22
BREXIT
ACCOUNTANCY IRELAND
OCTOBER 2016 VOL.38 NO.5
BREXIT: 100 DAYS ON...
Business leaders should start to consider risks and disruptive effects on a
‘hope for the best, plan for the worst’ basis, writes Cormac Hughes.
I
t is 100 days since the shock 23 June
vote for Brexit. What is clear is that
the UK will not commence formal
exit negotiations (by triggering Article
50) until 2017. Internal European Union
(EU) politics require a tough negotiation
with no sweetheart deal, and the vote has
created such practical complexities that
many believe it will take far longer than
two years to complete the disentanglement.
POLITICAL AND
ECONOMIC UNCERTAINTY
In the immediate aftermath of the vote, an
economic crisis was feared. While sterling
has devalued by 9% (at time of writing)
against world currencies, action by political
leaders and the Bank of England has
provided reassurance. Equity markets have
recovered from initial falls. Confidence
and trading monitors indicate “business as
usual”– for the moment.
A Deloitte survey of European leaders
suggested that three in five felt it was too
early to tell if Brexit will have a negative
impact on their business. However,
most analysts foresee reduced business
investment in the UK in the near term
Oct_2016.indd 22
(due to uncertainty) and an impact on
long-term economic growth (due to
decreased trade and investment).
Uncertainty continues at the political
level. “Brexit means Brexit” is the mantra,
but the desired negotiating position of the
UK Government is not clear.
At a recent Deloitte seminar, former
President of the European Commission
(EC), Herman von Rompuy, noted that
Brexit is likely fourth in the list of EU
leaders’ priorities – after the refugee
crisis, terrorism and the need to stimulate
economic growth and employment. While
the ball is in the UK’s court, EU leaders
have their focus elsewhere. This all points
to a protracted period of uncertainty.
ANOTHER APPROACH TO
“WAIT AND SEE”?
Given this uncertainty, should business
leaders even start to think about the
impacts and risks of Brexit?
The UK Prime Minister, Theresa May,
has talked about a “unique” solution being
required, and no doubt many within the
EU would like to find an accommodation.
However, this will require acceptance
among the remaining member states –
a major risk to finding a ‘middle way’.
Should there be no agreement, the most
likely outcome is what has been described
as the World Trade Organisation (WTO)
model, whereby the UK exits the EU and
the single market and takes full control
of domestic policies and trades with the
EU under a customs and tariffs regime
available to all WTO members. This
scenario would be highly disruptive to
trade and commerce. It effectively spells an
end to the UK’s single market benefits of
free movement of services, goods, people,
and capital. Hard though it may be to
accept, this scenario may be the baseline if
Article 50 is invoked.
Our advice to business leaders has been
to focus their attention on near-term
controllables while waiting for clarity to
emerge. This centres on three items:
• Review business plans with significant
UK market exposure and understand
downside sensitivities from possible
reduced economic demand or currency
fluctuation;
• Assess how upcoming investment
26/09/2016 16:24:03
23
BREXIT
ACCOUNTANCY IRELAND
OCTOBER 2016 VOL.38 NO.5
decisions may be impacted in terms of
timing or location; and
• Engage and reassure international staff
based in the UK, or UK nationals based
in your business here.
100 days on, businesses should also start
to develop a preliminary assessment of the
broader risks and effects under the WTO
model. Using this scenario, Irish businesses
can take a “hope for the best, plan for the
worst” approach to identifying major risks.
In terms of baseline impacts, we have
identified four primary areas of impact
under the WTO model for Irish business:
•
•
•
•
Movement of people;
Restrictions to market access;
Cost of market access; and
Market opportunities and risks.
The impact is generally specific to
particular industry sectors, but this provides
a useful framework for considering the
issues. For each area, consider how they are
relevant to your business and what types of
action could be available.
1. Movement of people: Much of
the vote to leave had been attributed to
concerns about control over immigration.
