With the trajectory of the Brexit process still at a nascent stage, Mercer & Hole’s Michael Armstrong looks at what it could mean for SMEs from foreign exchange fluctuations and access to the single market to VAT harmonisation and the risk of multiple customs declarations.
The negotiations have yet to formally begin and Brexit itself will not be delivered until the new year of 2019 at the earliest. All of the detail will remain up in the air for while yet but we continue to talk to our clients about the challenges and opportunities that lie ahead. Escaping the regulatory burdens imposed by the EU is often cited as a prospective boon for small UK businesses but there are a range of specific issues at play.
In both the short and long term businesses will need to plan ahead to take best advantage of their ability to be flexible and nimble.
The pound in your pocket
The most obvious and immediate impact of the referendum result was the devaluation of Sterling in the currency markets.
The boost for UK exporters only mirrors the pain for those with suppliers paid in Euros and Dollars. Although there was something of a rebound after 23 June, the currency adjustment has been sustained, and those businesses with significant transactions outside of the UK may require a re-appraisal of their trading partners and priorities.
For example, UK based suppliers may now be price competitive where they were not before, and tenders to overseas customers may prove an easier pitch to make.
Of course, protection from foreign exchange movements remains a common question for businesses whose fortunes are unavoidably tied to the movement of sterling against another currency in one direction only.
Leading and lagging or buying currency in advance provides the simplest route for smaller businesses to hedge against the transaction risks involved. It is worth noting however that this is simply a technique to protect against short-term volatility for those businesses who are exposed; this is insurance against risk and not a strategy to be adopted for all businesses who trade abroad.
Free from EU directives
Large sections of EU law are already subsumed within UK legislation – indeed the proposed EU repeal bill will enshrine all adopted EU directives into UK law. Changes on this front will come further down the track but are worth consideration nevertheless. The nature of the UK’s trading relationship with the EU can only be speculation at this stage, but indirect tax law is one area in which there will be significant scope for a shake up affecting all importers and exporters.
As a starting point, harmonisation of VAT rates and excise duties can no longer be assumed. EU VAT directives, insisting that standard VAT rates must be at least 15% and reduced rates be at least 5%, would no longer be in force. The UK may be inclined to seek a competitive advantage by reducing our existing rates.
If the UK were to remain part of the customs union that is the single market, then it is likely there would be a strong case for retaining the bulk of the current VAT rules. This would better allow continued interaction with the EU indirect tax rules. In the event of leaving the single market, the UK would find itself in the same position of the rest of the world with respect to EU VAT.
The UK would be free to derogate from the current directives but it is considered likely that parliament may seek to retain many of the existing concepts - at least in the medium term.
The most important changes may come for those businesses making business to consumer (B2C) sales to EU private customers. For example, the distance selling rules could cease to be applicable to the UK, meaning that B2C sales into the EU could become VAT free exports.
UK businesses may then need to consider making sales to EU private customers through an EU hub in order to avoid the negative impact of EU import procedures on sales to individuals.
The UK would also presumably lose access to the EU ‘one-stop shop’ mechanisms that are gradually being rolled out in various areas of VAT to remove the burden for a business to obtain VAT registrations across separate member states.
Intrastat and European Commission sales lists would no longer need to be completed - however, the compliance saving here would likely be offset by the need to file additional export declarations. At this stage it would be prudent for small businesses to identify which of the potential issues will be at play when the time comes.
UK property investment
While there may be increased uncertainty for those holding EU property investments, the gloomy predictions for UK property in the wake of the vote so far appear to be overdone. The chances of a significant fall in property prices cannot be dismissed but the vote to leave has not found any such weakness in the market.
For buy-to-let investors, the far more significant changes in the coming years will be the removal of higher rate income tax relief on mortgage interest costs.
Throw into the mix the additional 3% stamp duty charge on the purchase of second homes and there is pretty potent headwind facing this sector. In some cases tax planning may be able to soften the blow: placing property into a limited company structure or transferring ownership to a spouse may be an option.
The message from government, however, is clear, and it is not one that is encouraging you to seek to become a landlord.
The changes resulting from the UK’s new relationship with the EU will clearly present challenges to small businesses. Compliance costs fall disproportionately on the little guy - we can but hope that the UK grasps this opportunity to cut the burden in regulation and taxation in the long term. In the meantime, let’s see if UK PLC can refocus from political projects back to business.
This article previously appeared in CCH Daily.
Last reviewed 27 October 2016