UK businesses are still largely in the dark about trading conditions post-Brexit, and the prime minister’s proposal of a two-year transition period is likely to extend this period of uncertainty further. For many business owners, this is a major cause of anxiety, with many unsure how to prepare.
While we do not yet know whether to expect a hard or soft Brexit, businesses must be prepared for the possibility of the UK leaving the EU in March 2019 without any trade deal at all, which would trigger a move back to WTO trade rules. While it is impossible to plan ahead with certainty, anticipating and preparing for this worst-case scenario will allow businesses to identify the strengths and weaknesses of their current business operations and react quickly to emerging scenarios.
Minimise the impact of loss of zero-tariff trading
In the event of a hard Brexit, net importers are likely to experience significant additional costs as a result of increased import tariffs and potential VAT payable on customs duties. Businesses could also be hit by customs delays and an increasing administrative burden. Cumulatively, these effects could cause significant damage to the UK’s reputation as a place to do business.
While VAT should be recoverable by VAT-registered businesses, it is worth bearing in mind that this could create a cash-flow disadvantage. For exporters, tariffs, customs duties and VAT could be applied, making exports more expensive and therefore less competitive compared with suppliers on the Continent. All businesses should review their entire supply chain to identify where additional costs might be incurred and to see if this can be restructured. For example, a business that currently imports goods from outside the EU and then sells directly to EU customers from the UK may find it beneficial to have a distribution warehouse in another EU country post-Brexit, so that goods do not incur charges on import into the UK and then again on export out. Companies providing goods and services in other EU countries should take advice on whether they will be required to separately register for VAT in those countries post Brexit and if registration is likely to be required, they need to consider the timing of this to ensure registrations are in place in good time.
Planning for withholding tax changes
Dividends paid by EU subsidiaries to UK holding companies are generally exempt from withholding tax. However, when the UK leaves the EU, dividend payments will no longer be protected by EU directives and may be subject to withholding tax, depending on the terms of each Double Tax Treaty. UK holding companies should therefore review treaties for each country in which they have subsidiaries to determine whether withholding tax may be applied and, if so, assess the potential tax cost. A review of Double Tax Treaties is also important to assess whether interest and royalties received from or paid to connected companies will be subject to withholding taxes. Where withholding tax exposure is likely to be significant, international groups of companies should consider whether restructuring their operations could minimise the impact.
Consider a hedge
A lot of businesses are already feeling the effects of falls in the value of sterling and while this has been beneficial for exporters, it has led to increased costs for importers. As Brexit negotiations continue over the next few years, we could see extreme exchange rate fluctuations, and businesses should consider ways of managing the associated risks. In addition to hedging products which may be viewed as overly complex by some traders, simple solutions such as holding a foreign currency bank account may be an effective strategy for managing exchange rate risk and businesses should discuss options with their bank to ensure one is chosen which best aligns to its overall strategy.
Negotiate flexible contracts
For organisations looking to enter into or renew contracts with customers and suppliers based on the Continent, which are likely to extend beyond March 2019, it is important to ensure that flexibility is built in, where possible. For example, businesses that become tied into fixed price contracts could find themselves making a significant loss if currency movements shift in the wrong direction or if tariffs and customs duties are applied. Similarly, with the risk of terms of business changing after Brexit, it makes sense to avoid agreeing fixed dates for the delivery of goods post March 2019, as customs procedures could cause significant delays. Businesses that are potentially exposed to withholding taxes post Brexit could consider whether “grossing-up” clauses can be included in contracts as another way of mitigating these costs.
Understandably, some firms will be hesitant about making costly contract changes until they have greater clarity about a potential trade deal with the EU. However, beginning an audit now and identifying potential risk areas will ensure they are able to move quickly when the time comes.
Reconsider grant funding strategies
There is still a lot of uncertainty with regards to the continuation of EU grant funding, however, advice from government is that businesses should continue to apply for these until further information becomes available. While some EU grants could remain available for one or two years after March 2019, organisations should assess in the meantime whether any UK grants are available and monitor developments. It is also worth looking for new domestic opportunities that might arise post-Brexit. For example, once the UK leaves the EU it may no longer be regulated by EU State Aid Rules and therefore, the new UK grant funding opportunities, or other subsidies and incentives, could become available.
Recruitment and employee mobility
With a leaked Home Office document recently proposing to offer low-skilled EU migrants a maximum of two years’ residency in the UK post-Brexit, organisations should review what percentage of the workforce could potentially be forced or might choose to leave the UK. Where staff losses are potentially high, businesses should then waste no time in considering alternative models, for example, student and part-time workers. However, it is important that they do not discriminate against EU nationals in the meantime. For businesses with an internationally-mobile workforce, it is important to consider whether work visas will be required when sending employees on longer-term contracts overseas. Arranging overseas secondments may also take longer due to the admin of arranging visas and is also likely to involve additional costs.
For businesses that already have UK nationals working in EU-based subsidiaries, it will be necessary to consider whether these people will be required to come back to the UK. In terms of taxation, some employees on long-term work assignments in other EU countries could become subject to both UK and overseas National Insurance charges. Employers should therefore take advice about their tax liabilities and consider whether to terminate overseas employment assignments early.
In the prevailing uncertainty, it could be tempting for business decision makers to bury their heads in the sand. Instead, it is vital to begin planning early and discuss potential changes now. By planning for the worst and hoping for the best, organisations can help to keep operations running smoothly and profitably, even in the event of a hard Brexit.
Rebecca Wilkinson is a Brexit specialist at accountancy firm, Menzies LLP.