Caroline Biebuyck 8 May 2017 10:00am

The business of Brexit

There’s plenty for professional firms to be thinking about in relation to clients’ businesses and to their own, as Caroline Biebuyck finds out

Caption: Illustration: Paul Ryding

As the UK and the EU’s chief negotiators David Davis and Michel Barnier prepare to, in the words of one press report, “face off on Brexit mountain” when the UK moves into the next phase of pre-Brexit talks, businesses are working out what leaving the EU will mean for them. This puts professional firms in an interesting position. Not only are they gearing up to advise their clients – they are also having to think about how Brexit affects them.

There are five big issues for everyone, says Karen Briggs, head of Brexit at KPMG. “Access to skilled labour, additional tariffs and non-tariff barriers, the uncertainty of a closed negotiation process, the potential for a cliff edge situation and the long lead times that come with major legal changes, relocation and revised supply chains.”

Crossing borders

Last year’s referendum increased uncertainty in the business world. Many companies reacted by deferring long-term plans and commercial decisions until some of that uncertainty had resolved itself. But at some point, companies have to take a view and make some choices, regardless of external circumstances.

This is where accounting practices can help. “Members need to be thinking, which of my clients might be affected, and how? What can I do to ensure that when they want some help, I have something meaningful and sensible to say?” says Sally Jones, director in Deloitte’s tax policy group.

Results of a survey of 1,500 members of the Managing Partners’ Forum, a body for the leaders of professional service firms, showed that 92% of respondents currently provide services to other EU countries. This does not only apply to large firms: 90% of those with fewer than 250 employees operate in the EU. What’s more, 69% of smaller firms see free movement of people as important or essential (rising to 77% for larger firms).

The accountancy profession uses large numbers of people from both inside and outside the EU and relies on significant movement between member states, says Clive Lewis, ICAEW head of enterprise. “This is a big issue for service providers: for instance, we know that banks are relocating some staff to other EU member states.”

Meanwhile manufacturers are thinking about their costs. There are currently no taxes or duties on goods or services between EU member states – a position that is likely to change for UK companies after Brexit.

Customs duties are a huge issue because of integrated supply chains, with industries such as pharmaceutical and auto having most at stake. “Making a motor car doesn’t just involve getting all the parts in one location and constructing the car,” says Ian Young, ICAEW tax manager. “The car may be made in the UK but components come from all over. Adding 8% at every border crossing can mess up the business model.”

Everyone would like to see a zero tariff situation, ideally for the whole economy but definitely for certain sectors, adds Lewis.

“There is a very sophisticated supply chain in certain industries. Business will be looking at these supply chains and saying: we currently buy this or that from the EU but can we source it locally in the future? If there isn’t a supplier at the moment then can we create one? There does seem to be a trend towards in-shoring, and technology may facilitate that.”

As businesses look beyond the EU for opportunities in new markets, clients will want advice about the regulations and practicalities of doing business in regions such as North America or Asia. Medium-sized firms will need to draw on the strength of their international networks to help. “This could be a big plus for them and something they should make sure is in place before trade negotiations start,” says Lewis.

However, the challenge will be for smaller firms to target their advice to their clients’ industries, given they do not have the specialists that larger firms have. “This is happening at the same time as Making Tax Digital, which is going to take up a lot of practices’ time between now and 2018,” Lewis points out.

Everyone will have just two years to prepare for whatever comes next, says Briggs. “With the duration of major change normally measured in quarters, not weeks, prudent firms will want to understand costs and timelines, then plan for worst-case scenarios. However, Brexit isn’t just about risk mitigation – it is also an opportunity for businesses to create a new future.

“My advice is that you can’t wait. Practitioners need to act now to understand the process, the greatest risks and the smartest opportunities.”

Accounting for Brexit

What should companies be saying about Brexit in their annual accounts? Companies have to consider how to communicate their thoughts and conclusions to their shareholders and include this in the strategic report, a key part of the front-end of the financial statements of all but small and micro companies.

The strategic report concentrates on the principal risks to the business: on what might affect the company’s business model, plans and outlook. There are no mandatory disclosures involved here, meaning each company will have a different view on the likely impact of Brexit on its operations.

