Brexit Q&A for multi-national businesses
It's over three years since the UK voted to leave the European Union (EU) by a majority of 52% to 48%.
Nine months later in March 2017 then-Prime Minister Theresa May triggered Article 50 (the formal process to leave) meaning the UK was due to leave at the end of March 2019. However this date has been delayed twice and the EU has extended that deadline to October 31 2019.
Brexit the name given for 'British exit' from the EU will undoubtedly have a global impact. There will be consequences for not only the UK but also the EU and US. We spoke to Adam Jackson Head of Public Affairs Policy and Insights at Grant Thornton UK to get his view on the potential implications and address some concerns our clients may have. As the firm's Brexit leader he advises clients across all sectors on their Brexit strategies. Below Adam responds to questions from a number of multi-national businesses. These are just a small sample of questions we've asked to help identify areas of risk and spot opportunities for growth in the event of a no-deal Brexit.
What is no-deal Brexit?
No-deal means there is no transitional period. The UK leaves the EU with no agreements in place with the EU. Imports and exports between the UK and EU at that point become subject to tariffs (which vary from 1% to over 80%) and customs declarations. This means new processes for businesses as well as additional costs. Free movement of people ends. UK goods and services will face new regulatory barriers in the EU and in some cases will need to have EU registered offices to continue to provide services to customers.
The Government has warned of big delays at ports - particularly roll-on roll-off ports such as Dover and Folkestone - as additional customs checks will need to be done on all freight and trucks travelling between the UK and EU.
A no-deal Brexit would trigger an economic shock. The Bank of England has suggested that a worst-case scenario could be similar to the 2008 financial crash but with interest rate rises inflation and GBP falling below parity with USD.
What is the likelihood that there will be a no-deal Brexit on October 31 2019?
The likelihood of a no-deal Brexit at the end of October has fallen slightly though the risk of no-deal at some point remains high. Following the passing of a new law requiring the Prime Minister to ask for an extension if no agreement has been reached before October 19 we can expect the negotiating deadline to be postponed though this cannot be guaranteed.
Any extension is likely to be used to hold a General Election which could lead to any outcome from no-deal to no Brexit possibly via another referendum. Given the huge uncertainty we are recommending businesses plan for the worst (no-deal on October 31) and have a no-deal contingency plan to minimise disruption.
What can businesses do to prepare for this?
As part of contingency planning we'd advise looking at whether businesses can continue to run their core operations in the wake of a no-deal. The key questions to consider include:
- Have you considered your supply chain post-Brexit? Can your suppliers cope with the anticipated strain at the UK borders and are there alternatives in place?
- What would you do if you had to stop production and is there sufficient stock in the event that you do?
- Are you prepared for the post-Brexit regulatory environment?
- Given the potential changes in cost base ranging from VAT and Customs and direct taxation in addition to wider macro-economic factors (such as the currency exchange rate and UK inflation) have you modelled the projected financial results of your UK business?
There are also some simple 'must do' things any UK-based business with EU goods traded should do including: ensuring they have an EORI (European Operator Registration and Identification) number and registering for a new system of transitional simplified customs procedures.
Our group has significant UK and EU operations and cross-border transactions. How do you see a no-deal Brexit affecting the supply chain between the US UK and the EU?In the short term no-deal is expected to severely disrupt supply chains that have EU-UK transactions. This is particularly the case for those using roll-on roll-off trucks at UK and EU ports. If businesses have failed to ensure compliance with EU regulatory requirements there may be further disruption to deliveries in the EU. Direct trade between the US and UK and US and EU should not be significantly affected although there may be some unexpected knock-on effects. Any US supply chain that incudes UK-EU movement of goods will be impacted (e.g. if you ship goods to the rest of Europe via the UK).
Over the medium term there will be a financial impact. Most suppliers in Europe and the UK will be affected by Brexit. With a combination of stockpiling changes in sales volumes additional transport and Customs charges and foreign exchange differences some businesses may experience cash flow issues and financial difficulties. Some direct US exports to the UK may benefit from new UK tariffs which could be lower for certain goods compared to the current EU tariffs applicable in the UK.
If your supply chain is dependent on several key suppliers then you should be asking whether they are prepared for Brexit to minimise any disruption. Whilst we still don't know what the full impact of a no-deal Brexit would be it is important to have an adequate 'Plan B' in place to ensure business continuity.
Our US-based business holds several contracts with UK businesses. Is there anything we should be concerned about in the event of Brexit?
We've seen existing client and supplier contracts include guarantees that become impossible to uphold in the event of Brexit or terms that are dependent on EU membership. Significant risks may arise where existing contracts do not reflect the additional costs anticipated in your supply chain in the event of a no-deal Brexit.
