The outcome of the EU referendum has delivered a major shock, whichever way you voted. The only real certainty is that, over the next few years, there will be significant uncertainty as the UK negotiates a new relationship with Europe.
As with many seismic changes, the Brexit vote on 23 June has given rise to both opportunities and threats for our clients and their businesses. For some, it may be very much a case of ‘business as usual’ while for others, adjusting to the new economic reality will be an important next step.
Despite what the media would have us believe, life has gone on and, while there will be winners and losers from stock market volatility, currency fluctuations and wavering international confidence in the UK economy, we remain focused on helping our clients to readjust and thrive.
We should start with the reminders from the European Commission and HMRC: nothing has immediately changed. The UK remains a member of the EU, with all the benefits and obligations that this brings – and, like it or not, tax will continue to be due as normal.
It is too soon to understand what type of formal relationship we might have with the EU in the future. There is much talk in the media about mirroring the type of relationship Norway and Switzerland have negotiated: both countries have access to the EU’s Single Market for their goods and services in return for the free movement of people and a monetary contribution.
Whether the free movement of people is a price that UK voters are willing to pay remains to be seen. Any change could, of course, have an impact on the supply of skilled and unskilled labour in the UK, and would affect markets as diverse as agriculture, the healthcare sector, technology & R&D.
What we can do to help
Whilst some businesses are happy to use accountants solely for routine accounts and tax compliance work, many of our clients use us as a sounding board to discuss current challenges, future plans, and how they may achieve them.
Changes will come at a fast pace and it is vital that all businesses surround themselves with advisers who can help them navigate, take advantage of, and deal with, opportunities and threats as they arise.
Our experienced team of partners and managers is well-placed to assist: whether to aid clients to rethink or adjust their strategy to handle the coming changes; put contingency plans in place for a world where we are in or out of the common market; or expand or scale back operations, we have the skills and experience to help.
Business Innovation & management reporting
Management reporting is a vital and strategic function that drives key business decisions, but it can also act as an early warning support system for you in the current economic climate.
Few businesses have the in-house expertise to extract, analyse, report and interpret the ever-increasing quantities of dispersed financial data in their accounting systems.
With current levels of economic uncertainty, it has become even more important for businesses to make sure that they have accurate, meaningful and readily available Business Innovation & Management information. Some businesses have already identified a trend of orders being held back as a result of current uncertainties, and this will almost certainly impact on cash flow over the coming months.
We have a dedicated team of highly qualified accountants who draw upon practical professional services-based experience, information technology skills and a detailed knowledge of popular software packages to deliver services and solutions for our clients.
Speak to us about how we can help improve the visibility and usability of the financial information you already collect.
Those who import goods or raw materials will almost certainly be hit by the weaker pound, and will incur additional costs.
Early consideration should therefore be given as to whether costs can be passed on by way of price rises. Indications are that, in some sectors, businesses are already resetting their charges in expectation of an upward movement in prices. Supermarkets, for example, have already indicated that prices are likely to rise for imported produce. Forecasting the impact of these changes and their impact on future profits will enable you to take prompt action to mitigate the risks.
Exporters, on the other hand, will benefit from the weaker pound. For some export businesses, there may be an opportunity to push further into overseas markets and benefit from the relative cost-effectiveness of UK-produced goods and services.
We have excellent contacts with international accounting firms, and can make introductions in most jurisdictions through our MGI network. We can also assist with important decisions such as the type of business structure to adopt if expanding abroad, and the tax implications of doing so.
Some businesses may be able to tap into sizeable non-EU markets such as China – we would be delighted to share our experience and knowledge with those considering expansion into these areas.
We have strong links with banks and foreign exchange experts such as AFEX and can advise on the options for your business, including hedging by way of options, forward contracts and more.
Those considering a business sale may have initially looked at the Brexit result with dismay. Uncertainty and corporate finance are often seen as unlikely bedfellows.
The weak pound does, however, mean that UK companies will be particularly attractive to overseas buyers, and this may give rise to opportunities.
Our links with international accountancy practices and their clients, through the MGI network, ensure that we are well placed to identify international interest in your business. Our corporate finance team is active within the MGI International Corporate Finance Forum, and has already seen deals involving European acquirers being accelerated as a result of UK businesses appearing even better value as a result of the weak pound.
UK corporate finance deals are continuing to flow as well, with our team taking several new disposal instructions just days after the Brexit vote.
Speak to us if you are considering a sale over the coming months or are unsure about timing a disposal to achieve maximum return.
