22 BREXITACCOUNTANCY IRELANDOCTOBER 2016 VOL.38 NO.5

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 UNCERTAINTYIn 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

(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

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.

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23ACCOUNTANCY IRELANDOCTOBER 2016 VOL.38 NO.5

BREXIT

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

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 FAILBusiness 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 long-term 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.

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.

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