British business faces a tough 2019. Uncertainty over Brexit and the need for last-minute contingency plans are casting a long shadow over an already gloomy environment. Growth has cooled, markets are down and sterling exchange rates low. Corporate failure is rising: there were 19% more insolvencies in the third quarter of 2018 than the same time the previous year.
And yet the picture might not be so bleak for small and medium-sized businesses, even those operating in troubled sectors. economia spoke to specialist partners at four accounting firms to find out more while sole practitioner Rachel Balchin outlines her plans for a no-deal Brexit.
When Crowe UK surveyed property and construction companies last summer, respondents’ biggest concerns were Brexit, economic uncertainty and political uncertainty. “Before the 2016 referendum, political uncertainty wouldn’t even have been in companies’ sights,” says Stacy Eden, head of property and construction.
Construction topped of the list of sectors with the most corporate failures in the third quarter of 2018. However, the survey findings suggest that firms that are left are continuing to invest, albeit more guardedly. Certain sub-sectors and regions offer better prospects than others, with residential favoured over commercial. “Some residential developers are doing very well given the shortage of housing, especially in certain areas,” says Eden.
Crowe’s survey suggests that construction firms are not as worried about funding as they were a few years ago. “Most people expect funding to remain open, as it has done,” says Eden. “However since the market is quieter and some share prices have fallen, few are listing – and it’s not the best time to sell a business.”
Still, political and economic uncertainty dominates thinking in the sector. Property and construction are long-term plays, and business leaders are concerned with how they can plan when the Brexit outcome is still unknown. As a result, they are concentrating on fundamentals. “The housing shortage is a key driver for high house prices in certain areas although property companies are not as optimistic as they were in 2014-15, when the economy was growing well; instead they are being more cautious,” says Eden.
The retail sector’s well-publicised woes continue to compound. A number of household names left the high street for good during 2018. November trading figures were poor and while Christmas sales were not released at the time of writing, there had been a flurry of profit warnings from both bricks-and-mortar and online-only retailers.
Retailers are more concerned than usual that a significant drop in consumer spending could leave them with Christmas stock they are unable to shift, says Roberto Lobue, partner and retail sector specialist at Menzies LLP. “At a time when margins are tight anyway, this could bring them closer to insolvency. And a cliff-edge Brexit could knock consumer confidence further.”
Many smaller retailers are unprepared for Brexit. “Without any certainty about the future, some are hoping for a deal and a transitional agreement, which will at least allow them to continue where they are in the short term,” says Lobue. “Others are hoping that Brexit doesn’t go ahead.”
The uncertainty and poor environment mean UK retailers are holding back on big capital expenditure decisions and are unlikely to invest large sums until the gloom starts to lift. One exception to this is retailers that sell internationally. The benefit they are currently seeing from the low sterling exchange rate is a short-term phenomenon. “Selling overseas will become costlier, particularly if tariffs are introduced and there are customs delays,” says Lobue. “To avoid this, some retailers exporting to the EU are establishing a warehouse in continental Europe to stockpile goods for this marketplace.”
Restaurant insolvencies rose more than 35% in the first three-quarters of 2018 when compared with the whole of 2017. But Mark Tenzer, partner at Jeffreys Henry, senses an air of cautious optimism among his independent restaurant clients. “The independent side is still growing with lots of new openings – a number of our clients are expanding,” he says.
Staffing is an issue in London and the South East, partly because of Brexit but also due to the fall in the pound making sterling salaries less attractive to eurozone nationals. Using agency staff is one solution, albeit a costly one. Some of Tenzer’s clients use head chefs who live abroad and come over once a month or so to train staff, check on standards and change menus. “They’re not paying for a full-time person or paying accommodation costs, so this works out as less expensive,” he says.
Places serving the middle-market are suffering most, partly because their customers are going out less, but also because food delivery firms are taking their toll. Deliveroo sales account for a third of the turnover at one of Tenzer’s clients. “They still need to employ staff and pay rent and rates, but they are not making the high-margin beverage sales or the service charge with the takeaways,” he says.
However, he thinks the overall situation for independents isn’t too bad. “If the owner is a good operator, has the right staff, keeps their eye on the ball and is clever with rotas and purchases, there’s no reason why the business can’t make money.”
Lights, sound, and action
The biggest factor affecting the entertainment industry right now is the dynamics of the internet, not Brexit, according to Dave Morrison, partner at Nyman Libson Paul. “Adaption to globalisation and the impact of the digital market are bigger issues than potential tariffs,” he says.
While Brexit means filmmakers will no longer be able to apply for grants from Creative Europe, they will still be able to access funding through the European Convention on Cinematographic Co-Production, a treaty governing multi-party productions.
Tax reliefs have historically been good for creative independent businesses, with breaks such as the Enterprise Investment Scheme offering investors income tax relief on buying shares in new companies.
Language barriers mean that Europe was never realistically going to be a truly single market for visual content distribution models, says Morrison. “Brexit may even be a benefit as production companies will be able to sell to the UK and Europe as separate markets.”
The UK government intends to seek Parliament’s approval for prime minister Theresa May’s Brexit deal tomorrow. Chartered accountant Rachel Balchin, founder of Bulldog Accounting, spoke to economia about what a no-deal Brexit means for her clients and her business.
Talking about the kinds of clients she has and their current links with the EU she says: “Most of my clients are smaller entities, with less than £1m turnover. Some are local businesses, such as IT contractors, stylists and photographers. But others do a lot of trade with European businesses. For instance, there’s an electronic equipment trading firm that buys and sells most of its goods in Europe, and a firm renting electronics for exhibitions, which does most of its sourcing in the EU. A bridal shop client buys from Europe and most of its staff are from Eastern Europe: they would be badly affected if all their staff had to leave suddenly.
Asked what sort of effect a no-deal Brexit would have on her business as well as her clients’, Balchin says: “Those that buy and sell from EU-wide businesses are the most nervous. VAT-registered clients have had letters about applying for the EORI (the EU registration for businesses trading with companies in the EU) but there’s no clear indication about what else to do. The situation is made even more confusing by the imminent Making Tax Digital for VAT deadline of 1 April, just after Brexit day.
“Businesses don’t want to make big decisions or to commit to large obligations until they know how they are going to be affected. The uncertainty means everyone is waiting to find out what it means so they can respond accordingly. That includes me! Because everything is still up in the air, there’s no point in engaging with the current minutiae when there’s nothing concrete or practical to act on. I will need to do something with my VAT clients, but I’m not entirely sure what it’s going to be.”
In terms of the Withdrawal Agreement and what she’d most like to see she says: “Clarity is the overwhelming problem. It’s still not clear what a no-deal Brexit would mean and how it would apply in reality. The situation is theoretical and vague and that doesn’t really help anyone in business make decisions. There’s a long way to go before the practicalities are ironed out. To some extent, the only way to make progress may be to jump and get down to discussions about the trade deal: what it means, how it’s going to be implemented, and how to reduce the inherent risks.”