by Simon Schmidt and Søren Mosberg
No-deal Brexit – What does it mean for your SAP system?
At the moment the British Parliament is on the bench, while Boris Johnson is trying to complete his political manifesto that Britain is leaving the EU on 31 October, deal or no deal. To ask for a postponement lies him seemingly more distant than to lay down to die in a ditch.
Johnson’s alternative ways of fulfilling his electoral promises may also very well mean that he is very much looking at the recent adoption of a law that prevents the UK from leaving the European Union without a deal. It should also be remembered that the current default is that the British leave the EU on 31 October, if they do not ask for postponement!
The European Union is not obliged to renegotiate the agreement, nor is it subject to British legislation, so that a British exit without an agreement is quite legal from the EU side.
Against this background, it can legitimately be assumed that a no-deal Brexit on 31 October is more likely than ever before and therefore Danish companies with interests in the UK, customers or legal locations should be up on their toes to be prepared for Brexit on 31 October.
How does your business practice due diligence in relation to this scenario?
It is therefore undeniable that Britain is leaving the EU, and so all of your British customers and suppliers will leave the single market by the end of October.
This means that all trade with the UK, as per 31 October, will be considered in line with current trade with so-called third countries, thereby falling under the EU Customs Code, national and European import and export rules.
Therefore, it may not come as a surprise to anyone that if your business does trade with the UK then your business processes are facing a change. We would like to draw attention to a few SAP areas that undoubtedly require your company’s attention.
The fact that Britain is leaving the European Union may well lead to the need for a restructuring of your business. Would it be advantageous to establish a legal entity in the UK? If you are already established with company codes in the UK, these must be configured according to the new prerequisites. Also, master data for your business partners must be analyzed and possibly corrected. These changes will of course be encroaching on your current SAP system, and therefore require testing.
The handling of taxes and duties is facing the change imposed by Brexit.
The EU and the UK are expected to implement some tariffs on goods, and these must be reflected in the SAP configuration.
In addition to this, your company should revisit your VAT setup. If your company is already established in the UK, you should review the VAT calculation schema (TAXGB). It is expected that new VAT codes will be required on transactions related to foreign trade. VAT Codes for EU-to-EU trade should be deactivated as this no longer takes place.
The discharge of sales tax codes must be revised, typically the Access sequence MWST will need to be configured differently. Just as the Conditions tables have to be revised where the entry/exit country is “GB”.
If you use the special rules of the EU on triangular trade, these will no longer apply if the UK is part of your trade triangle and due to this your company might have to be registered for VAT in the UK.
All master data related to VAT – must be reviewed, on vendors, customers, Plants.
If you have intercompany transactions with a UK-based legal entity, and if you have set these transactions to run via EDI, you must also review your EDI VAT determination.
Your company must also review your outgoing documents, invoices to the UK should no longer be printed “Free of VAT”.
Danish companies must also be aware that after 31 October, imports from UK will be added import sales tax (deductible).
Intrastat and EU sales lists: since Britain is stepping out of the EU, Intrastat or EU sales without VAT should no longer be reported, from UK-based entities, and trade with Great Britain from Denmark (or other EU countries) should not be reported.
Customs reporting: trade from the EU to the UK will in the future be perceived as exports (in the absence of a free trade agreement) and must be reported to customs and tax in a similar manner.
Specifically, this means that your company must be able to manage customs declarations, handling of EORI number, and create user accounts for the electronic customs settlement system if you do not already have this.
In the past 9 months, SAP has released a number of notes to deal with Brexit. We would like to draw attention to the following notes which contain SAP’s recommendations for dealing with a possible no-deal Brexit on 31 October.
