Spotlight

The impact of Brexit on Northern Ireland

Sep 28, 2017
With great change comes the prospect of opportunity for Northern Ireland’s business community.

Figures published by the Northern Ireland Statistics & Research Agency (NISRA) in May 2017 show that total sales of Northern Ireland products and services amounted to just short of an estimated £66.7 billion in 2015. Exports amounted to £9.1 billion of which £3.4 billion went to the Republic of Ireland, £1.9 billion to the EU and £3.8 billion to the rest of the world. While Northern Ireland’s businesses rely heavily on the local economy, the export sector is critical for growth and the creation of a viable and sustainable private sector.

In this uncertain period, it is vital that growing export businesses and their advisors work in partnership to overcome challenges and take advantage of the opportunities that will inevitably present themselves as the Brexit jigsaw is put together. This, however, is only half of the story as the importing of raw materials and components sourced outside Northern Ireland, typically from the Republic of Ireland or the UK, will present further challenges for these businesses. Nowhere is this more apparent than in the food sector where the supply chain for higher value finished products often depends on high-volume, low-value cross-border trade at an earlier stage in the process. Meanwhile, the UK continues to be an important market for Northern Ireland’s businesses and one where ambitious companies see opportunities to expand. In 2015, Northern Ireland sales of goods and services to Great Britain amounted to an estimated £13.9 billion, more than four times the sales to the Republic of Ireland and seven times the sales to the rest of the EU. The strength of the trade relationship with the UK and a common currency have insulated Northern Ireland businesses from the worst impact of Brexit, but that is not to say that there are no other concerns. In the food sector, for example, profit margins are well below potential tariff levels and hiring of non-UK staff is becoming more difficult as potential employees are worried about their future residency rights.

Dependency on cross-border trade is particularly evident in the agri-food sector, with Ireland the destination for 53% of Northern Ireland’s export sales according to an additional data paper published with the UK Government’s Brexit position paper on Northern Ireland in August. Bord Bia figures show that 37% of Irish agri-food and drink exports went to the UK market in 2016. There is plenty of cross-border activity in other sectors too.

Unworkable solutions

Commenting to the UK House of Lords European Union Committee on the significance of the UK-Irish economic and trading relationship, John McGrane, Director General of the British-Irish Chamber of Commerce, said that it accounted for €60 billion a year in two-way trade and directly supported 400,000 jobs.

Given the volume of trade and traffic, it is not surprising that the question of border controls has been at the forefront of Brexit discussions. However, the issue will be difficult to resolve. Michel Barnier, the EU negotiator, recently dismissed the notion of a “frictionless border” and Irish foreign minister, Simon Coveney, has said that a technical solution involving cameras and pre-registration will not work. A proposal to have a border in the Irish Sea was not popular either and although UK and EU officials have said they want to preserve the Common Travel Area, it is as yet unclear how this might be achieved. While the negotiations continue, businesses across Ireland have little option but to plan for the worst while hoping for the best. 

Innovative solutions

To mitigate Brexit-related risks, some Northern Ireland businesses are exploring relocating certain functions out of the region. PKF-FPM is currently working with a number of clients who are exploring strategic alliances to mitigate potential supply chain and market entry risks associated with Brexit. Successful and progressive business leaders are identifying risks and actively looking at innovative solutions. Across the island, agile businesses are exploring all options to maintain access to the UK market and/or to access passporting rights, international talent and the ability to pursue government tenders in EU member states.

However, where Brexit prompts businesses to restructure, there are a plethora of issues to consider. Tax must be high on the list as changes to functions or profit-earning activity will alter a business’s effective tax rate while changes to an entity’s legal structure may affect losses brought forward in the UK or elsewhere. Exit charges where functions are moved out of one jurisdiction and into another may trigger taxable gains or require transfer pricing adjustments. Similar issues will arise for the disposal of assets. Supply chain changes potentially impact VAT, and businesses also need to factor in the potential cost of tariff changes to inter-company terms and IT systems.

There will be capital acquisitions tax issues for Irish farmers whose land straddles the border as the existing regime for agricultural property relief refers to agricultural land being land situated in the EU. Similarly, the Irish capital gains tax (CGT) exemption for investment property bought in the period from 7 December 2011 to 31 December 2014 and held for at least seven years refers specifically to property within the European Economic Area (EEA).

Other potential problems are that non-residents wishing to establish an Irish company must have an EEA resident director under current legislation and that UK/Irish social security legislation currently refers to residents/workers in EEA countries. Many clients are worried by the uncertainty about the enforceability of UK judgments and potential legal conflicts in contracts and cross-border matters.

Concerns and opportunities

Across all sectors, regardless of whether businesses plan to restructure, relocate, source new markets or concentrate on the UK, there are concerns about currency, financing, grants, data protection and various sector specific issues. Yet, amid the talk of problems, there is also talk of opportunities. Of the estimated £66.7 billion total sales of Northern Ireland products and services, 65% (£43.7 billion) is accounted for by sales within Northern Ireland, with the UK the next biggest market. Unlike the Republic of Ireland, where the devaluation of sterling has had a major impact on exporters, the sterling-based Northern Ireland economy has not felt any significant adverse impact. In the services sector, for example, which accounts for over £18 billion of sales, most small- and medium-service businesses find their customers locally.

NISRA estimates that sales of goods represented almost three quarters (72.8%) of total sales in Northern Ireland in 2015. 62% of these goods were sold within Northern Ireland. Ambitious Northern Ireland businesses see opportunities to expand their trade with the UK on the one hand, and potentially to retain access to EU markets by establishing cross-border alliances or restructuring. Similarly, we are seeing some Irish businesses actively exploring opportunities to establish in
Northern Ireland.

Conclusion

History shows that with great change comes opportunity. In the coming months businesses will need to continue to review business models, supply chains and existing markets, and look for new markets to de-risk where their existing models are adversely impacted by Brexit. The recently negotiated EU trade deals with Canada (CETA) and Japan (and commitments for a similar UK post-Brexit trade deal with Japan) present new opportunities and it is likely that further EU and non-EU deals will be negotiated in the future. In the meantime, businesses must focus on being agile, flexible and planning strategies to reduce risk and secure new markets and opportunities.

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