- Strategy, International
- December 21, 2020
- by Eve Rouse & Rachel Bowditch
- 12 minute read
With Brexit here, we cover the key considerations for e-commerce brands. Though the impact will be as unique as your individual business, there are some common themes and general advice to get your head around.
It’s happened, we’ve Brexited. The focus in these first few weeks has been mostly on shipping and taxes, whilst we all figured out what the last minute trade deal actually meant. But even with a deal, there are other changes you need to be ready for.
How worried should I be? The 80/20 Rule
We can expect the first half of 2021 to be rocky as everyone adapts to new ways of doing things. So, let’s employ the 80/20 rule for now. There are two considerations: your customers and your supply chain.
If less than 20% of your customers are inside the EU
Then the easiest bet for early 2021 is to focus your marketing efforts outside of the EU until things hopefully calm down. You may want to target the local UK market, or other international markets, such as the USA. However, if you already have a full set-up inside of the EU (i.e. with an EU VAT registration and stock held in an EU-based warehouse), then you will be able to continue to serve the EU market from there.
If less than 20% of your supply chain is inside the EU
Then you should try to focus on marketing non-EU derived goods/materials to start with. If these EU supplies are fundamental to your business (even if they’re a low overall percentage), we’ll address this below.
With changes like this, we often end up making our businesses more complex — adding layers on top of existing processes, instead of doing a strategic review. So, let’s use Brexit as an excuse to revisit and simplify things where we can.
Currencies - what happens if the British Pound slides south?
Most e-commerce companies are international in some respect — either in how they source their goods and/or where their customers are based.
Even with a trade deal, there is a lot of uncertainty and we can expect the British Pound to wobble about a bit this year.
Many e-commerce brands source goods from overseas and pay in other currencies, often the US Dollar. If the British Pound weakens against the US Dollar, the cost of these goods could easily go up by 10%, increasing businesses’ supply costs. And, if you source in Euros from the EU, there may be new import duties and VAT to contend with on top of any currency movements. So we’re talking at least 10%+ extra hit to cashflow here (though you should be able to claim import VAT back later).
So, what do we do? Well, we can look to manage this risk – but even better is to REMOVE the risk.
Removing currency risk
We recommend removing currency risks where possible. What’s good, is that you can do so with a really simple equation:
Cost Currency = Revenue Currency
Basically, if you have costs in USD, then you need to look to generate revenue in USD to offset their value. That way, you don’t need to worry about currency risk. For example, if you import US$250,000 of goods each year, then look to generate at least US$250,000 a year in US Dollar revenue. Doing this means you net off your buying and selling and effectively have reduced your currency risk to just the difference.
With Shopify, processing payments in other currencies can easily be done by enabling Shopify multi-currency. This gives your international customers the opportunities to pay in foreign currencies such as US Dollars or Euros.
Managing currency risk
If you can’t remove currency risk, then it’s time to manage it. There are three key ways to do this:
Reduce your supply costs to give you more margin wiggle room.
Review your pricing and increase it to cover any reasonable currency costs (e.g. 10% increase in US Dollar to cover costs of goods).
Speak with a foreign currency broker to take out contracts that fix your currency cost, so you know what rate you’ll be paying and can budget effectively. For example, if you know that you’ll be buying US$100,000 of goods over the next 6 months, then you can take a contract out for this amount at a fixed exchange rate. You don’t need to pay for it in full upfront, but it does give you the security of knowing the rate you will be paying.
Outside of currency costs, we can expect two main impacts on supply chain:
Import delays: goods will take longer to get into the UK due to increased border checks.
Import duties and/or VAT: on goods coming from the EU.
To be safe, add 2-4 weeks lead time into your planning for any international goods or goods made in the UK that are reliant on international materials (i.e. lots of things!). As the deal was done so late on, there wasn’t time for all the border controls and shipping handlers to get their systems in place in advance. The changes are having to be figured out and implemented as we go.
It’s also a good time to review your supply chain and put back-up options in place, if you haven’t already. We saw numerous manufacturers go out of business in 2020, and it’s a trend that’s only going to grow this year.
Customs duties & VAT
From January 2021, we need to complete a customs declaration when exporting goods to the EU – just like to the rest of the world.
To do this, you need to apply for an EORI number (Economic Operator Registration and Identification Number). This is a unique ID code that’s used to track and register customs information in the EU. Even if you have one already, you may need to update it, so it’s worth checking. The application is simple and can be done in a few minutes on that link.
The trade deal effectively ring-fences the UK and EU. If your goods are made in the UK/EU, from parts that are mostly sourced there, then you are unlikely to pay any customs duties when shipping to the EU.
If you source your products from outside the UK/EU, then you may need to pay customs duties when you ship these products from the UK to EU customers. This is basically to stop there being a back door for international goods to enter the EU via the UK at any point in the future.
When it comes to VAT, things start to get a bit more complicated…
UK companies can no longer make use of the EU distance selling rules when shipping from the UK to the EU, which meant we didn’t need to pay VAT when shipping to other EU countries until we reached a threshold (usually around €35,000 — at which point you’d need to register for VAT directly in that country).
