Brexit ‘an opportunity’ if you plan ahead

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Gerald Edelman’s Richard Kleiner considers the factors finance directors should consider when their companies are planning for overseas growth from outside the EU

Finance directors of high-growth SMEs thinking about how their company’s growth strategy may change in a post-Brexit environment will need to keep a watchful eye on trade agreement negotiations as they pan out over the next few months, even though they are unlikely to be agreed in full this year.

This means that the full impact of Brexit will not be felt by companies trading with EU member states until 2021 at the earliest.  

Brexit is still causing much uncertainty. So, it is understandable that businesses may be put off expanding and doing business overseas, especially if they don’t already do so.

However, high-growth SMEs should see Brexit as an opportunity and those that do expand and begin planning to export or set up new operations overseas now, will find that they are ahead of many businesses come 2021.

Investment

As every finance director knows, to expand, businesses need investment. Brexit may result in a fresh wave of inward investment, especially from private equity firms and others, helping SMEs to grow.

This is certainly what the UK government are stating is likely to happen, mainly as a result of the renewed stability following the General Election result.

Trading with the EU

Between now and the end of this year, there will be no change in any part of the VAT system in respect of the EU. Unfortunately, HMRC has not communicated this at all.

This means that the following will remain unchanged this year:

  • EU cross border supplies of goods and services
  • Distance selling rules
  • Intrastat
  • Tour Operators Margin Scheme
  • Refunds of VAT incurred in other EU countries
  • Mini One Stop Shop (MOSS) VAT returns
  • CJEU rulings  
  • Specified supplies and place of supply rules

There were a number of business briefs issued by HMRC in September 2019 that have stated that there will be wholesale changes in 2020. These are now redundant.

These business briefs were assuming the UK was leaving the EU without a deal i.e. with no transitional arrangements, and it is very unfortunate that they have not been withdrawn or replaced.

However, there are two areas that are causing debate: EU refunds and the application of MOSS. Even now there are many websites that are stating that these two points are exceptions and will change early this year.

This would mean, for example, that digitally supplied services by a UK business to a private individual in Italy in say April 2020, could not be reported by MOSS and the UK business would either have to register for MOSS in another EU country or register for VAT in Italy. We can confirm that this is not the case.

It is business as usual this year for UK VAT within the EU, and supplies made by EU members to the UK.

Manging your supply chain

When it comes to managing your supply chain after the Brexit transition period, due to more red tape in the short-term, suppliers and customers may look for alternative solutions. Now is the time to review your relationships with customers and suppliers and identify whether these relationships will continue. There is also the opportunity here for you to consider alternative suppliers, not only in the EU.

You will need to consider tariffs, currency fluctuations and customs disruptions that are likely to lead to delays and price changes on goods for businesses and customers. Currency fluctuations could also provide opportunities as they will make some goods and services more accessible to international buyers.

Changes to bureaucracy

In the short-term at least, it is expected that Brexit will mean an increase in bureaucracy.

Despite the name, a free-trade agreement (FTA) does not mean frictionless trade. It will involve plenty of costs and bureaucracy. To qualify for zero-tariffs, UK firms selling goods to Europe will likely have to prove that their products are sufficiently British-made. For goods that have come through a complex supply chain, documenting the origin of a product’s value is not always easy, and often it is simpler and cheaper to pay the tariff than it is to try and document origin.

Employment

If you are considering employing people on the ground, in the country you wish to expand to, consider the following:

  • If you intend to employ UK nationals who are based overseas, you need to consider the rules in that country (which may change after Brexit). UK nationals may need to apply for residency and you will need to check if they are covered for healthcare
  • How much time you have to set up an operation – getting a business up and running is not easy. We recommend you speak to accountants and lawyers in the country in question to understand all the requirements
  • Be aware of different cultures – holiday entitlements (e.g. Spain is 30 days) and pay and bonus expectations
Keeping employees based in the UK
  • If you employ EU, EEA or Swiss citizens, they will need to apply to the EU Settlement Scheme to continue living in the UK after 30 June 2021
  • Business that employ EU-migrant labour will need to keep abreast of the new rules, which the UK government will be bringing in to effect within the next few months
Understand your market

Due diligence on the markets you are planning to target is important. Consider the legal implications: some countries expect you to contribute to health insurance or social care programmes. You will need to review whether these expenditures will be too costly. Some countries offer grants, such as tax breaks, to SMEs. You might not be flexible on the country you wish to move into, but if you are, it is worth doing your research.

Company structure

Finally, know how best to operate and structure any overseas operation or activity. It will be important to obtain advice as to the most appropriate vehicle, whether that is a representation office, a principal branch, or a holding company.

Richard Kleiner is CEO at the Top 60 accountancy and business services firm Gerald Edelman