported or exported goods.

However, Next called on the government to clarify its intentions in respect of overall tariff rates in the event of a no-deal Brexit.

It said the loss of GSP relief could result in “a material increase in costs for our EU business” and, at worst, increase the selling price of goods in the EU by 2%.

 

Additional costs of bringing EU stock into the UK

Next does not anticipate that any additional data would be needed to import goods from the EU in any future scenario, since the current declarations required are already of a high standard.

The company estimates that the increase in the volume of declarations, for which additional payments for customs clearance charges would be levied, will cost around £100,000.

 

Delays at ports

Next says it is not yet clear if HMRC’s systems and personnel are sufficiently prepared to manage the potential increase in workload and data capture. The retailer said the indirect risk to operations running smoothly at the UK’s ports represents the largest risk posed by Brexit.

However, it said, there is “no reason” why goods should not continue to flow relatively frictionlessly: “The issue will be the preparedness of the UK authorities and UK businesses.”

Next proposed three potential measures that it believes would reduce the volume of work required at ports and airports.

  • Temporarily raise import thresholds for goods bought into the UK by small importers so that they can avoid customs procedures
  • Introduce self-assessment tax procedures similar to VAT for customs tariffs and duties to alleviate pressure on UK ports
  • Extent temporary “Trusted Trader” status to more operators through a simplified application process allowing checks on vehicles to take place inland or at a later date, rather than at ports

Import duties

There is a theoretical risk that stock imported to the UK could be liable for double duty if it is subsequently exported. This is because the consumer would be importing the goods at selling price into the EU from outside the free trade area. Goods sold to EU customers from the UK incur duties on their selling prices, although this is waived for orders beneath €150.

Next has set up a German company in anticipation of this potential risk, so that EU customers can be sent their goods from a German warehouse.

In order to minimise cost increases to consumers in the longer term, Next intends to increase the volume of its EU business done through Germany.

As a result of the risk of volatility in the value of sterling, Next has insured itself against any cost-price changes that may arise as a result of the potential drop in value of the pound.

 

The Drapers Verdict

In its analysis, Next stressed the reporting is specific to the retailer and should not be extrapolated to other business or industries. Smaller businesses, by sheer virtue of their size, may find it difficult to absorb the extra administration costs precipitated by Brexit. They are also likely to have less flexibility to simply open a German warehouse to cater for its EU customers.

Nonetheless, the company’s underlying expectation – that everything will be relatively fine so long as the authorities are prepared for Brexit – rings true across the board. 

The question is whether the UK is ready to exit the European Union. As we hit the six-month mark before we leave the EU retailers need clarity, and fast. 

 

 

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