For now, the high-level rules are as follows, based on the shipment value:
- Below €22: not subject to VAT
- €22 to €150: might incur VAT at the border, plus any clearance/handling charges
- €150+: might incur VAT and customs duties (i.e. if the goods are made outside UK/EU), plus any clearance/handling charges
If you already need special licenses or certificates for shipping to non-EU countries (e.g you sell food, chemicals), then you are likely to need these for the EU too. You can check if your product offering warrants these here.
From a cashflow perspective, you’ll need to factor in the cost of any customs duties and VAT for goods imported from the EU.
All the main accounting systems will be updated to take the new rules into consideration, though your accountant may need to adjust the settings to ensure they’re activated. You may also need some specialist tax software and possibly specialist advice, depending on your level of complexity.
Keeping customers happy — and VAT as simple as possible
EU customers won’t be happy paying VAT/customs duties when buying from you if they have never done so before, so let’s see what we can do.
There are basically three options for now:
- Ship from the UK and let the customers pay any VAT, duties and charges (they might not like this!)
- Register for VAT in each EU country you ship to, so you can handle the VAT aspect (what a palava!)
- Get your goods into an EU-based warehouse/3PL and register for VAT in that country. You then charge VAT on any sales in that country and make use of the EU distance selling regulations to effectively charge 0% VAT on sales to other EU countries.
From 1st July 2021, things change again..
The distance selling regulations get replaced with the One Stop Shop (OSS) system. This means you register for VAT in one EU country and you can use it to manage your sales across the EU.
If you don’t already have an EU 3PL and/or EU VAT registrations, you could offer your customers a unique discount code on your EU-facing stores to soften the blow of the import duties and VAT until you get things in place.
Which brings us to locations.
Locations – where’s best for your business?
The matrix of locations of the many elements within your business determines the complexity of what you’ll need to deal with Brexit. Key locations for e-commerce brands that you’ll need to think about in relation to Brexit are:
- Origin of raw materials
- Location of manufacturer
- Location of warehouse/where you ship from
- Location of customers
The simplest scenario would be all these four being in the same country (but we know that most of our businesses aren’t like that!). With Brexit, it’s time to consider the location of each, and if there is anything you can do to reduce cost and complexity.
For example, let’s take a manufacturer in the UK that sources raw materials from Spain and Italy. 85% of their customers are in the USA and UK, with most of the remainder in the EU. They use 3PLs in the USA and UK.
As they prepare to scale in 2021, however, they expect to move most manufacturing to Italy or Spain – very close to their main suppliers – and to also take on an EU-based 3PL. They’re likely to keep limited manufacturing in the UK as they work with some of the last remaining shoe factories in London and would like to continue to support them. All non-UK orders will likely be shipped from their EU and USA 3PLs.
In deciding where their EU 3PL should be, they want somewhere with good transport connections and competitive shipping costs.
Depending on your business, you may also want it to be in an EU country where you don’t have a significant customer base – so that you’re not liable for too much sales VAT.
GDPR & personal data
For many e-commerce merchants, personal data is processed outside of the EU – by the likes of Shopify, Klaviyo, etc. These companies have already been through the GDPR process and have met the EU requirements for the processing of data.
The potential gap is any processing of EU personal data in the UK. The EU is yet to confirm if they think the UK data laws are strong enough. So, to be safe, continue to behave exactly in line with GDPR whilst we await news of any changes.
If you operate under a .eu domain name, you will have lost the rights to use this after 31st December 2020, unless you update your account with a valid EU address (i.e. not a UK address).
For EU country domain names (i.e. .de, .it), each country can set their own rules. If you use these, it’s worth checking with the individual countries to ensure that you can continue to use them post-Brexit. Some may require you to have an address in the respective country that you can use thereon.
You will still be able to protect your brand name in both EU and other international countries by using the Madrid Protocol registration processes. The forms may look a bit ugly, but it’s hugely powerful and covers 90+ countries.
If you initially registered your trademark in another EU country and have the UK included as part of your broader EU registration, you will still be protected in the UK after Brexit. Your existing registration will effectively have been ‘cloned’ to create a new UK registration with the UK Intellectual Property Office.
Travelling in the EU
If you’re heading to the EU on business trips, it’s worth checking the following:
- Passport: ensure you have at least 6 months left
- Driving license: check that your international driving license is up-to-date
- Mobile phone: check that your international roaming charges haven’t changed
- Travel insurance: if you have an EHIC (European Health Insurance Card) this remains valid. When the time comes to renew, this will be replaced by a GHIC (Global….). The arrangement is slightly different, so you may need additional travel insurance to cover medical
- Goods and samples: if you’re carrying goods and samples with you, these may need to be declared at customs
Brexit is coming. And it’s up to you to decide how best to react and deal with the impact this might have on your businesses. Instead of being purely reactive, think strategically about your future direction. 2020 has been a pivotal year for e-commerce broadly, and proof that there are opportunities even in the most challenging of times.
Brexit it here, and it’s up to you to decide how to navigate it. Whilst things have undoubtedly become more complicated, there could be opportunities.
Instead of being purely reactive, think strategically about your future direction. 2020 was a pivotal year for e-commerce broadly, and proof that opportunities do exist — even in the most challenging of times.
If you want to get an overview of your individual situation, there’s a handy Brexit transition tool here.