Businesses facing challenges from delayed investment decisions or the potential loss of EU grants can benefit from our proven track record of securing funding from banks, finance houses or peer-to-peer lending such as Funding Circle.
Corporation tax and income tax
We expect a Budget or early Autumn Statement in October, when we will still very much be part of the EU. Depending on the economic outlook at that point, we would anticipate that any tax rises will be tempered by at least some incentives for business investment.
Before leaving office, former Chancellor George Osborne indicated that corporation tax could be reduced to around 15 per cent in an effort to ensure that the UK continues to be attractive as a destination for international business investment, but the rapidly-reformed government has not indicated that it intends to deliver a post-Brexit Emergency Budget.
Tax rises and cutting back of tax reliefs both now seem likely as the UK strives to balance its books in an atmosphere of chronic uncertainty. However, in the longer term, tax reliefs which have been restricted as a result of EU state aid approval rules could be extended, including R&D tax relief, patent box, EIS and Seed EIS relief.
Income tax relief for pension contributions could be an easy target, and the Treasury’s pre-Brexit vote decision to slash the rate of tax on capital gains to 10 per cent and 20 per cent now looks a little rash, and could potentially be reversed or adjusted.
The Treasury and HMRC will be faced with significant challenges as they design new laws and systems, and negotiate with the other EU states on the new relationship. There is unlikely to be much room for new UK initiatives.
Please speak to us about the timing of income and capital extraction, as there is certainly an argument for ‘banking’ the current tax rates and reliefs on offer, prior to any future changes.
Pensions and investments
Those concerned about their pensions or investments should consider investments with guarantees. There is a range of investments which are ‘in the market’, but guarantee to return your original capital at a set future date. There are also investments which pay a guaranteed income for life.
Structured deposits could also be considered. These are bank deposits with all the usual protections which pay interest linked to stock market performance.
Pressure on government finances may also mean reductions in pension tax relief, which were widely predicted before this year’s March Budget and then not implemented (presumably to keep middle England happy before the Referendum vote). These changes are now being widely predicted to be introduced this year.
Our independent financial services team has a huge amount of experience across each of these areas, and would be happy to review your current arrangements and discuss how they could help.
VAT is our one truly European tax, with similar rules applying across the continent, and a minimum rate of 15 per cent being set by the EU.
The EU will, without doubt, require the UK to adopt a legal basis for VAT after our exit. The monetary value of VAT to the UK government is such that it will almost certainly continue well into the future.
Even after a formal exit, VAT cases will continue to be decided by reference to the law in force at the time of the matters in dispute. Given the slow progress of VAT cases through the legal system, it is possible that UK courts could be applying EU law principles well into the 2020s.
Once the UK’s EU exit has been formalised, it is expected that goods bought into the UK from an EU country will be subject to import VAT and import duty. Goods exported from the UK to an EU country will be subject to import VAT and import duty in the EU recipient country.
Speak to us about any VAT and customs duty queries. Current rules on cross-border trade are complex and will remain important until a formal exit is finalised.
With many businesses having to comply with the new FRS 101 and 102 standards for the first time this year, tensions are running high as to whether these will be changed again following Brexit.
We consider it unlikely that we will see a retreat to former UK accounting standards, regardless of whether we remain in the EU or not. The UK has always been an advocate of the International Financial Reporting Standards (IFRS) and the Financial Reporting Standards (FRS) which were specifically developed to allow for pre-existing UK legislation such as the Companies Act 2016. The micro-entities standard, with its 13 notes, could well be a candidate for amendment.
The message from the Financial Reporting Council remains ‘business as usual’. EU laws and directives governing UK accounting have been written into UK company law, and this framework won’t be changing for the foreseeable future. The Companies Act 2006 was tweaked to make small companies adopt FRS 105 in place of FRSSE for accounting periods beginning on or after 1 January 2016.
In terms of the day-to-day accounting functions, for some businesses, outsourcing of the finance department or payroll may be an opportunity to keep overheads under control, maximise flexibility or bring in new skills.
We have the capacity and knowledge to help fill these gaps, as and when needed.
Few concrete answers on Britain’s exit from the EU currently exist, as the main political parties reshape themselves prior to making any formal decision about triggering our exit from the EU, or commencing negotiations around our future relationship.
For most of our clients there will be both opportunities and threats as they prepare themselves to confront uncertainty and challenges ahead.
Given our client base, it is almost certain that we have seen most issues before, in one form or another – and we will almost certainly have managed to find a solution for them, in one form or another.
Whether it be expansion, asset protection, hedging or simply improving visibility of your financial position, we would be delighted to share our experience and knowledge with you. Please contact us to discuss how we can help.