Preparing for a ‘No Deal’ Brexit

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Even by recent standards, it marks a strange day in Politics when a British Prime Minister views it as a successful result to be given a brief to go back to re-negotiate a deal which is already binding and the EU insists it has no intention of re-opening. Still no credible statement has emerged of what the mooted “alternative arrangements” to the backstop might look like.

The other amendment passed last week was a motion rejecting a no-deal exit. But that motion was passed by an even smaller majority and is not binding on Parliament.

Since the proposal of a second referendum has been ruled out by Theresa May, and the suggestion of not leaving the EU would be regarded by the Government as a democratic failure, the prospect of us leaving with no deal appears to harden. At the very least the EU will resist giving ground on any concessions until the UK spells out what these should look like and, unfortunately, we seem unable to do this or, even if so, only at the final hour.

With the deadline fast looming, at the very minimum businesses should actively consider how their business model and processes would stand up in the event of a no deal Brexit on 29^th March. So, what practical measures should business owners be taking?

Supply chain management

In the event of a ‘no deal’ Brexit, the flow of goods that originate from EU member states is likely to be disrupted, particularly in the short term. This will damage sensitive supply chains and add extra costs and tariffs.

In terms of mitigation, all businesses should be liaising with their direct suppliers to see what measures they have in place. However, the truth is that they are as much in the dark as we are. Many businesses are ‘stocking up’ – buying excess stock to ride them through a period of reduced supply. Others are sourcing alternative supply from the UK, although that is likely to be a high cost option due to increased demand.

You may think you’re unaffected if none of your product comes directly from the EU, however, have you considered which of your UK suppliers source their product from the EU? Understanding your extended supply chain is critical to ensuring the impact of a no deal is minimised.

VAT and Duty on Cross-Border Movements of Goods      

A ‘no-deal’ Brexit outcome would mean that all arrivals and departures of goods to and from the UK will become imports and exports from a VAT and Customs Duty perspective. Currently, only goods whose origin or destination is outside the EU are considered “imports” or “exports”. The importance of this distinction is that imports attract Import VAT – which is recoverable subject to the usual rules on VAT recovery – and Customs Duty, which is not recoverable. Crucially, as the Duty is not recoverable this will unfortunately represent an additional cost of doing business.

As Customs Duty is an absolute cost, it will be very important to assess the type of goods arriving and categorise them correctly - as this will drive the rate of Duty - and also understand how to correctly value imports for Duty purposes and take advantage of any Duty reliefs. Equally important, as hold-ups at borders could be commercially extremely damaging, is exploring any possible deferment options, which allow goods to move freely with the Duty paid retrospectively.

Cash flow planning/funding

Clearly carrying increased stock and the cost of any additional Customs Duties requires cash – indeed all of the issues raised here have an impact on cash in one way or another. Understanding the cash flow impact of various scenarios (the impact of buying increased stock, the impact of a reduction in income due to a lack of product) is critical to being able to manage that impact.

More prudent business owners will be asking their accountants to prepare long and short term cash flow forecasts (the latter on a detailed, 13 week basis) in order to identify any possible cash shortfalls. Where shortfalls exist, there are a number of options available to business owners in terms of sourcing short term funding. The range of ‘asset backed’ debt (borrowing against stock, debts or fixed assets) has never been more diverse, while more traditional forms of borrowing (short term loans, overdraft extensions) are in ready supply for profitable, cash generative businesses.

The key here is pro-active engagement with your bank and/or your adviser.

Foreign exchange

Although Sterling continues to perform poorly against both the Euro and the US dollar -and, by extension, pretty much everything else - a no deal Brexit could see Sterling weaken yet further. Businesses seeking assurance could do much worse than investigate the benefits of a forward contract arrangement to give certainty to future cash outflows.

Conversely, the prospect of a no-deal Brexit is perhaps priced into the current exchange rate, so any positive result i.e. any result which gives certainty to the markets, may see Sterling bounce back – a consideration both for importers and exporters.

EU national employees

This is an easier one. The UK government has sought to reassure EU citizens and their family members living in the UK that they are welcome to stay in the UK in the unlikely event of a ‘no deal’ scenario. To achieve this, the UK will continue to run the EU Settlement Scheme for those resident in the UK by 29 March 2019 in a ‘no deal’ scenario. Bottom line, make sure your staff are aware of their right to work and have made plans to register with the Settlement Scheme.

Conclusion

We are inevitably faced with continued uncertainty, with no likelihood at all that the position will become clearer for many weeks, and possibly not until the very last stages of the countdown to 29^th March. This makes it essential for businesses that have not so far analysed the implications for them of a ‘no deal’ Brexit to ensure now that they have a clear plan to deal with the eventuality, whatever personal views of the ultimate likelihood of that might be.