How can Brexit be made to work for fashion retail?

After a two-year transition period, on 31 January 2020 the UK officially left the European Union. But 18 months on, fashion businesses tell Drapers the myriad issues surrounding the complex divorce process from Britain’s biggest trading partner still have not been resolved.

Mark Neale, CEO of outdoor clothing and lifestyle retailer Mountain Warehouse, which has stores in Ireland, Poland, Germany and Austria, as well as selling online, says supplying his retail stores in Europe has become “considerably more painful, expensive and time-consuming” since the UK left the EU. However, he says the full impact of Brexit has also been masked and overshadowed somewhat by “Covid and supply chain chaos”.

Most fashion businesses Drapers spoke to that operate in Europe, including wholesalers, brands, agents and retailers, say trading has become more challenging because of increased costs and bureaucracy that have come into effect over the past 18 months.

However, some areas of the market appear to have been hit harder than others: smaller brands and businesses report growth and sales declining as a direct result of Britain leaving the EU. And uncertainty surrounding the Northern Ireland protocol – which prevents a “hard border” for customs checks with the Republic of Ireland –  is only adding to the woes.

The problems have been thrown back under the spotlight by Labour leader Sir Keir Starmer’s five-point plan to “Make Brexit Work” (see below), announced on 4 July, and the search for a new prime minister following Boris Johnson’s resignation earlier this month. We dive into some of the biggest challenges facing the fashion industry today and what businesses are doing to mitigate them.

Customs chaos

Under the EU/UK Trade and Co-operation Agreement, there are no duties payable on trade in goods between the UK and the EU, provided they are of UK or EU origin. However, the zero tariff rule applies only when goods are first shipped from the “country of origin” where they were manufactured.

Goods that are not of UK or EU origin are potentially subject to customs duty when crossing the UK-EU border, under the UK Global Tariff for goods imported into the UK or the EU’s Common Customs tariff for goods exported to the EU. This means importers that distribute non-UK/EU-originating goods across Europe from a UK or EU hub risk a double duty liability – once when the goods arrive at the hub and again when they are shipped across the UK-EU border to customers.

Fashion businesses tell Drapers this is still creating “profound” issues that have become even more complex rather than simpler in the past 18 months.

The CEO of one high street footwear retailer, which has more than 120 stores across the UK and Ireland agrees the complexities are worsening: “If we deliver via warehouses in the UK, as we used to, there is now a 9%-12% punitive charge – tax we weren’t paying before we stopped being part of the EU. The only way to deliver directly into Europe, if you’re a bigger operator, is via European distribution centres. But it’s been like Wacky Races trying to find warehousing in Dublin, and you can’t divert deliveries to an entity you don’t own or operate from.”

One solution has been to split shipments before dispatch, and then ship direct to a warehouse in the EU and separately to a warehouse in the UK. But this has not been without significant cost and infrastructure implications, the footwear boss says.

“If you’re an established European operator, you have a lot of infrastructure in place, but it depends on the nature and size of your organisation,” he explains. “For a UK-based retailer which before Brexit brought all UK goods in and shipped out to Europe, it has had a profound effect that is still lingering.

“What we all want is clarity and stability. Tariffs and duties by their very nature are complex. We need continuity for people to understand what’s happening.”

Simon Berwin, owner of Simon Berwin Advisory and former managing director of menswear supplier Berwin & Berwin, says his fashion clients are continuing to lose customers owing to the difficulty of getting their products into Europe, and then the duty on top [to get them to the UK]: “One of my clients manufactures in Bangladesh and typically brings their garments into their finishing warehouse in Germany, and then sends them on. We can’t do that any more as double duty makes it non-commercial commercially unviable. It means all stock must be delivered in one hit rather than drip feeding, especially core lines, which impacts cash flow.”

UK businesses and consumers have paid 62% more in customs duties on goods imported to the UK in the year to 31 March, reaching a record of £4.7bn, up from £2.9bn for the same period the previous year, according to a report published in April, compiled by accountancy firm UHY Hacker Young.  The main increase in customs costs comes from the new ‘rule of origin’ tariff”, it said.

