Brexit – a ticking time bomb or a chance to spread one’s wings? With Britain scheduled to leave the European Union on 29 March, Michelle Perry looks at how businesses are preparing for potential scenarios, including a disruptive “no-deal” one
Illustrations by Gianfranco Bonadies
Almost three years have passed since a slim majority of Britons voted to exit the European Union (EU). But as the days pass by it is becoming less and less clear exactly how the United Kingdom will leave the EU and disentangle itself from a 40+ year union. With just weeks before the official exit date on 29 March – and an exit agreement agreed between governments – terms still have not been approved. The British government and parliament have found little common ground on which to agree an exit strategy that would also suit the 27 EU nations.
For foreign observers, this result must seem incoherent given that Britain has typically been viewed a reliable, practical and diplomatic nation. For British business and overseas businesses trading with the U.K., the ongoing uncertainty weighs heavily. It has stalled investment plans and stymied economic growth.
Most British members of parliament want to avoid a no-deal exit, considered as the worst-case scenario for business and the wider economy. But there is also not a majority in favour of the Withdrawal Agreement that Prime Minister Theresa May brokered with EU leaders in December 2018 which was defeated in parliament by a historic margin on 15 January. So, the current situation has ground to a deadlock.
Carolyn Fairbairn, Director-General of the Confederation of British Industry, which represents around 190,000 businesses covering around a third of the private sector workforce, recently warned of the dangers of a no-deal Brexit. “The economic consequences would be profound, widespread and lasting. The International Monetary Fund has warned that over the long-run, GDP could be 5 to 8 percent lower than in a no-Brexit scenario.”
Of the most recent parliamentary Brexit votes, Fairbairn said: “The never-ending parliamentary process limps on, while the economic impact of no-deal planning accelerates.” Some companies are still scrambling to put contingency plans in place for 30 March, the day after the U.K. leaves the EU, while others such as the U.K.’s financial services sector began planning a long time ago. But contingency plans need to be sufficiently flexible to cope with the possible outcomes.
Should I stay or should I go?
Due to their size, small- and medium-sized enterprises are more exposed to the risks of leaving the EU because they have less capacity and resources to respond to events such as a disorderly exit, compared to their larger counterparts. The flipside, however, is they often have greater flexibility to adapt.
More importantly though, it’s costly and difficult for organizations to make contingency plans because they don’t know what they are planning for. There are, however, some things that all businesses should do. They involve scenario planning based on the threats and opportunities of the myriad possible outcomes, reviewing supply chains as well as those of suppliers, and ensuring alternate funding is available in the event of an increase in costs.
“One of the first things, if you are an export or import business, is to review your supply chain and see how it will be affected if there’s no deal. It’s difficult because businesses don’t know the outcome, but it won’t hurt to have a contingency plan,” says Rebecca Wilkinson, Corporate Tax Director at accounting firm Menzies.
The outcome of scenario planning may, for some, result in an organization having to open operations elsewhere to mitigate the risk of leaving the EU, especially if your clients are based in the EU. Companies will need a clear strategy and funding already in place to achieve this. Some companies are exploring the option to move operations to the Republic of Ireland or mainland Europe in the event of a no-deal, or a deal where tariffs would rise. Larger companies may already have multiple overseas locations and can therefore redeploy resources and staff more easily to suit their needs.
One example of such a strategy can be found with TAM Asset Management, a London-based boutique investment manager. TAM has set up a second office in Spain to be able to continue operating in Europe on behalf of its European-based clients should there be a disorderly exit from the EU.
“We have a number of clients whose pensions we manage who are based in Europe – Spain, Malta and Cyprus. For us, it was always important that we didn’t lose the opportunity to service those clients. We made a decision over a year ago to set up a new entity based in Europe, so that whatever happens we will always be able to service those clients,” says John Gracey, TAM’s Chief Financial Officer and a Hong Kong Institute of CPAs member. “We are in a good position to be ready come March if there’s a no-deal Brexit to operate within Europe with our own European-regulated entity.”
“The economic consequences would be profound, widespread and lasting.”
The U.K.’s financial services sector began cutting jobs in London’s financial district and establishing new offices or redeploying staff to existing EU offices early on. As an EU member, British financial services firms can “passport” or sell their services to customers in the other 27 EU countries from a base in the U.K. But without a transition period, which would result from a no-deal Brexit, firms in Britain need to open new EU offices to continue serving EU customers.