Before the referendum, Brexit did not feature much in companies’ analyses of their prospects. Deloitte’s survey of 100 UK listed companies’ annual reports that were published just before the referendum showed only 16% had identified a potential Brexit risk in their 2015 year-end annual reports. In contrast, just over 52% of participants at an ICAEW webinar held in January this year predicted they will disclose Brexit in their next annual report.

Brexit will be a real test of strategic reporting, says Pamela Taylor, audit director at KPMG. “The question is how businesses can communicate their business models clearly so that investors can see what the implications might be from an understanding of what is happening in the marketplace as the exit negotiations progress.”

The risks are clear if a business model is to generate most of its revenue from cross-border flows between the UK and EU. However, it is just as relevant for the report’s readers to know if the company does not have exposure to the EU. Either way, the likely exposure needs to be made clear before the company gets into specifically talking about its prospects.

The starting point for all this is for companies to understand the risks, potential impacts and outcomes of Brexit. This could cover anything from contracts, customers and costs to potential implications on staffing and shifting markets. “This starting point drives what it means for businesses and their accountants,” says Taylor. “Then risk and risk mitigation come into play.”

The Financial Reporting Council has released guidance on the sorts of issues that companies need to consider in their strategic report. While this is mainly aimed at listed companies, ICAEW’s Financial Reporting Faculty head Nigel Sleigh-Johnson says it is potentially useful to medium-sized companies as well.

“The FRC guidance is not a bad starting point for businesses that think there may be a material impact on their prospects or business. Certainly the same broad range of issues will affect larger private companies as well in their strategic report. There will be a lot of attention on the annual reports, and strong public interest, not just by the shareholders but also the wider users of accounts.”

Companies need to think about the back end of their accounts as well, says Taylor. “The situation is uncertain. There will be judgments taken around significant estimates and disclosures around these.”

The Financial Reporting Faculty is starting to look beyond the Brexit date to assess how financial reporting standards might change in the future and will be issuing a thought leadership paper on this topic in the coming months.

“This is a chance for debate with practitioners about what might happen, both from UK and international financial reporting,” says Sleigh-Johnson.

Regulation and recognition

Regulation of the accountancy profession is unlikely to change on the day the UK leaves the EU. “The FRC will still be doing the same work: its auditor independence standards will be the same as the day before,” says Tony Bromell, ICAEW head of integrity and markets.

The longer term is a different matter. The issue will be whether the UK maintains levels of equivalence or mutual recognition in terms of qualifications, registrations and licensing for regulated professions, and what opportunities this presents.

Audit qualifications are not freely recognised between EU jurisdictions. “If we had a best-in-class free trade agreement that included a comprehensive series of schedules for audit and accounting, then maybe we could get there,” says Deloitte’s Sally Jones.

There is a precedent for this. The WTO came up with just such a series of schedules in audit and accounting during its attempts to liberalise trade in services during the Doha round of talks –
in fact, audit and accounting are the only professional services in which this has been done. “If the UK wanted to pick up that work, it would have a ready-made set of points that it could drop into negotiations,” says Jones.

The future of banking

Finance is perhaps the most important of the service industries to feel buffeted by Brexit. But despite fears about the loss of passporting, industry feeling is that London will continue to be one of the world’s global finance markets. “There might be some movement but the expectation is that the major players will still be in London,” says Iain Coke, head of ICAEW’s Financial Services Faculty.

That’s not to say finance firms are keeping everything in the capital. Some are looking to move their European HQ; others are moving parts of their business to other financial centres. Issues they are considering include the capacity of these other markets, workforce availability and the ability of the cities to take on their business and house staff. “They are asking whether they like other places’ way of doing business,” says Coke.

“We don’t know how long businesses will have to implement the new system, but we do know that typically a lot of details are finalised very late in these kinds of negotiations. I don’t expect many financial institutions will wait until the final details are resolved before they decide where they want subsidiaries and who they want in what position. They have taken a few months to consider things but are now saying: we need to make a decision.”