The ‘meaningful vote’ has been and gone and no-one is any closer to knowing the final outcome on Brexit. All the potential options remain on the table, which makes it difficult for businesses to plan with any real certainty over the next few months. As such, risk mitigation should be the priority. To our mind, the greatest risk for businesses remains a no deal scenario, which is the default position for the UK to exit the EU on 29 March 2019 unless Article 50 is extended or the Withdrawal Agreement wins a majority vote. In that event, the UK may need to fall back on World Trade Organization (WTO) rules for its trading and tariff arrangements.
Who is at risk?
All manufacturing companies that import or export goods from or to the European Union (EU) need to have a plan in place. The risks are numerous, but include:
- Higher tariffs - every WTO member has a list of the tariffs it applies on imported goods, plus quotas. For the most part, these are higher than the average EU tariff and pose a particular problem for companies with long and complex supply chains, where goods may move from the UK to the EU or vice versa.
- ‘Non-tariff’ barriers – this includes areas such as product standards and safety regulations. The EU could – in theory, at least – begin imposing checks on UK products at borders immediately after Brexit, even if the UK changes none of its rules. This would lead to significant delays.
- Logistics – expected delays at Channel ports regarding the delivery of goods inwards and outwards.
Other potential issues relate to any business that recruits staff from the EU at a time when the immigration rules are expected to get more onerous.
Also at risk are those clients that are regulated and require ‘passporting rights’: typically the financial services and legal professions. European Economic Area (EEA) firms that passport financial services into the UK will have to seek authorisation from the Prudential Regulation Authority (or, for solo-regulated firms, the FCA) to continue. The position of UK firms that passport out of the EU could be determined by the relevant member state rules and any applicable EU rules that apply to third countries.
Companies based in EU member states that trade with the UK are also vulnerable. We advise one EU-based food supplier that has been forced to change the terms on which it provides food to a major UK supermarket. In this scenario, if the perishable products get stuck at Customs, the company has the liability rather than the supermarket. These are important considerations for companies that want to continue operating in the UK post-Brexit.
Who is not at risk?
Approximately 80% of the UK economy is based on the services sector, rather than businesses that move goods across borders. Businesses that are not regulated and not dependent on EU staff will see very few changes in the event the UK leaves the EU on 29th March, that are not specific to any general change in economic conditions.
What to do?
In practice, it is difficult to give practical advice when the outcome remains unclear. However, at Smith & Williamson, we work with a lot of different types of businesses and see the following preparations being made:<
- Revision of supply agreements – minor contract changes to trading terms may significantly increase the risks for individual businesses, particularly in big fish/little fish scenarios. Companies may force difficult terms on suppliers to minimise their Brexit risk, particularly in certain vulnerable industries – such as pharmaceuticals and food.
- Consultation with distribution partners – the people best placed to advise on the day-to-day issues affecting the movement of goods and supply chains are logistics and freight companies. Businesses are ensuring that their procurement departments are fully engaged with their distribution partners, flagging any potential problems as early as possible.
- Revisiting supply chains – there are certain pressure points, such as the Dover/Calais crossing, but there are alternative networks – shipping through Ramsgate or Felixstowe, for example, but these need to be considered well in advance.
- People – any business heavily dependent on management or labour from EU countries will need to consider its future availability and the cost of such resources, as well as potential alternatives.
- Treasury management – businesses that transact in foreign currencies will need to consider the impact of any future change in exchange rates and whether any adverse changes can be mitigated.
- Reviewing EU footprint - of those Smith & Williamson services sector clients that are regulated, many have taken action some time ago to establish a footprint in mainland Europe or, in some cases, already maintain a presence in Europe. In particular, we have advised several clients on establishing offices in Dublin.
- Reacting to change – it is likely that businesses will need to quickly react to changes in the business, economic or regulatory environment. The ability to measure the impact of such changes will be more challenging unless management have access to a well-constructed business model, which can assess the impact on the business of different scenarios.
- Understanding and quantifying their risks – companies are looking at the potential impact of tariffs on their costs so they can consider alternative suppliers or have a reserve to see them through tougher times.
How we can help
Businesses should be preparing for Brexit today. We can provide Brexit-readiness reviews and reports, as well as assisting with Brexit strategy across all industries and sectors including the development of business models.
|New customs tariffs, deferment accounts and customs warehousing
Authorised Economic Operator (AEO) or Common Foreign and Security Policy (CFSP) status.
If a UK business trades with the EU and does not already have one, it should apply for an Economic Operator Registration and Identification (EORI) numbers so that post 29 March 2019 it may need both a UK and EU EORI number, which may cause complications. This will allow the business to continue to import or export goods with the EU after 29 March 2019, in the event of no deal. This should be done at an early date. Register for an EORI number at gov.uk
International Commercial Terms (Incoterms) may need to be updated
|B2C cross-border sellers
|Businesses may wish to consider setting up a VAT registration in an EU Member State e.g. Dublin, subject to how they operate.
|Mini One Stop Shop (MOSS)
|The UK may be forced to leave the MOSS regime, requiring businesses to register for MOSS in another EU country and to register for UK VAT e.g. Dublin
|UK incorporated subsidiaries and parents of EU companies
|Certain exemptions in the Companies Act 2006 relating to the preparation of individual accounts will no longer be extended to companies with parents or subsidiaries incorporated in the EU.
For example, a UK company is currently exempted from having to prepare individual accounts if it is dormant, and part of a group of companies with an EU parent company that prepares group accounts. This exemption may only continue to apply after Brexit if the parent company is established in the UK.
|UK businesses with a branch operating in the EU
|Such businesses will become third country businesses and will be required to comply with specific accounting and reporting requirements for such businesses in the Member State in which they operate. Complying with the accounting and reporting requirements of the Companies Act 2006 may no longer be treated by those Member States as sufficient.
|UK companies listed on an EU market
|Such companies may be required to provide additional assurance to the relevant listing authority that their accounts comply with IFRS as issued by the IASB. This will need to be done in accordance with EU third country requirements. In the short term, this could lead to changes to the compliance statements required within the annual accounts submitted to listing authorities.
Websites that can help:
- A useful Brexit Risk Register from the British Chamber of Commerce: https://www.britishchambers.org.uk/media/get/Business%20Brexit%20Risk%20Register.pdf
- World Trade Organisation – tariffs: https://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm
- HMRC view: https://www.gov.uk/government/publications/no-deal-brexit-advice-for-businesses-only-trading-with-the-eu
- Declaring your goods at customs if the UK leaves the EU without a deal
- Preparing your business for the UK leaving the EU
- EU guidance: http://europa.eu/rapid/press-release_IP-18-6851_en.htm
- The ICAEW’s Brexit resources: https://www.icaew.com/technical/economy/brexit
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.