“If there’s no Brexit agreement then U.K. firms will lose their passporting rights. Organizations are preparing for the worst-case scenario and are moving offices and people to EU nations. The main concern is whether banks can continue to serve their clients in the EU whatever the outcome,” says Chi Hong Li, an Institute member who works for a financial institution in London as a manager. “In general, financial institutions in the U.K. need to reassess their existing operating model and work out a plan including staff, resources, governance etc. to serve clients after Brexit.”
Another strategy companies are employing is to shore up cash reserves. Santander, one of the biggest business lenders in the country, said in January its manufacturing clients were building up cash reserves and delaying capital expenditures in order to keep cash in the business. “It’s clear based on the research that companies, large and small, are resisting making any capital investments because of Brexit. Financial directors are likely to be advising boards to retain cash in the business because of the potential for increased costs,” says Tej Parikh, Senior Economist at the Institute of Directors in London.
Manufacturers also ramped up their stockpiling of raw materials in December in preparation for a potential no-deal Brexit, according to a survey from IHS Markit and the Chartered Institute of Procurement and Supply (CIPS), released last month. The IHS Markit/CIPS manufacturing purchasing managers’ index (PMI) rose to 54.2 in December from 53.6 in November. “The trend in production volumes remained lacklustre despite the safety stock-building, with the latest survey consistent with a mild decrease in the official measure of manufacturing output over the final quarter. Uncertainties regarding Brexit disruption on supply chains and the exchange rate are also weighing on business confidence.
Although manufacturers forecast growth over the coming year, confidence remains at a low ebb. Manufacturing will therefore be entering 2019 on a less than ideal footing with Brexit uncertainty having intensified considerably,” said Rob Dobson, Director at IHS Markit.
Access to different workforce skills will also be heavily impacted. Directors should know what the make-up of their employees and skills base are in order to know who to recruit. One in five small business employers rely on skills and labour from the EU, according to the Federation of Small Businesses. Employers won’t be able to count on EU nationals as much as in the past once the U.K. leaves the EU.
The U.K.’s planned exit is already having an impact. The latest official statistics from the U.K. Office for National Statistics published in November 2018 showed that net migration from the EU to the U.K. fell to a six-year low and that total immigration was at the lowest level since 2014.
While the future is uncertain, employers are shoring up their workforce, and the latest U.K. employment figures revealed that the number of people in work has reached a record high of 32.54 million. “The number of people working grew again, with the share of the population in work now the highest on record. Meanwhile, the share of the workforce looking for work and unable to find it remains at its lowest for over 40 years, helped by a record number of job vacancies,” said Office for National Statistics’ Head of Labour Market, David Freeman.
“If there’s no Brexit agreement then U.K. firms will lose their passporting rights. Organizations are preparing for the worst-case scenario and are moving offices and people to EU nations.”
Brexit-ready Hong Kong?
The world is watching Britain over Brexit, with the decision having a far reaching impact on global politics, economies and financial markets. Earlier this month, Japanese carmaker Nissan confirmed that its new SUV model X-Trail, originally planned to be built in its Sunderland factory in the U.K., will be made in Japan. Its Europe division chairman said Brexit uncertainty had played a part in the decision and that continued uncertainty is not helping businesses to plan for the future, according to British online newspaper The Independent.
Hong Kong businesses are also not immune to the impact of Brexit. Some remain positive, such as Hong Kong conglomerate CK Hutchison Holdings. “The impacts of Brexit negotiation remain unknown and could affect the economic environment of the U.K. As the group’s investments in the U.K. are businesses which focus on utilities and essential consumer goods and services, we believe these impacts will be manageable and the key fundamentals of the group will remain solid,” a spokesman for the company told A Plus.
However, some Hong Kong businesses are watching developments anxiously. “In general, our clients are most concerned about the currency risk of the depreciated pound sterling, the potential increase of customs duties, the potential delay in custom declaration and clearance in the case of a “no-deal scenario,” the depreciation of the value of existing U.K. investments, and the possible withdrawals of investments or change and termination of projects, which negatively impact the recruitment and retention of staff,” says Andy Wong, Initial Public Offering (IPO) Leader and Partner of Assurance and Business Advisory Services, at ShineWing HK CPA Limited and an Institute member. “Our clients attach great attention to the possibility of a declining trading business with the U.K., as the consumers may switch to local goods when the prices of imported products increase due to weak GBP. Also, there may be possible disruption to the supply chains of the business.”