2749671 – BREXIT: Guidelines in case of “no deal”
2754659 – Recommendations for an unregulated hard (no deal) Brexit in SD
2766616 – Recommendations for an unregulated hard BREXIT (“No deal”) in Materials Management (MM)
2753338 – UK leaving the EU (Brexit) – program adjustments for Intrastat in case of NO DEAL
2752353 – Sales Tax Guidelines in Case of a “No-Deal” Brexit for Cloud Customers
2776981 – UK leaving the EU (Brexit) – Intrastat: Change of the withdrawal date to October 31, 2019 / program correction
Impacts on the workforce
Be prepared! Brexit has an impact on your HR system. Especially in scenarios with:
- Employees located in the UK
- Having expatriates in the UK
- Having inpatriates from the UK
First and foremost, the ability to identify affected employees will be the essence. Our experience is, that when the urgent need for clean and validated master data is acknowledged the very same data is questioned. With regards to GDPR, we’ve noticed a trend that companies only start to worry about where the fire hydrant is once the house is actually burning. Why not plan and execute ahead? Plan how to get the nationality, work permit, possible job paths, expatriations etc. updated and validated in your systems.
- Is your HR system already capable to hold this data in a consolidated manner?
- Is it time for you to look into the Work Permit functionality?
- Are the right attributes available for reporting in your SAP HCM / SuccessFactors?
The list is long. A critical success criterion in the Brexit process will be your company’s ability to quickly identify the affected workforce. The (local) HR organizations must prepare, expected changes must be introduced, and affected employees must be informed of the time to come.
Keep UK employees happy!
Since the expected shape of the labour market is still unclarified including employment law, immigration policy, and the length and operation of any transitional period, businesses should be prepared by proactively ensuring a present and qualified workforce. A probable outcome is a migration adjustment that will cause an alienation of a UK workforce from an EU perspective. That would mean, applying for fundamental permits that today is a given. UK companies with EU employees will be affected. UK expatriations will be perceived as “third country” employees. Customs issues and movement delimitations. Inpatriates in the UK need to apply for permanent resident status and etc. This adds pressure to have a steady UK workforce when the process to join it will be cumbersome for EU employees. To further stress this challenge is the fact that the UK workforce has the characteristics of a smaller segment in combination with an aging population. Therefore, the ability to obtain and retain skilled UK employees will be a yet unseen critical and competitive dimension.
- What does that mean for your recruitment in the UK?
- How do you design the processes to strengthen Expatriation and Compensation?
- What does it do for your Talent Management policy to reduce UK turnover?
There are many aspects to this scenario. Danish companies alone have almost 800 subsidiaries in the UK, so there is a lot of work to do.
The 2BM Way
In a recent article, Chairman of the UK & Ireland SAP User Group, Paul Cooper, was quoted saying: “The clock is ticking…It’s a political activity at the moment but once the politicians have agreed what’s going to happen, when and how, organisations are going to have to make decisions about changes they need to make from an SAP and business process perspective.” This statement clearly shows that Brexit is a major concern.
In 2BM’s experience, companies that think ahead, make the contingency plan and follow the development closely, have a stronger outlook. They are confident and have a head start compared to those who “wait and see”. Similarly, we advise companies to start early, depending on their UK engagement, if not the project, then at least the task of getting prepared. In that perspective, 2BM offers a “Brexit Readiness Review” in which facilitated workshops will uncover which tasks are relevant to your organization. In the review, we will also evaluate if developments in your HR solutions are beneficial. We have a broad experience within both SAP HCM and SAP SuccessFactors, and we have insights in what SAP is expected to deliver in regard to the upcoming Brexit. Furthermore, 2BM consults a vast collection of major companies that face similar challenges. We’ll be able to answer your question of: “What do other companies do?”.
In addition to the issues mentioned, there is also a number of other areas which should be analyzed with regards to the new relationship between the EU and the UK. Here, we are thinking of the areas where the UK no longer needs to follow EU rules – it can be the handling of product standards, labelling and intellectual property rights.
Although the last sentence of the UK/EU divorce papers has not yet been set, companies in the EU that trade with the UK or are physically present in the UK should have at this stage started projects that ensure their ERP system can continue to meet the changing legal requirements that will meet them on 31 October.
2BM offers help for these projects.
is team lead for the SAP Finance & Development team at 2BM. He has worked with SAP Finance for more than 20 years both as architect in some of the biggest SAP installations in Denmark but also as a consultant for a broad range of companies in Denmark and abroad. He is, furthermore, certified in S/4HANA Finance.