A guide to Brexit
How could it affect your business?
As the UK Government moves towards triggering Article 50 to leave the European Union, we look at the implications of Brexit for businesses in Ireland.
Does your business:
- Export to the UK?
- Import from the UK?
- Have operations in the UK?
- Operate in a sector that consumers can purchase directly from the UK?
- Operate in a highly regulated sector?
- Employ UK citizens in Ireland?
- Employ Irish or other EU citizens in the UK?
- Plan to have operations in the UK in the future or do more business with the UK?
- Plan to diversify into new markets outside the UK?
If any of the above apply to your business, then Brexit is likely to have an impact on your business and this may create both opportunities and challenges.
What will be the potential impacts of Brexit?
On 7 December 2016 the Central Statistics Office (“CSO”) released its statement entitled “Brexit: Ireland and the UK in numbers” which highlighted the level of trade between Ireland and UK in recent years. The key headlines were:
- In 2015 13.9 per cent of goods exported went to the UK and 25.7 per cent of goods imported arrived from the UK
- In 2014 18 per cent of services exported went to the UK and 10 per cent of services imported were from the UK.
- The UK accounted for 10.9 per cent of Irish stocks of direct investment abroad at the end of 2015.
- The UK accounted for 4.6 per cent of the stock of direct investment into Ireland at the end of 2015.
- Visitors from the UK accounted for 41 per cent (3.5 million) of overseas trips to Ireland by non-residents in 2015.
- 23 per cent (€971m) of the total expenditure (excluding fares) by non-residents on overseas trips to Ireland was from the UK.
We have identified four main areas where Brexit will have the biggest impact on Irish businesses:
- Foreign exchange rates
- Movement of people
- Restrictions to market access
- Customs duties and tariffs
Foreign exchange rates
The GBP/EUR FX rate has fluctuated since the result of the UK Referendum on 24 June 2016, with a significant devaluation in sterling. As sterling has weakened, exports to the UK have become less competitive and imports from the UK have become cheaper. We have already seen the movement in the FX rate being cited as the cause of business failure in some sectors. The concern is that the pain could worsen as the sterling fall and Brexit-induced uncertainty hits demand from Irish businesses selling into the UK.
Businesses should invest time now in reviewing their hedging strategies and to identify what level of exchange rate could potentially put their business at risk. This will drive what action needs to be taken to mitigate any risks associated with potential future adverse currency movements.
From an M&A perspective, we have noticed an increasing trend towards Irish corporates considering an acquisition of manufacturing and supply chain capability in the UK. This creates a natural FX hedge and could lead to a lower cost base in light of the devaluation of sterling.
Irish businesses which export to the UK should consider how they can either increase sales into the UK to grow revenues, or diversify into other markets to reduce their exposure to a weakened sterling in the medium to longer term.
Movement of people
Movement of people is one of the pillars supporting the Brexit decision after concerns were expressed about control over immigration. Brexit could lead to restrictions, possibly through a work permit system for EU employees, which in turn will impact on Irish businesses that employ EU workers in the UK or employ UK citizens in Ireland.
Employers should review existing and future pipeline requirements to assess the potential costs and the administrative impact caused by new immigration requirements and to assess what mitigation measures can be taken in advance.
Employers should review current contractual documents and practices to assess potential contractual issues including data protection and immigration quotas.
Restrictions to market access
Brexit will mean restrictions on trade between the UK and the EU and as a result significant barriers may arise in highly regulated sectors. As we await details on what form of Brexit will be agreed, it is possible that negotiations could lead to certain sectors having access to the single market. All contracts involving UK counterparties will need to be reviewed.
Sectors which are subject to regulation will need to monitor any proposed changes.
Customs duties and tariffs
It is possible that the UK VAT system will continue to operate as currently. However, depending on what rules are applied, there may be a cash flow impact for businesses.
The cost of market access will increase due to customs duties and tariffs imposed on goods moving between the EU and the UK, depending on what trade agreement is reached.
There will undoubtedly be some form of a border between the UK and EU and much of the focus is on what form of border will exist between ROI and Northern Ireland. There will be customs formalities which may be by means of border stations or may be managed remotely or electronically. Commercial traffic to and from NI and ferries to and from Britain could in particular be subject to such formalities.
The imposition of customs duties and tariffs could lead to additional costs to your business. Although no formal trade agreement can be negotiated before ‘Article 50’ has been triggered, the rates that could be imposed may be tested under various scenarios by reference to other international trade agreements. Irish businesses should understand the customs duty rate applicable to their imports and exports of goods to and from the UK on the basis the UK will no longer be within the EU and some form of customs duties and tariffs will apply.
Such costs may be exacerbated by increased administrative tasks that will be imposed on your business. Businesses will need to update their accounting and administration systems and procedures. Businesses will also need to review legal contracts with suppliers and customers from a Customs perspective.
What should businesses do?
In the short term, businesses should consider how to appropriately manage and respond to the immediate uncertainty surrounding the indirect impacts of Brexit.
In the medium to long term, you should plan effectively and future proof your business for the ultimate exit scenario and the disruptions that will result. Do not adopt a passive attitude and instead actively engage in scenario planning to assess the possible impacts of Brexit on your business. This is an evolving situation and will require ongoing monitoring. This may include:
- Potential revision of existing employee contracts/ location/visas
- Reviewing currency hedging strategies
- Reviewing supply chain and business operations in Ireland and UK
- Reviewing Data Protection legislation and preparing for the General Data Protection Regulation (“GDPR”) due to take effect in 2018
- Scenario planning in relation to FX rates, customs duties and tariffs
- Exploring opportunities in new markets outside of the UK.
For further details on our Brexit and how Deloitte can assist you, you can contact one of our Brexit team in Deloitte or visit our Brexit webpage.