However this also means there are opportunities to renegotiate existing contracts to reflect changes in the international landscape and to put your business in a stronger position moving forward. With Brexit possibly just weeks away now is a great time to go through those contracts and see if you can achieve a better position.
Our UK operations have a significant amount of debt financing from Europe. How do you expect a no-deal Brexit to impact interest and foreign exchange rates?
The Bank of England stress test modelling of a no-deal Brexit assumes more disruption in the UK than the financial crash of 2008. Its worst case scenario estimates GDP coming in 5.5% lower over five years; 5% inflation; a rise in Bank of England rates to 5.5% and consumer and business interest rates peaking at 8% and a 25% fall in GBP to below parity with the EUR and USD. In the short term a cut in Bank of England interest rates is also possible.
This volatility and devaluation of the pound could see more expensive debt finance and we are already seeing lenders tighten their credit. Where money is lent between the UK and Europe then the fall of the pound could see significant foreign exchange losses and gains.
Our operating model across Europe is complex and based largely on revenue generated from intangibles. Are there any added considerations we should be looking at in the event of Brexit?
Many groups with royalty-based revenue across Europe and multinationals with cross-border interest and dividend payments may have relied on the EU Parent-Subsidiary Directive and the Interest and Royalties Directive to exempt payments from withholding tax. With the UK leaving the EU then these exemptions may no longer apply and there may be additional withholding tax incurred on each payment - over 20% in some countries. Where businesses have significant royalties interest and dividends flowing around Europe then their current structure may no longer be efficient.
To prepare for this we've been helping businesses analyse their structures and find ways to mitigate their tax exposure arising as a result of Brexit. Equally it is important to ensure any structural changes do not crystallise unwanted tax charges. In particular we have advised a number of businesses in the financial services sector where we have helped identify a number of opportunities and risks around their current structuring and helped them to establish a future fit business model. For these businesses beyond cost base and tax structuring the regulatory environment is a key consideration.
How do you see a no-deal Brexit affecting groups with considerable exports and imports between the EU and UK?
Customs duty and VAT procedures are two areas that will be significantly affected by the UK's exit from the EU. In the event of a no-deal Brexit the UK will be treated by the EU as third-party country for imports and exports potentially resulting in immediate changes to the procedures and documentation required to formally import or export goods between the UK and the EU and a potential cost impact.
For businesses in the UK exporting or importing goods to and from Europe it is essential to obtain the necessary EORI number to enable them to make customs processes much easier in the wake of a no-deal Brexit.
For example we've seen companies which are worldwide exporters of fruit about the correct customs valuations method that should be used in order to import their products in the EU. This involves putting forward a solution that would be useable in all member states of the EU that the company works in to reduce the impact of a no-deal Brexit on their day to day operations.
Aside from new tariff schedules there will be additional paperwork and customs documentation that will need to be completed.
On average we estimate that this may add an additional 35 per consignment so we are recommending companies to look at their customs procedures well in advance to help plan for any extra cost. In particular groups with supply chains moving to and from the US and the EU via the UK (and similar arrangements) should consider whether the current movement of goods might expose the group to increased cost pressure and compliance obligations.
We have operations in Ireland which provide goods and people across the Irish border into the UK. What effect will a no-deal Brexit have on this?
At present there is continued uncertainty about the border arrangements between Northern Ireland and Ireland however all political parties have agreed it is one of the most important aspects of Brexit. The UK Government has published details of its approach to the Irish border; this states that 'the UK government would not introduce any new checks or controls on goods at the land border between Ireland and Northern Ireland including no customs requirements for nearly all goods'.
New UK tariffs for EU imports would not apply to goods crossing from Ireland into Northern Ireland. The UK would only apply a small number of measures strictly necessary to comply with international legal obligations protect the biosecurity of the island of Ireland or to avoid the highest risks to Northern Ireland businesses - but these measures would not require checks at the border.
The EU can be expected to require some controls to protect the integrity of the EU single market. The Irish Government has indicated that Ireland would check trade with Northern Ireland but would not put checks on the border or close to it. The EU and Irish government have not published details of what approach they would take. This is an area to keep under review.
In terms of movement of people the long-standing Common Travel Area between the UK and Ireland will be maintained. This ensures that British and Irish citizens will continue to enjoy additional rights in Ireland and the UK including the right to work study and vote in certain elections as well as to access social welfare benefits and health services.
If your company does business with the UK and you have any queries relating to the above Q&A or related topic please contact our International Expansion team on +1 212 590 2310 or Info_US@praxisifm.com.
Many thanks to Adam Jackson for contributing this article.