Pace of Brexit continues to frustrate business

Aug 01, 2018
Chartered Accountants can help businesses translate abstract Brexit scenarios into strategic planning.

Another significant milestone on the road to Brexit came and went at the end of June, leaving businesses none the wiser about the future shape of the UK’s relationship with the EU. Then, in July, at a meeting at Chequers, the British Cabinet agreed on a plan for negotiations with the EU. Briefly, this envisages maintaining “a common rulebook for all goods” but not for services. The UK is proposing a “combined customs territory”, one benefit of which would be to prevent a hard border in Ireland. However, at the time of writing, due to political developments in the UK, the prospects for this plan are unclear. It also remains to be seen how the detail of the plan will be received by the EU. Meanwhile, a survey conducted among local communities in the border region between March 2018 and May 2018 found that most respondents (59%) now think that a ‘hard’ border is more likely than they previously anticipated.

Since the last issue of Accountancy Ireland was published, both houses of the UK parliament have agreed on the text of the European Union (Withdrawal) Bill 2017–19. This legislation enables EU law to be transferred into UK law and allows work to begin on preparing the UK statute book for Brexit. The bill now awaits royal assent, when it will become an act of parliament.

Readers will recall that when the draft legal text of the withdrawal agreement was published by the EU in March, it included a “backstop” solution to prevent a hard border on the island of Ireland and avoid a “cliff-edge” Brexit by creating a “common regulatory space” where goods could flow back and forth without border checks. Subsequently, on 7 June, the UK Government published a technical note proposing that “in the circumstances in which the backstop is agreed to apply, a temporary customs arrangement should exist between the UK and the EU.” The UK said this temporary arrangement should be “time limited” pending finding a solution to the border question, which it expects to be in place by the end of December 2021 at the latest. However, the EU’s chief Brexit negotiator, Michel Barnier, said the backstop cannot be extended to the whole UK because it is designed for the specific situation of Northern Ireland.

More recently, in the run-up to the EU Council meeting at the end of June, UK and EU negotiators issued a joint statement stating that both parties recognise that the backstop requires provisions in relation to customs and regulatory alignment and are committed to accelerating work on the outstanding areas. Negotiations will continue over the coming weeks. Meanwhile, frustrated by the slow pace of the negotiations, various UK businesses and representative organisations have been highlighting the practical problems this creates for businesses.

Accountancy Europe, the organisation that represents one million professional accountants, auditors and advisors from 37 countries, has warned that Brexit-related disruption in audit services could threaten the stability of markets. A recently published paper entitled Implications of Brexit on Cooperation within the European Audit Profession stresses the need for a favourable regulatory framework post-Brexit, where the European audit profession can continue to cooperate effectively and efficiently in the provision of statutory audit. This position is supported by Chartered Accountants Ireland.

A Moore Stephens study of 653 owner-managed businesses in the UK, published in February 2018, showed that 94% of respondents feel that the UK Government ignores their concerns on Brexit. When asked about their specific Brexit-related worries, 38% of owner-managed businesses said that the introduction of trade tariffs was their biggest concern. 30% fear a loss of EU labour while 23% are concerned about loss of European customers. Only 33% said that they had no concerns around Brexit.
In a risk assessment published in June, Airbus said: “While an orderly Brexit with a withdrawal agreement is preferable to a no-deal scenario, the current planned transition (which ends in December 2020) is too short for the EU and UK governments to agree the outstanding issues, and too short for Airbus to implement the required changes with its extensive supply chain. In this scenario, Airbus would carefully monitor any new investments in the UK and refrain from extending the UK suppliers/partners base.”

The ongoing uncertainty appears to be slowing the UK’s commercial property market according to business lender, Capitalflow, which has said that some UK developers and investors are now looking to invest in commercial property in Ireland and “unlike their Irish counterparts, who are still having difficulties accessing finance from the Irish pillar banks, UK developers typically have access to multiple sources of finance”.
Meanwhile, there is no shortage of Brexit-related reports from official and other sources. One of these, published by the Irish Government in June, looked at the firm-level impact of Brexit on the most exposed sectors of the Irish economy. A list of 20 potential impacts were presented and firms were asked to rate their level of concern for each and to comment on how they understood and evaluated the risks presented. Across all sectors, fear about changes to the free movement of goods was the top concern, followed by fear of reduced freedom to trade in services. Levels of concern varied within sectors. Of the 15 sectors analysed, the chemicals/pharmaceuticals sector expressed the highest level of concern about the impact on their business while firms in the rental/leasing sector expressed the least aggregate concern.

In another report, also published in June, the Irish Government’s Expert Group on Future Skills Needs (EGFSN) addressed the skills need arising from the potential trade implications of Brexit. The study deals with skills such as customs clearance, logistics and supply chain management, which will be needed in a potentially more restrictive trading environment with the UK, as well as skills to support diversification of trade to non-UK markets such as international management, sales, marketing, design and development, foreign languages and cultural awareness. The report makes eight recommendations, with 46 associated sub-actions, aimed at enhancing the pool of trade-related skills available to Ireland-based enterprise.

At a practical level, skills shortages are a growing problem for businesses across the island of Ireland. EY’s Economic Eye Summer Forecast projects growth of 236,700 net additional jobs in the period 2017–22 across the island of Ireland and reveals that since the day of the Brexit referendum result, 21 financial services organisations have confirmed that they will move all or some of their operations from the UK to Dublin. This positions Dublin as the most popular post-Brexit location ahead of Frankfurt (12), Luxembourg (11) and Paris (8).

While the employment rate is currently high, InterTradeIreland cautions that it may be at a plateau and “we are beginning to enter a critical phase of the economic cycle, with businesses across the island taking a collective pause on many key decisions”. Worryingly, InterTradeIreland says that the level of business preparedness around Brexit has improved, but continues to be low with just 8% of cross-border traders having a plan in place. Chartered Accountants have a vital role to play in helping businesses translate what can appear abstract and difficult Brexit scenarios into their strategic planning, focusing in particular on highlighting solutions that could work in specific sectors.

Politically, tensions are likely to intensify over the coming weeks and there must be a question mark over whether meaningful progress can be achieved ahead of the next significant milestone, which is the EU Council meeting in October.

Michael Farrell FCA is Director at PKF-FPM Accountants Ltd., a service provider for InterTradeIreland’s Brexit Advisory Service.