Potential problems that could be caused by Brexit

Crowe UK has posed the question: “Could 2019 by the year of the Brexit-inspired Company Voluntary Arrangement (BiCVA)?”

With the much-discussed environmental uncertainty UK businesses are currently enduring as the government tries to structure a deal that will pacify all groups, Crowe UK has predicted that this could mean that there will be an increase in the number of businesses entering BiCVAs.

Their report stated: “CVAs, whereby a company agrees a resolution deal with its creditors when it cannot meet its liabilities within a set timeframe, have increased in recent years. In 2018, CVAs became more prominent following several high-profile retail collapses, underpinned by the prevailing economic conditions.”

“Following the defeat of the government’s deal in the House of Commons, the period immediately following the March 2019 deadline is now increasingly looking likely to be a challenging time for UK businesses, and it is unlikely that any existing problems will be solved in the short-term,” said Mark Newman, partner in recovery solutions at Crowe UK.

The knock-on effect

UK businesses that rely on supplies being shipped from abroad will have to also manage their supply chains. This will impact their short-term financial decision-making. The risk remains that, anything that unbalances UK businesses, can then have a knock-on effect for consumers.

Newman continued: “As an example, take a company [that] is trading profitably, has a good order book, but cannot commit to a delivery date in April 2019, because a part of their process or product is dependent on an EU source. Their customer, though understanding, has its own deadlines, and goes elsewhere to someone who will commit to an April delivery.

“This scenario presents three different companies with potential problems. The first has lost an order, and possibly a customer, and their previously good order book starts to look less certain. The customer has committed to supply in April and is reliant on the second supplier performing. The second supplier may have sound reasons for believing that they can deliver in April or may feel that they have to commit to do so to protect their order book, whether or not they have their own supply line confirmed.

“Each of these companies is currently profitable, and there is no reason to suppose they will not perform in the medium-term. However, they may all come up against short-term financial problems (usually manifested by cashflow issues), perhaps through prudence in not taking on orders, or reliance on a delivery that does not materialise. This, in turn, could lead to a damages’ claim for non-performance of a contract. The end customer may be understanding, but if they suffer a loss due to non-delivery, they may seek damages.

“Taking a step back, if we are to assume that each business in this scenario is trading profitably at present, management could attribute their trading problem to a specific issue that will be resolved and is unlikely to recur. If they find themselves in a cashflow problem that cannot be resolved by informal negotiations, this may lead to a ‘BiCVA’ being proposed.”

Crowe UK has outlined that it is wholly expected that the number of proposed CVAs where Brexit “is named as the underlying cause could very well increase in the early part of the year.”

Beyond the issue of Brexit

However, it is important to note that some cases are more complex than Brexit-focused issues.

Newman concluded: “Undoubtedly, the current climate will affect many businesses, but, for those processing CVAs, it is worth reviewing the causes beyond those stated carefully. There can sometimes be a tendency during times of uncertainty for those running businesses to concentrate on the climate, rather than underlying issues that businesses may already be facing. It is essential that businesses concerned about CVAs, and indeed those processing them, seek specialist advice where there is any uncertainty.”

Tax trouble for UK tour operators

Furthermore, MHA MacIntyre Hudson has warned that there is tax trouble ahead for UK tour operators if a Brexit deal is not secured before March 29.

“[The Treasury has] issued a new Statutory Instrument (SI) to be enacted in the event of a no-deal hard Brexit,” commented Sue Rathmell, VAT specialist in the travel sector at MHA MacIntyre Hudson. “This SI says tour operators will continue to pay VAT on margins for UK holidays, but the margin will be zero-rated for all holidays taking place outside the UK.”

As it stands, under the Tour Operators’ Margin Scheme (TOMS), which is a “special EU VAT scheme, tour operators are not burdened with a “hefty VAT bill”. Rathmell explained that “VAT is due on margins for any holiday taking place within the EU, but not on holidays outside the EU.”

“But is there a sting in the tail?” 

Rathmell explained: “The explanation accompanying the SI states ‘[it] is possible that some member states will require UK-based tour operators to register for VAT for supplies of travel services made in their country, although practices vary.’

 “Today, UK tour operators don’t have to register in any other EU country, because TOMS cover their activities in the whole of the EU. Non-EU tour operators, e.g. those based in the US, Dubai, or Asia, aren’t required to register either. This has given non-EU tour operators supplying holidays into the EU a financial advantage.

She concluded: “It’s hard to see how the EU could require UK tour operators to register for VAT, without also requiring non-EU companies to do the same. However, if this is on the cards, operators would face up to 27 local VAT registrations, with a lot of additional work and costs involved.”

What other problems do you foresee for businesses and the accountancy industry if we leave the EU without a deal?

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