Under a WTO scenario, there are likely
to be some restrictions required, possibly
through a work permit system for EU
workers. This is, of course, a very complex
matter – particularly given the UK’s high
dependence on foreign workers and
the long-standing common travel area
between the UK and Ireland.
The likely strategic impacts will centre
on internationally-mobile knowledge
workers and also, lower-cost workers in
sectors such as retail and agriculture. Brexit
will likely have implications for the access
to, and cost of, labour. Business could
also see increased costs in permits, and of
course any reciprocal impact with respect
to UK nationals working in Ireland.
2. Restrictions on market access:
Financial passporting is the most obvious
activity that will face barriers and is a likely
focal point in Brexit negotiations.
In certain regulated sectors, or those
with deep requirements on product
standards, the WTO scenario is likely to
create significant barriers to market access,
both into and out of the UK.
UK business groups have traditionally
been critical of perceived heavy-handed
regulation by Brussels. A WTO model
could lead to a divergence in EU and
Oct_2016.indd 23
IF THE UK LEAVES THE SINGLE MARKET, GOODS
TRADED BETWEEN THE UK AND IRELAND MAY
ATTRACT VAT ON IMPORTATION – POSSIBLY
LEADING TO CASH-FLOW AND ADMINISTRATIVE
COSTS. MOVEMENT OF GOODS CROSS-BORDER
MAY ALSO REQUIRE CUSTOMS DECLARATIONS,
PROBABLY BY ELECTRONIC MEANS.
UK regulation and standards. There has
been speculation of regulatory ‘arbitrage’
(creating competitive advantage for
certain business sectors through regulatory
divergences). However, the UK will need
to balance attempts to create a favourable
regulatory regime with its ambitions to sell
into the EU market. It’s worth noting that
modern free trade agreements (such as the
EU-Canada agreement) focus largely on
harmonising regulation to address “behind
the border” trade barriers.
Other sectors where restrictions on
market access could emerge due to the
nature of existing regulatory regimes
include the life sciences, business services,
technology and airline sectors.
3. Cost of market access: Leaving the
single market and customs union under a
WTO scenario implies WTO tariffs and
extensive customs processes between the
EU and UK, and essentially additional cost
for business.
In some sectors, such as industrial
products and pharmaceuticals, complex and
integrated supply chains have developed.
Clearly, these would be heavily impacted.
Tariffs would also impact sectors such as
agriculture and food producers, which are
heavily reliant on the UK market.
If the UK leaves the single market,
goods traded between the UK and Ireland
may attract VAT on importation – possibly
leading to cash-flow and administrative
costs. Movement of goods cross-border
may also require customs declarations,
probably by electronic means. Customs
controls on goods would likely be imposed
at entry and exit points (EEA members
and EU countries still have customs
controls), leading to delays and significant
administrative costs.
4. Market opportunities: The
performance of the UK economy and
sterling will continue to be critical for
Irish business. Modelling sensitivity to
movements in both and considering
strategies to address particular weaknesses
remain priority actions. Where investment
is concerned, opportunities for Ireland
with regard to foreign direct investment
(FDI) have been well-documented and
we may see benefits in certain sectors.
However, businesses seeking to expand
activities or ramp up operations through
M&A in Ireland will be impacted if their
targets have any UK dependencies. In
many cases, such activity will be put on
hold as contingent strategies until the
final terms of the EU-UK relationship are
made known.
For Irish operators seeking to
expand into the UK, a UK acquisition –
particularly one which caters to the UK or
non-EU countries – may actually be more
favourable than before, owing to the drop
in sterling.
FAIL TO PREPARE,
PREPARE TO FAIL
Business leaders can start to consider these
impacts by asking the following questions:
• How would the identified areas disrupt
our business strategy and operations?
• Are there specific areas (e.g. suppliers,
locations,
manufacturing,
market
development etc.) which require longterm planning (30 months) or a change
to address?
• What preparation should we take to
mitigate these impacts?
By addressing these questions, you will
be well-positioned to respond as clarity on
the exit process emerges.
Cormac Hughes is a Partner in
Consulting at Deloitte.
26/09/2016 16:24:04