Deal or no deal

Oct 01, 2018
While business continues to hope for the best, the prospect of a no-deal Brexit appears to be strengthening.

BY MICHAEL FARRELL

More than two years on from the Brexit referendum, the business community still has no clarity on the UK’s future relationship with the EU. In recent months, rising political tension in the UK has contributed to anxiety among businesses that the prospect of a no-deal Brexit appears to be strengthening. A July white paper set out the UK’s approach to economic partnership, security partnership, cross-cutting cooperation (in areas such as personal data, cooperative accords in science and innovation, and fishing opportunities) and institutional arrangements. It said that preparations for a range of possible outcomes, including a no-deal scenario, should continue and “given the short period remaining before the necessary conclusion of negotiations this autumn, the Government has agreed that preparations should be stepped up”.

Within days of its publication, the white paper heightened political division in the UK Government with Prime Minister Theresa May’s difficulties compounded by amendments to the UK’s Trade Bill, which is currently making its way through Parliament. These included an amendment ruling out the UK sharing the EU’s VAT area, which could threaten the avoidance of a hard border in Ireland.
At the time of writing, while much is undoubtedly going on behind the scenes, things are relatively quiet during Parliament’s summer recess. However, the Conservative Party conference at the end of September will stir tensions again and may impact the UK’s negotiating stance ahead of the next EU Council summit in October.

Nothing is agreed until everything is agreed

While Brexit may mean Brexit, despite the political to-ing and fro-ing, we’re none the wiser as to what Brexit will eventually mean for businesses. Currently, the draft Withdrawal Agreement between the UK and EU is 80% agreed, with a 21-month transition period envisaged whereby the UK would stay in the Single Market and Customs Union until 31 December 2020 to give businesses and administrations time to adapt. However, all we know for sure is that this could still unravel since nothing is agreed until everything is agreed. Indeed, if anything, the prospects for a no-deal outcome seem to be growing stronger. In June, the EU urged member states to step up preparations for a potential no-deal outcome while, more recently, UK Trade Secretary Liam Fox, quoted in The Sunday Times, put the odds on the chances of the UK leaving without a deal at 60/40.

Meanwhile, the border between Ireland and Northern Ireland remains a major hurdle. While the UK and Ireland have both said that they will not erect a hard border, it is difficult to see how customs checks and border police can be completely avoided in a no-deal scenario. Even if a border is somehow avoided, there will be customs and border issues to overcome as EU member states will not want unregulated goods entering the single market. It is also likely that there will be customs skills shortages. Speaking after a Cabinet meeting in Derrynane, Co. Kerry in July, Taoiseach Leo Varadkar said Ireland could have to hire around 1,000 new customs and veterinary inspectors to prepare Ireland’s ports and airports for Brexit and, earlier this year, over 550 border force roles were advertised by the Home Office, including some Belfast-based roles.

Worryingly, an InterTradeIreland survey of 751 businesses carried out in June/July 2018 showed that only 20% of respondents anticipate having a Brexit plan ready by March 2019. Of the businesses surveyed, 30% predicted a negative sales impact and 24% are deferring investment plans. The survey also showed that businesses face challenges in areas such as overhead costs, energy costs, new competitors and difficulties in recruiting.

Where businesses have plans in place, we are beginning to see estimates of the potential cost impact of various Brexit scenarios. This is particularly true of larger businesses. Bombardier, for example, recently estimated that it would cost their Belfast plant, which operates a ‘just in time’ supply policy, around £25-30 million to hold a number of months’ worth of material to avoid stopping its lines in the event of a no-deal Brexit.

Useful reading material

For Chartered Accountants, an interesting paper to review is the recent publication by the Tax Strategy Group (TSG) on the taxation and customs impacts of Brexit. This notes that traders may use a customs agent for deferred payment of VAT and excise, and for assistance with customs clearance procedures. The paper points out that such services come at a cost to business. “In 2016, over 1.3 million customs declarations were submitted to Revenue by 140 agents on behalf of numerous Irish traders, whereas only 75 individual businesses submitted declarations on their own behalf. This suggests that a significant portion of third-country trade is facilitated by agents and this is also likely to be a feature of trade with the United Kingdom post-Brexit.”

The TSG paper states that customs formalities on trade with “third countries” are currently managed through Revenue-approved authorised economic operators who pay duty and VAT on a monthly basis rather than at the point of import. Ireland has 144 authorised economic operators, which account for 89% of third-country imports. Revenue has identified 38,000 traders who have regular dealings with the UK and a further 100,000 who have less frequent trade. It is the larger group, with infrequent trade, that is at risk of significant changes in processes as they are less likely to have authorised economic operator status, the paper states.

Other useful publications include a seven-point fact sheet setting out what businesses across the EU 27 need to do to prepare for Brexit. It warns that businesses will need to make all necessary decisions, and complete all required administrative actions, before 30 March 2019 in order to avoid disruption. It also covers responsibilities under EU law in areas such as the supply chain, certificates, licenses and authorisations, tax, rules of origin, restrictions on the import and export of goods, and the transfer of personal data.

Bord Bia has published a guide for current and potential food and drink exporters, which aims to help identify operations partners, establish more efficient distribution channels and devise strategies for reducing supply chain costs. Chartered Accountants Ireland and the Institute of Chartered Accountants in England and Wales have also jointly published a guide to help businesses prepare for the post-Brexit trading environment.

Dangers on the horizon

As well as trading and supply change challenges, other dangers include a weaker Sterling and recruitment difficulties. Businesses in Ireland and Northern Ireland are not alone in facing skills shortages – recruitment difficulties are also being felt by employers in the UK. According to the latest quarterly Labour Market Outlook from the CIPD and the Adecco Group, labour supply is failing to keep pace with demand, exacerbated by a “supply shock” of fewer EU nationals entering the UK. The number of EU-born workers in the UK increased by 7,000 between Q1 2017 and Q1 2018, compared with an increase of 148,000 from Q1 2016 to Q1 2017.

As we move into the last quarter of the year it is frustrating that, more than two years on from the referendum, there is still so much uncertainty. Chartered Accountants will be helping businesses review budgets and plans for 2019 in the coming weeks. As is always the case in uncertain times, cash and costs will need to be the focus pending greater clarity on what the future holds.
 
Michael Farrell FCA is Director at PKF-FPM Accountants Ltd., a service provider for InterTradeIreland’s Brexit Advisory Service.