Tax

Business after Brexit

Nov 30, 2020
Tony Buckley shares eight tips to help businesses plan for a bright post-Brexit future and explains how Ireland could ultimately emerge from the mayhem as a nation of international market-making traders.

Well, now we know – or do we? We are getting used to the new reality of the UK as a third country, but the UK’s relationships will continue to evolve and the changes to our way of doing business will take some time to show their impact fully. The process of realising and adjusting to change is, in many ways, just beginning.

The Brexit process has taken us through some unprecedented scenes, scarcely believable public debates, and commentary that veered from “it won’t change anything” to apocalyptic descriptions of “cliff-edge” and “crash-out” and invocations of the spirit of the Blitz.

In fairness, confusion and a lack of clarity were inevitable. Never before, outside of wartime, was there an attempt to consciously create a full border in the middle of an integrated and prosperous market. With it comes the risk of re-imposing all the impediments to trade so successfully lifted by the Single Market and, going back even further, the customs duties and quotas that were eliminated in 1973.

Borders and their accompanying strictures usually develop over a very long period, and the countries on either side grow with, and adapt to, the border as a simple reality of life and business. Brexit proposed to dismantle a vast number of accepted and profitable practices and trading structures and reform them for a new and ill-defined reality. Daily life was going to change, but no-one could provide a full and detailed picture. The best that could be concluded was that the short-term effects would not be good.

Setting the political framework was imperative so that the legal, regulatory and administrative structures and systems could be developed in good time. Unfortunately, due to various factors, the political process took up almost all of the time available and resulted in uncertainty up to the last minute. It is only fair to say, however, that with something of this scale, some lack of preparedness is unavoidable, leaving much to be resolved in the ‘live’ environment of EU-UK separation.

Trade tends to find a way through. In modern Western Europe, where the benefits of free-flowing trade and commerce are so visible, all governments regard the facilitation of trade as a critical priority. We can see that in the solutions that have been created to keep trade flowing in January 2021. Without the urgency of Brexit, some of the changes, especially for Ro-Ro, would have taken years of negotiation and planning.

So, not everything is in place, and the practical administration has not bedded down into the smooth operating models that will emerge. Teething troubles are expected in any new system, and this is an enormously complicated situation. Nevertheless, we can be sure that by the end of 2021, the new reality will be as well understood as was the old. At that stage, we will be able to properly take stock, count the cost, seek the benefit, and adjust our future planning.

At the moment, many businesses are shouldering significantly increased cost to ensure that goods continue to move across borders in the short-term. The agents, freight forwarders and express carriers who can navigate the new rules and systems are not cheap. The generally accepted estimate is that customs will add about 4% to the cost of traded goods. For most of 2021, and possibly beyond, this is likely to be an underestimate for Irish and UK businesses, which are struggling with a shortage of expertise and capacity in customs and trade support services, not to mention long-standing supply chains and agreements that are no longer fit for purpose.

The way forward will be different for each entity. The following is not intended as a full guide, but as a small collection of tips that appear to apply to most businesses.

1. Don’t be hasty

The new systems and rules are permanent. They therefore represent a quantum shift in the operating parameters of business – not just for traded goods, but for all businesses directly or indirectly affected by Brexit (which is virtually all Irish businesses). For that reason, don’t rush. It may be worthwhile to incur very high costs in early 2021 for the benefit of breathing space. This will, in turn, allow you to design and tailor suitable long-term arrangements.

2. Understand the changes

Costs must be managed. For those that cannot change their prices, the question is whether the margin reduction can be minimised and made sustainable. If not, the wisest course is to change direction early. There are many options to reduce costs or find off-setting benefits, but the first requisite is that the business planners (owners and advisors) fully understand the rules of the game. Customs and international trading rules are, and will remain, central considerations in planning any business involving, or connected to, the UK. We are well used to the need to understand tax exposure. We now need to become familiar with the complexities of international trade, which have not been relevant to European trade since 1993.

3. Nothing is untouchable

Established structures, devised for a variety of reasons from tax efficiency to comparative cost advantage to administrative preference, must be reappraised. One of the most common challenges encountered by those advising on Brexit preparation is the insistence that existing structures and practices cannot be changed. This position usually stems from a failure to appreciate the cost of failing to optimise the supply chain.

4. Supply chains must change

Commercial agreements must reflect the new reality. Many of the goods sold in Ireland arrive here via UK distributors. It makes no sense to pass goods through two sets of customs and market regulations. Standing agreements will not be easy to renegotiate, but the alternative is a significant impact on cost.