And this is becoming unsustainable for some in the industry, says Simon Poole, managing director of contemporary menswear brand Luke 1977: “We need to pay custom duty once to import from countries like China to Europe and then again to get them in the UK. Together with the rising price of raw material and issues with shipping and staff, it’s becoming a real problem.” 

Fashion exports have also been hit hard by duties and customs charges. Across textiles and leather, the UK’s export relationships (the number of trade relationships it has) with the EU fell 45%, relative to the rest of the world, between the fourth quarter of 2020 and the three months to 31 December 2021, the Resolution Foundation and the London School of Economics, found in The Economy 2030 Enquiry: The Big Brexit – an assessment by of the scale of change to come from Brexit, which was published in June.

The report said one explanation for this fall in export relationships is that SMEs (small and medium-sized businesses) that were previously exporting to the EU are no longer able to afford the costs of non-tariff trade barriers or comply with the rules of origin requirements under the EU-UK Trade and Co-operation Agreement (TCA).

Guy Mor, co-founder of UK-based sustainable activewear brand 3RD Rock, which wholesales the brand in Europe and retails online, says: “Imagine you are a small business in Italy or Spain. You’ve been buying from Europe and the UK for the past 15 years and everything is smooth, no paperwork, no delays. Simple.

“Now, small businesses there are needing to deal with shipping, VAT charges and duties. Many don’t want to deal with that, so they’ll just buy an EU product instead.” His business used to comprise 50:50 wholesale to retail, but now it is 90% retail.

Meanwhile, Paul Alger, director of international business development at the UK Fashion and Textile Association, highlights that “worse than the duties faced by exporters, the substantial customs and non-reclaimable EU VAT charges are a very real problem that is here to stay. As one of our members commented to me privately, ‘It’s a mess and it’s not going to go away’.”

Sean Glancy, a tax specialist and partner at accountant UHY Hacker Young, says duties are always a cost, due to the fact you cannot recover the duty charge.  However, Import VAT can generally be recovered by businesses but they have to account for import VAT and then try and recover it, normally through a VAT registration in the EU country of import.

He says can be expensive and cause cash flow issues. “Some businesses have lost £m’s due to incorrect documentation and claims being denied,” he adds.

Northern Ireland protocol

The Northern Ireland protocol, which has been in force since 1 January 2021, is an element of the Brexit withdrawal agreement that governs the unique customs and immigration issues at the border in the island of Ireland between the UK and Northern Ireland and the European Union, and on some aspects of trade in goods between Northern Ireland and the rest of the UK. 

Northern Ireland effectively remains part of the EU for supplies/movements of goods, which means that some customs formalities apply to goods moving between Northern Ireland and Great Britain.

Glancy says this has resulted in an increased administrative burden, as special rules are required for Northern Ireland as it has a land border with the EU.

He explains: “Issues arise as the EU requires border checks on goods arriving from non-EU countries such as Great Britain. This brought the introduction of a confusing set of tax and rules, and results in customs checks at Northern Irish ports – so effectively businesses are exporting to an EU member state – a different customs territory to the UK, resulting in customs documentation and a hybrid of UK and EU VAT and statistical reporting requirements.”

The UK government is looking to withdraw this agreement, simplifying trade between Great Britain and Northern Ireland, but this carries political risk in respect of the relationship with the EU and the issues in respect of a “united” Ireland. The EU is seeking discussion on the UK’s proposed changes, which may result in litigation.

William Bain, head of trade policy at the British Chambers of Commerce, tells Drapers that businesses are calling for a secure, stable and sustainable trading arrangement between Great Britain and Northern Ireland reached through negotiation.

He explains: “With companies already struggling from the impact of two years of the pandemic and the war in Ukraine, the last thing they need is the risk of tariffs on exports to the EU, or the entire trading agreement being suspended or terminated.

“Rules of origin compliance have certainly made UK fashion exports to the EU more complex over the past 18 months. If a tariff war results from the current Northern Ireland protocol impasse between the EU and UK, UK clothing and footwear exports could expect to be among those goods targeted.”

With the impact of Brexit continuing to remain challenging 18 months on, the fashion industry is calling for greater clarity and stability, as well as open and honest dialogue on the key issues around trading with Europe, if they are to navigate the choppy waters over the coming year.

The government did not respond to requests for comment.