KPMG on Brexit: Businesses are welcoming progress but remaining cautious

With less than two weeks to go until the new year, Brexit suddenly feels a lot closer than it has done. 29 March is no longer a distant look into the future.

With that in mind, Accountancy Age spoke to KPMG’s Brexit team about how they are preparing the global professional services firm, and their clients, for the day we have all been talking about for two years.

When it comes to the withdrawal agreement, James Stewart, head of Brexit at KPMG, said: “The withdrawal agreement marks a big step forward in the construction of a Brexit deal but there remains a long, hard road to travel before any final agreement is clinched.

“The businesses we’re speaking to are cautiously welcoming the progress being made.  However they are under no illusions about the pitfalls that lie ahead, the potential for an impasse being reached, and the absence of detail on the UK’s future trading relationship with the EU.

“Businesses that crave certainty and detail will have heard very little in recent days to make them feel they can now relax.  Indeed the feedback from some of our clients is quite the opposite.  Until there is broader political alignment and fewer risks, business leaders have little option but to continue to assume that the quest for a deal could yet be derailed.”

When it comes to the political declaration though, Stewart believes businesses view it as a “document of hope”.

He said: “Its constructive ambiguity may offer a route out of the current withdrawal agreement quagmire because it leaves the door open to a range of different future trading relationships.

“If it enables the withdrawal agreement to pass, then firms will welcome the stability that brings but, in the medium term, this declaration does little to nail down the final shape of how UK companies will trade in the EU two years hence. It could be a means to an end.”

Tracey Perera, Brexit programme director at KPMG UK, looked forward to the next couple of weeks and the run up to Christmas and said: “Most of the Withdrawal Agreement relates to matters which are tangential to business interests or which won’t change: the ‘divorce bill’ is paid by the UK government, the Irish border which will remain infrastructure-free, and EU citizens’ rights, which do affect our employees but have in any case already been unilaterally reinforced by the Prime Minister.

“The main thing for businesses is the transition period.  If there is no withdrawal agreement, there is no transition period. And that would mean the UK would leave on 29 March 11pm with no deal.”

Perera added: “The political declaration is also positive but not something you can make a weighty investment decision on.  The language is markedly different from the withdrawal agreement – there is less legal text as it’s more aspirational.

“So legal certainty on the future deal is some way off yet. The other document which has had less attention is the EU’s no deal planning paper. This sets out the EU’s advice to member states for contingency planning in the event of no deal. It is tougher than the UK’s equivalent: On trade friction, for example, we’d see tariffs, customs declarations and regulatory checks on day one.”

Perera noted that the withdrawal agreement has a lot to overcome before it can be ratified and businesses are definitely aware of “parliamentary arithmetic”.

She observed if we look at the stated positions of MPs, most would agree that the deal will not pass.

Prime minister Theresa May has set the date for MPs to vote on her Brexit deal for the week beginning 14 January 2019.

The vote was meant to be held last week, but May put it on hold after admitting she would lose the vote, despite criticism from Labour opposition for delaying another month. The deal will only be passed if both parliaments approve.

Perera continued:  “Those who back [the deal] must hope some MPs change their minds. This is possible, particularly if the alternative is cliff edge.”

So what of businesses? In truth, how prepared are they for Brexit and the uncertainty surrounding it?

According to the Bank of England, less than half of UK businesses currently have contingency plans if a no-deal Brexit comes to light. A no-deal would send the pound plunging and there would be another recession, this time worse than the financial crisis.

Perera shared some advice, saying it is key that businesses do not rely on a deal being reached. They must continue and even speed up their planning for a no-deal Brexit.

She said: “Businesses should identify the decisions they can take now with no regrets. Next businesses should consider the tactical decisions they can undo if need be, and ultimately do their homework on some more irreversible decisions.  With time running out, we’re seeing an increasing number of clients reach this stage.

“We know from our conversations with banks that they are increasingly concerned about how to support their customers’ working capital requirements in a ‘no deal’ scenario. This has seen some rapidly trying to segment and prioritise their portfolios in order to form views on credit risk appetite. Indeed, we’ve already seen a number of banks confirm they have set aside extra cash for exactly this purpose.

Speaking about KPMG’s own clients, Perera continued: “Our clients are ramping up their contingency planning.  They generally fall into one of two groups.  You have what we call the our OMG clients.  These are the businesses who’ve only just begun to appreciate the risks and decided that some preparations are a good idea.  We have seen a big increase in businesses getting in touch that have not done any planning at all – from small to medium sized businesses right across the country.  But it’s not just small companies.  Some very large firms are in the same boat.

“The second category of clients are the planners.  These are the businesses with plans who are now looking to activate.  It almost goes without saying that automotive, financial services and life sciences are in this category.  But now we’re seeing a far wider group typified by consumer goods companies and construction companies really go into overdrive.

What issues exactly could arise from all the outcomes of 29 March?

Perera explained: “Overall we’re seeing a short-list of ‘critical path’ items emerge – that is, those which could have the most direct and immediate impact on day-to-day liquidity, access to capital and bottom line profitability.

“First, the impact that tighter border restrictions may have on working capital and cash conversion cycles, should import and export lead times be slowed. Second, many companies are running a slide rule over what further significant currency volatility would do to their margins, in addition to evaluating the operational impact of migration measures affecting lower skilled workers.  Thirdly, we’re also seeing clients respond to potential problems in their supply chains.

“All this short termism means a great deal of longer term UK business planning is on ice whilst Brexit plays out.  Once the outcome of Brexit is more certain, whichever route is taken, we expect a bow wave of restructuring.  If we end up with no deal our industry may also see some of its clients becoming distressed and insolvent and perhaps a surge of acquisitions taking place.

“As a professional services firm employing 15,600 people across the UK, our assessment considers different scenarios which have at their core the safety of our people and their ability to continue to work for our clients.  We have looked in depth at issues including our contracts, mutual recognition of qualifications, data, people, IT capabilities, finance and supply chains.”