To gear up for the potential Brexit scenarios, Hong Kong businesses might have to change their invoicing currency from British pounds to U.S. dollars, change their shipping hub from the U.K. to an EU member country, and should set up an internal Brexit task force or steering group to manage short-term and long-term strategic plans for any scenario, says Wong.
There are also opportunities to prepare for. “It is expected that there will be increasing demand from the U.K. to use Hong Kong as a hub for trading in the Asia-Pacific region to compensate their loss of EU markets due to increase in customs duties after Brexit,” says Wong. He adds that as Brexit leads to the depreciation of GBP, Mainland Chinese outbound investments may seek Hong Kong instead of the U.K. for fundraising in the capital market. “To prepare for this, our clients should have a comprehensive analysis on the future trends and layouts of their businesses according to certain Brexit scenarios, and establish an effective and efficient mechanism for the allocation of people to work out the scenarios at business level and the utilization of other resources.”
“The impacts of Brexit negotiation remain unknown and could affect the economic environment of the U.K.”
For some companies the opportunity to investigate new markets overseas is a boon. For others it could also be a chance to sell up or seek new investors. British assets are more attractive with sterling so low, and therefore much cheaper for foreign investors who in their turn may be looking for an opportunity in the U.K.
For Gracey at TAM, the prospect of a no-deal Brexit forced TAM to bring forward their overseas expansion plans. Now that the asset manager has a Spanish office it is already starting to think about the growth opportunities available to the business. “Brexit has speeded us along the line of expanding into Europe. Whereas we could have expanded from the U.K., the fact that we may now not be able to do that has put the focus on having a European entity in Spain that is regulated and can operate in Europe and be passported throughout Europe,” says Gracey. “We see Brexit as an opportunity.”
Wong is optimistic about the prospects Brexit holds for business opportunities between Britain and Hong Kong. “The U.K. is keen to explore opportunities with the non-EU partners and Hong Kong maintains its strategic advantages – free trade policy and a well-established common law framework – for companies seeking to access the Asia-Pacific region.
“In addition, the Hong Kong IPO market, which has emerged as one of the top global IPO markets in recent years, will be seen as a key gateway for U.K. companies seeking access to international markets, triggering enormous investment and more free trade ties in Hong Kong” he says.
Relocation and expansion decisions represent significant costs for businesses, but if the calculations add up then organizations must move quickly. Although the U.K.’s exit from EU continues to be a moving target both in content and timeframe, businesses need certainty, and certainty is something that accountants are always good at providing based on robust financial calculations.
Business Brexit Checklist
To help some businesses, the British Chamber of Commerce (BCC) designed the Business Brexit Checklist, outlining key areas of operations that may be impacted after the United Kingdom’s departure from the EU. Indeed, the BCC suggests all companies – not just those directly and immediately affected such as importers and exporters – should have undertaken a Brexit “health check,” and a broader test of existing business plans.
- Workforce and future skills needs
What percentage of your U.K. workforce is from the EU.27? Do your staff know the next steps to take to register as an EU citizen working in the U.K.? What can you do to help retain skills and labour?
- Future staffing requirements
What will be your skills and labour needs over the next few years? Will you need to hire someone from outside the U.K.? What steps will you need to take to hire them? Could different arrangements (remote working) be feasible for your business?
- U.K./EU customs checks
What customs procedures do you comply with for trade with non-EU markets? Are you ready, if the need arises, to apply these to imports from or exports to the EU?
- Potential delays at U.K./EU border
The potential of customs checks to cause delays at the border will depend on how new policies are implemented in practice: customs checks are typically risk-based rather than universal. As yet there no details on how enforcement might be executed in practice.
- Tarifs on U.K.-EU trade
Do you know the HS codes (international classification system) for your products? Do you know the EU Most-Favoured Nation (MFN) tariff that is applicable for your product? If the U.K. and the EU do not reach an agreement that removes all tariffs, what would the impact of the MFN tariff be on your cost base?
- VAT registration in the EU
Do you know which country would be best suited to support your supply chain to EU customers/suppliers? Do you have access to bank guarantees required by Fiscal Representatives? Does your business model allow enough margin to absorb the increased costs these new processes will bring?
For the full checklist visit: www.britishchambers.org.uk
If no deal is made, projections show that by 2030, Britain would be 9.3 percent smaller in gross domestic product terms, housing prices could sink by 30 percent and the pound could fall against the U.S. dollar to US$1.10, according to The New York Times.