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  • Insights

As Brexit reality looms, fortune will favour the prepared!

12 June 2017

Original content provided by BDO

The politics of Brexit remain fascinating and fatiguing in equal measure, both in the UK and in Brussels. It was somewhat of a relief therefore to interview the co-chairs of the BDO pan-EMEA Brexit Task Force recently (I know, everyone’s got a Brexit task force…) to discuss the effect of the Brexit process on clients and their reactions to this all-consuming behemoth.

I wanted to hear from my colleagues Stuart Lisle and Iain Lowson, senior tax and audit/risk management partners respectively, about how the continuing political uncertainty is affecting BDO clients, not just in the UK but across Europe. Stuart and Iain have been leading the cross-border BDO task force for some time now and engaging with clients and colleagues far and wide on the business aspects of the UK’s vote to leave the European Union. You can hear my full interview with them at BDO Brexit task force co-chairs podcast but some of the key discussion points that came up are recorded below.

The major challenge that BDO clients are facing is how to deal with the continuing uncertainty as to the end-result of the Article 50 process. Whilst we now have a broad understanding of the starting negotiating positions and priorities of both the UK and the EU27, clients don’t know how these will eventually play out as the process unfolds. The calling of a general election in the UK has added to the fog of uncertainty. At the time of writing, the opposition parties are performing extremely well in the polls, putting a sizeable question mark over whether it will indeed be Mrs. May and her team who negotiate on behalf of the UK or a new government, possibly a coalition, who sit down with European Commission negotiator Michel Barnier, later this month. There has also been a lot of sabre-rattling and early position-taking with the rhetoric from both sides oscillating, at times wildly, between hard and conciliatory over the last year. Business everywhere hopes that this will subside as we get into the serious negotiations.   

Despite the political rhetoric, Stuart and Iain remarked that businesses in the UK have remained very focused on ‘business as usual’ – driving growth and profits as well as doing deals. As a result the UK economy has continued to thrive since the referendum result, with growth in 2016 second only to Germany, amongst the developed economies. Thus far in 2017, most UK economic indicators have continued to show growth, economic resilience and an underlying confidence that has at times confounded commentators. The BDO Business Trends reports and High Street Sales Tracker (a key indicator for the consumption-driven UK economy) continue to give a positive picture for the UK, despite a slight reduction in rates of growth in recent months and creeping but still modest inflation.  

They mentioned a number of the specific challenges that businesses should be thinking about in this environment and expressed some concern that only 40% of businesses have done any meaningful planning for the outcome of Brexit. Stuart in particular has carried out research on the ‘hard Brexit/No Deal’ scenario and the impact of the WTO tariffs. Ignoring the politics of WTO membership, revised schedules and the like, he found that on the face of it, the level of tariffs to be faced would generally be manageable. There is no doubt however, but that this would have some impact on profit margins, particular in sectors where margins are already tight. Stuart and Iain firmly believe that before any decisions are made by businesses regarding moving any part of the supply chain out of the UK into the EU27 (or elsewhere), a full comparative fiscal analysis would need to be undertaken, taking account of the fact that the UK has the lowest security costs and one of the lowest headline corporation tax rates in the EU28. Switching out of the UK therefore could bring significant additional costs that far outweigh any customs duty savings.     

The ambitious midmarket businesses that BDO advise, tend to be equally focused on the risks of the impact of non-tariff barriers (NTBs), including the friction caused by customs checks and delays on their routes to market and their ability to move goods through their supply chain efficiently. Stuart and Iain’s advice to clients where this is likely to cause business problems, is to start planning for this now and start thinking about how to secure their supply chain and any other required steps to minimize downside risk. One such step could be to apply early for Authorised Economic Operator (“AEO”) status, to reduce transit times within customs and therefore get ahead of the inevitable processing queues. Interestingly, this is a particular concern for many in my home country of Ireland also, since one of the major exports is perishable foodstuffs.

A final potential challenge for all businesses that I discuss with Iain and Stuart in the podcast is around the potential impact of #Brexit on skills and recruitment. There is already evidence of a skills gap impacting the UK economy and a ‘hard exit’ by the UK could exacerbate and accelerate the effects of this. However, Stuart observes that we are also witnessing a technology revolution, meaning a significant and increasing proportion of processes currently done by humans, are likely to be automated. This development may counter the negative business impact of reduced immigration of workers into the UK, if indeed there is any substantial reduction in the long term. Perhaps also an opportunity to work on improving the UK’s historically poor relative productivity rates!

Stressing the need for businesses to lift their heads from ‘business as usual’ in order to horizon-scan and think ahead, they highlighted multi-dimensional scenario-planning tools they have developed to help BDO clients across EMEA to navigate the uncertainties and create effective plans for coping with the uncertain future and inevitable Branxiety that generates! Fortune may well favour the brave in many circumstances but most likely it will mostly favour the prepared in this case!

One final message from Stuart and Iain of which UK and EU negotiators might take note:

For European businesses and for the entire European economy, the sooner uncertainty becomes certainty, the better! Don’t delay! Businesses and the economy can’t wait!