5. Check the small print

Irish companies are, on average, smaller than their UK trading partners and a higher proportion of Irish companies depend on the trade. Irish companies must resist the strong temptation to agree to dictated trading terms without fully understanding the costs involved.

6. Manage expectations

Consignments will get bigger on average, and for a good reason. Just-in-time and small deliveries are disproportionately expensive when compared to less frequent full loads. Test your customers’ tolerance for less demanding delivery schedules.

7. Invest in your market

For a UK-based business, buying goods and components from a UK producer is preferable as the producer retains responsibility for standards, quality and customer rights. Purchasing from an Irish (or other EU) producer transfers all the producer’s responsibilities to the importer. For this and other logistical reasons, serious consideration should be given to establishing in the UK if significant and long-term business is planned there.

8. Look for opportunities

Don’t overlook the unique position that has been accorded to Northern Ireland. While the operation of the Protocol on Ireland/Northern Ireland is complicated, its possibilities are likely to repay close exploration. More generally, be aware that the advantages enjoyed by UK business – free access and large scale, for example – are significantly reduced in their effectiveness in a post-Brexit world. The competitive position of Irish business has therefore improved in the Irish and EU markets.

These points may appear to be an extreme reaction. A common belief (or hope) is that the adjustment can be made with minimal cost – just an addition to variable cost that can be passed on. The reality is that, while some will struggle on without adaptation for some time, their costs will ultimately leave them uncompetitive with those who read the writing on the wall and adapt accordingly.

Services have not been extensively dealt with in the EU-UK talks so far. The result is that, broadly speaking, services to and from the UK will operate similarly to any other non-EU country. The principles outlined above also apply here. There is a new reality, with national borders inhibiting the free movement of services. A similar reappraisal and planning exercise must be conducted.

We are, I believe, looking forward to a new awareness of international trade in Ireland that will significantly benefit our ability to operate in world markets. Traditionally, only the largest companies in Ireland had those skills. The vast majority of Irish importers and exporters dealt only with the UK or within Europe and failed to develop the skills and knowledge that would have enabled them to become market-makers. That is changing, and I look forward to the prospect in a few years of Ireland as a nation of international traders.

In summary, we are entering a critical period for Ireland’s traded goods and services sectors. If we adapt well, as we have the ability to do, we may find ourselves stronger, more agile, and a better place for small enterprise to flourish. This is not to minimise the inevitable prospect of business failure and job losses that will follow the economic and social turmoil caused by COVID-19. We must, however, look to better times ahead – and I believe that they are attainable.

Tony Buckley is former Head of Revenue’s Customs division and Programme Lead for Chartered Accountants Ireland’s Certificate in Customs and Trade.

Point of view: Crona Clohisey

The UK is entering a new world, standing aside from Europe amid promises that it will have greater control over its destiny. Brexit could be an opportunity for Britain to reinvent itself, to cast itself off from Europe and thrive in the world on its own. But one must ask: can Brexit work? Britain’s place in this new world will not be determined on 1 January 2021; it will emerge in the months and years ahead. Indeed, some studies suggest that that Brexit will boost economic output by 7% while others say it will be reduced by almost 20%.

The opportunities afforded by Brexit are often overlooked. The UK will remain an attractive place to do business and will also be free to forge new trade deals. That said, there will initially be disruption and challenges for businesses in Ireland and the UK, particularly for those dealing with customs administration for the first time.

The Irish economy will remain heavily exposed to the UK, and a working UK-Ireland relationship must continue beyond Brexit. The Protocol on Ireland/Northern Ireland will avoid the need for a land border on the island of Ireland. However, trade barriers between Northern Ireland and the rest of the UK must not result.

Cróna Clohisey is Public Policy Lead at Chartered Accountants Ireland.

Point of view: Jason McIntosh

Preparations for Brexit began shortly after the referendum result – particularly for businesses located near to, or trading across, the border between Northern Ireland and the Republic of Ireland.

Information and support have recently increased in availability. With the terms of a future trading relationship still unclear just weeks before the deadline, businesses have found industry resources (Chartered Accountants Ireland’s recent webinars, for example) hugely beneficial.

A central pillar of successful Brexit preparation is the involvement of all relevant departments, from finance and purchasing to HR and communications, in a business. Such a collaborative approach allows for detailed impact analysis and the drafting of a robust action plan, which must have the buy-in of senior management.

The impacts of Brexit extend beyond the import and export of goods. For businesses located on the island of Ireland, for example, employees might cross the EU border for work. While the risk of delays at the border for people seems to be subsiding, there will continue to be taxation and employment law impacts to consider. Taking advice will, therefore, be crucial. 

Jason McIntosh is Finance Manager at Seagate Technology.