The scheduled departure of the UK from the European Union is 11pm UK time on 29 March 2019, with an anticipated two-year transition period post March 2019 to help smooth the path to the final settlement between the UK and EU. Negotiations on the future UK-EU relations are only now commencing, so the ultimate Brexit deal between the UK and the EU (and the precise form of the relationship in the transition period) is unclear and likely to remain so in the short-term.
Despite the uncertainty, there are several Brexit-related issues facing UK businesses which should be considered now.
Exporters to the EU – Goods
Companies exporting to the EU, or planning to do so, should assume Brexit will increase costs and lengthen timescales to some extent. This ranges from the mild (some form of declaration at the border with the EU) to the more extreme (tariffs on goods exported to the EU in accordance with the EU tariff schedule if the UK must follow WTO rules).
Businesses can take practical steps to make the customs process as friction-free as possible, such as the establishment of an EU subsidiary to act as their export hub, or seeking Authorised Economic Operator (AEO) status. Entities with AEO accreditation have demonstrated their compliance with customs processes and controls and their role in a verifiable supply chain, which supports fast-tracking of goods through customs. To mitigate risks of delays to shipments, consider the establishment of warehouse space in the EU to facilitate a stock buffer; companies may need to review staff levels – are they adequate to cope with additional bureaucracy without lengthening the export timescales?
For UK companies with suppliers based in the EU, potential changes to customs regulations will have an impact on costs or operational procedures. Making supply chains more resilient is a sensible approach – businesses may wish to consider alternative (or reserve) suppliers who are non-EU based, for example. Do business plans factor in contingencies if there is a delay at UK ports? Are your own suppliers reliant on EU imports? Companies should consider discussions with their suppliers well in advance of Spring 2019 so such questions do not remain unanswered.
Another consideration is VAT. If a Brexit deal is struck that allows the UK to remain within the EU VAT union then very little will change. However, if this status is lost then import VAT may become due at customs, with the VAT only recoverable on the next VAT return – a significant cashflow disadvantage.
Businesses that employ significant numbers of EU nationals are already seeing some Brexit-related impacts in terms of a tightening labour market and such risks are increasing. ONS reports in 2017 showed much lower levels of net migration from the EU to the UK; coupled with currently low unemployment levels, firms face mounting pressure on employee retention and recruitment, particularly in sectors such as agriculture, hospitality, healthcare and retail.
Pay increases and enhanced benefits such as flexible working can help alleviate labour shortages in the short-term. Whilst firms should have succession plans in place to manage key man risk, Brexit makes this a ‘must-have’. Efficiency-driven solutions such as investment in training and increased automation may prove more durable long-term, particularly in industries where margins are low, or the public sector where scope for additional budget funding is limited.
Structure and operations
Brexit can be the catalyst for companies to review their corporate structure and where their operating activities are located. Could or should parts of business operations be based in the EU? Or, conversely, could operations in the EU be relocated back to the UK?
Legal contracts and mandates should be reviewed to ensure they remain valid and enforceable post-Brexit. Similarly, does company documentation need changing and updating?
Whilst data management has garnered much attention recently due to GDPR, Brexit potentially adds further complications. Within the EU and the EEA processing of personal data is governed by the EU data protection regime, which permits the intra-EEA transfer of personal data. It is possible, therefore that the EU will seek to limit this permission post-Brexit. Companies need to consider their current cross border data management arrangements and ensure they have adequate contingency plans if the current arrangements are curtailed.
The services sector is the dominant sector of the UK economy and financial services its most significant element, with a trade surplus of £63bn in 2015.
For financial service firms, establishing a subsidiary within the EU may be necessary to mitigate the potential loss of ‘passporting’ rights for the provision of financial services within the EU by UK companies. Such a subsidiary would need to be adequately capitalised and have a meaningful management presence, as the EU has clearly indicated ‘brass plate’ operations are unlikely to be satisfactory. Allied to this, UK-based banks may need to apply for European banking licences if they wish to have continued access to the EU market.
Significant numbers of EU nationals are employed by the financial services sector, many of whom are highly skilled and mobile. Firms should ensure they have adequate tools to manage staff retention and recruitment and robust succession plans to mitigate key man risk.
Strategies for the allocation of working capital and attendant financing need consideration. If more working capital is required due to higher inventories, longer export timescales or VAT cash flow changes, is there the ability to finance this? Does this impact investment or expansion plans? Currency hedging approaches should be reviewed – earnings volatility due to forex fluctuations can be considerable, as witnessed by sterling’s sudden slide post Brexit referendum result, so more active hedging strategies may be appropriate.
It is very likely the use of International Financial Reporting Standards in the UK will not be impacted by Brexit, so the financial reporting impacts would appear to be slight. However, accounting standard rules (both IFRS and UK GAAP) mean that Brexit will have a significant impact on companies’ financial reports, for example: risk assessment disclosures; forward-looking items such as fair value measurement and underlying assumptions; and impairment reviews. It is important finance departments consider this when planning for year-end reporting as additional data and process steps may be required.
Uncertainty is a fact of life – businesses are used to coping with events outside of their control – so the challenges caused by Brexit should be kept in perspective. Other long-term factors, such as technological change, the vagaries of government policy, access to finance etc are at least as significant. Business as usual should remain the primary focus.
Nevertheless, there are practical steps companies can take to prepare for the post-Brexit world. For example, EU exporters could assess how to make export processes as friction-free as possible, undertake supply chain reviews and working capital planning. It is recommended such initiatives are planned now as lead times to delivery are likely to be measured in the several months and competition for resources with the expert knowledge required will intensify in 2018.