ManagementIT & OrganizationExpert Information - 06.07.17

The Impact of Brexit on the IT World

Brexit Is No Big Deal for ERP Software

Britain's vote to leave the EU unsettles many small and mid-sized enterprises. It might lead to changes to regulations on taxation and data protection as well as contract law. With state-of-the-art ERP software such as proALPHA, companies are braced for Brexit at least from a technological point of view because it allows them to implement modifications effortlessly.

The Brexit referendum was held about one year ago. After a snap election in Britain, the future of the relations between Britain and the EU is still uncertain. Although experts do not expect "hard Brexit", which would mean that Britain leaves the EU customs union, this is far from being certain. Exporting companies would do well to start thinking about the impact of Brexit.

If Britain leaves the European Union, it is considered a third country. However, there are different kinds of third countries in the EU. Although Norway, Iceland and Liechtenstein are not members of the EU, they are members of the European Economic Area (EEA). If Britain joins the EEA, things will not change much for European trade partners. Countries belonging to EEA are subject to the same EU single market regulations as EU member countries. Switzerland is in a similar situation: The country does not belong to the EMU but has made numerous individual agreements with the EU and achieved almost the same result. Things will get difficult if the United Kingdom leaves the EU without a deal in place, as the following key issues illustrate:

1. Customs Duties and Taxes

The issue: The import and export of goods between the EU and Britain is currently duty-free. No import turnover tax is applied to goods imported from the United Kingdom. This might change in the future.

The solution: If an EU member becomes a third country, this has to be reflected in the ERP system. Related modifications will not cause any problems. After all, there are already third countries whose structures can be used as a template. The important thing is to apply the changes to the entire database. For this purpose, proALPHA provides update programs that feature wizards guiding users through the individual steps required to implement these changes. This ensures that it will no longer be possible to send an invoice with the status "EU Country" to a British customer as of a specific date. Companies with a relatively small database can also make these changes manually, of course. Moreover, documents have to be adjusted that were created before the as-of-date but have not been completed yet.

Brexit can be effortlessly mapped with proALPHA 7.1, which will be released in spring 2018. This version allows tax territories such as "EU", "EMU" and "Third Country" to be assigned to individual countries. These territories feature regulations that apply to business transactions within the EU or between the EU and other countries. Manual adjustments are therefore hardly required. At the same time, modifications can be implemented fast. If changes are made to a tax territory, these changes automatically apply to all countries belonging to this territory. It is not necessary to adjust individual records.

2. Trade and E-Commerce

The issue: For many companies, Britain is one of the most important target markets in the EU. This might change after Brexit. Trade will become more expensive due to customs duties and taxes. The purchase of foreign goods will be less favorable for both parties. Moreover, it will take longer to deliver goods because they have to go through customs first. Most likely, customs service is not prepared at all to handle EU imports in addition to the usual volume.

The solution: If Britain leaves the EU single market, terms of delivery have to be checked and modified, if required, to reflect that deliveries to customers will take longer. Since trade will be more expensive, too, a drop in sales should also be taken into account. It might be best for exporting companies to start looking for new target markets to avoid gaps in the future.

3. Logistics and Vertical Supply Chains

The issue: Brexit particularly affects vertical supply chains. If parts of production have been outsourced to Britain, related costs will rise due to customs duties and taxes. It does not matter whether the companies involved are affiliated or only partners. Brexit does not favor groups. Delays due to customs are another issue. They might lead to longer delivery times.

The solution: Companies operating with low stock as part of just-in-time concepts should reconsider their supply chain strategy. Higher buffer stock would be an appropriate measure to avoid fluctuations in delivery times. With production costs rising, companies should consider the option of outsourcing production to another country in the long term.

4. New Product Variants

The issue: If Britain leaves the European Union, it will define regulations on access to its market itself. Companies might be obliged to develop product variants for the British market to pass the regional approval process. As a result, production would be more expensive. This would also have a negative impact on companies' competitiveness.

The solution: Customs duties, taxes, import procedures and approval processes are external factors that cannot be influenced by business decisions. If companies do not manage to adjust increased costs and lose market shares instead, they will have no choice but to look for new target markets.

5. Contractual Agreements

The issue: If Britain leaves the European Union, British courts will no longer have to obey European laws. Moreover, judgements by the European Court of Justice will lose their importance in Britain. Europe and the United Kingdom might drift apart in terms of legislation. European companies will have to spend more money on legal advice. It will be more difficult for them to push through their legal position if related contracts are based partially or completely on British laws.

The solution: It might be best to check existing contractual agreements with British companies and agree on German law, if required.

6. Data Protection

The issue: If Britain leaves the European Union, it will be considered a third country in terms of data protection. Uniform regulations on data transfer within the EU no longer apply in this case. The German Federal Data Protection Act (BDSG) stipulates that whoever intents to transfer personal data to a third country has to ensure that these data are protected appropriately in the target country. This means that, in a third country, data have to be protected to at least the same degree as in the EU. This regulation applies regardless of whether data are transferred within a group only or to other companies. Technical and legal assessments as well as detailed documentation might be required. If these measures fail, customer data may only be transferred partially or not at all. However, this is not feasible for many companies.

The solution: Depending on the course of negotiations, companies operating in the United Kingdom should have a backup plan. Even if this might mean that they cannot store personal data in Britain anymore.

7. The Cloud

The issue: Regulations on data protection not only affect data exchange but also cloud services storing data in Britain. A British datacenter might no longer comply with EU regulations.

The solution: Depending on the course of negotiations, it is best to look for alternatives early on. After all, changing the cloud service provider and related systems takes some time. Companies should not delay this decision until the very last day.

Conclusion: No Need to Panic

Brexit will complicate matters for many exporting companies. However, negotiations have just begun. There is still time to look for alternatives. Fortunately, key issues affecting operational business can be resolved with proALPHA. Companies will not have to put much more effort into this than they do when having to adjust the sales tax. They would still do well to follow the negotiations and develop appropriate strategies once there are concrete results.

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