Brexit: Key issues you need to consider

How will Brexit affect the pound?

When the UK decided to leave the EU in June 2016, there was an instant and tangible impact to the pound, even though the exit wouldn’t actually take place for years to come.

As Luke Walden from Moneycorp says, “Overnight, Sterling plummeted by up to 15% versus the Euro and US Dollar. Nothing fundamentally had changed, but currency market movements are propelled by speculation and businesses which trade internationally were immediately affected.

For UK exporters, the fall in the value of the pound suddenly made their product more desirable to overseas buyers. Export tariffs in a Brexit world have been discussed for hours on end and this will be a key topic of negotiation in the next few weeks. However, right now the ‘Made in Britain’ brand is sitting pretty.

UK importers, on the other hand, immediately saw their costs surge overnight and were left with some tricky decisions to make; to pass those extra costs on to customers, thus potentially becoming less competitive, or swallowing the cost themselves and eroding profits.”

So, what does the future hold for the pound?

Luke says “Volatility became less aggressive, albeit ever present, throughout 2017, 2018 and 2019 especially when we had to endure the change of leadership in Government and UK elections. It was only when Covid struck in early 2020 did we see a huge spike in currency volatility over such a short period of time.

Between 18 February and 19 March, we saw Sterling decline by over 12.5% versus the Euro and 13.5% versus the US Dollar purely on concerns and uncertainty how this pandemic would impact the UK economy.

To put that in perspective, a business needing to make a EUR 100,000 payment to a supplier in February 20 would’ve been c.£12,000 better off than making the exact same payment in mid-March, purely because of the movement in Sterling.”

It’s impossible to predict what will happen to the pound over the coming weeks and months. Luke affirms “businesses should not be speculating but rather utilising FX hedging tools to protect profit margins and give themselves peace of mind and clarity over costs.”

This will be more important than ever as we move ever closer to the Brexit date of 31 December 2020. At this stage, a deal of some description is expected to materialise but a ‘No Deal’ scenario cannot be ruled out. Such a scenario is predicted to weigh on Sterling once more. Talk of potentially seeing it as low as 1.05 and 1.20 versus the Euro and US Dollar respectively have been muted.

What can you do to protect your business from currency movements?

Ultimately, no one knows what will happen over the next few months and years. Will Covid-19 fade away or will there be a resurgence in cases as we enter the winter months? Are the current difficulties in Brexit negotiations indicators of a no-deal Brexit or just political posturing?

All of this uncertainty will affect the movement of Sterling against other currencies.

Luke’s advice is that “Businesses should not be sitting on the side lines hoping for the best when it comes to managing their FX exposure. Doing nothing is doing something. Leaving currency exposure unattended is an easy way of potentially eroding valuable profits. The good news is there are a range of useful tools and products to help mitigate this risk.”

Getting in touch with a reputable and credible foreign exchange broker should be the first point of call. They will be able to understand the business requirements, discuss different solutions available and suggest strategies which minimise risk and maximise potential beneficial moves in currency.

If you would like a non-obligatory conversation about this, please let us know and we can set up a meeting with Moneycorp or you can email a4g@moneycorp.com directly.

How could Brexit affect your supply chain and cash flow?

Following on from the previous point, the falling pound will also have an impact on your supply chain. The impact will depend entirely on your supply chain and the deal with make (or don’t) with the EU.

The falling pound will put prices up from a number of products and services that are tied to overseas prices. For example, if you use any raw material early in the supply chain that is sourced from outside the UK, or if you rely on any overseas services or production costs.

Currency fluctuations, price changes and customs delays could all also impact your customers. This could therefore impact the demand for your products and services, meaning an even greater impact on the cash you have coming in and out of your business.

So, what can you do to plan ahead and protect your business?

• Assess the issues and additional costs you may have in your supply chain and look into your options
• Talk to your customers and suppliers and get an idea of what their plans are
• Negotiate fixed prices for products or services in Sterling that you think are at risk during to currency fluctuations
• Create cash flow forecasts (which we can help with) based on different scenarios. This will help you identify any potential weaknesses in your cash flow in the coming weeks and months

And even if you think this doesn’t apply to you because you do not do business directly with anyone in the EU, someone above or below you in your supply chain will so it’s important to be aware and prepare for potential issues.

How will Brexit affect UK VAT?

The VAT changes all depend on the deal made with the EU. The most likely outcome, whether there is a deal or not, is that VAT with EU countries will fall in line with VAT rules we currently have for non-EU countries.

It potentially gives the opportunity for changes to the VAT treatment of some items that were previously dictated by Europe.

VAT, however, is never a simple tax to deal with. It is guided by specific case law, not overarching principles most of the time, but it has some very quirky rules to be considered.

Whilst we are unclear on what VAT changes Brexit will bring, we’ve gathered our thoughts on what may change and what you need to do.

Changes to VAT rates on specific goods

The current regime and rules may change as there will be more flexibility available due to no longer being bound by EU restrictions.

For example, there is an EU prescribed list of goods and items that can be at a reduced rate of 5% and certain items must be zero rated, but this could change.

Sales of services to Europe

The current VAT system runs on the basis that the VAT is accounted for in the country that is buying the goods or services.

There is no precedent for such a system continuing with a country that is outside the EU, therefore this will end, and EU countries would be treated the same as non-EU countries.

Where you are a service provider this could be useful as you would then not have to charge VAT on business to business services for EU customers.

However, you would have to review the VAT rules in each country you trade in if you are providing services in that country. Some countries require you to register for VAT in that country. Likewise, businesses selling services to the UK may also need to register for UK VAT.

VAT on the sale or purchase of goods with Europe

Goods leaving or entering the UK to or from EU states will become imports and exports. This means they will attract import VAT and customs/excise duties, similar to current rules for exports/imports from the rest of the world.

The payment of VAT at the border will have cash flow consequences. To counter this, HMRC introduced postponed accounting for import VAT.

Postponed accounting will apply to all imports and not just those from the EU and allows you to account for import VAT on the next VAT return instead of managing it at the border.

Whilst HMRC says this will be available in a no-deal scenario, there is a chance that it may not be available if a deal is made. But in reality, the ports and the UK economy probably couldn’t survive the delays caused by EU goods waiting at ports for the import VAT paperwork to be prepared and then paid so it seems high on the agenda to ensure there is a work around to stop delays.

There will however be UK VAT to account for on these goods purchased.

Essential admin for import and export

If you are importing or exporting goods to and from the EU you need to have registered for an EORI number before 1 January 2021. This can take a few weeks to come through, so make sure you are prepared before the deadline.

Online services post Brexit

Little detail has been announced on VAT on services.

One change that may have to occur is for UK suppliers of digital services using the Mini One Stop Shop (MOSS) scheme which allows those not established in the EU country to file a single VAT return covering everything. This may change to a ‘non-Union scheme’ instead.

There’s a lot to consider in terms of tax and there’s a lot of unknown. It’s crucial you know exactly what to do. Other guidance is only general so it’s important you speak to us about your specific circumstances to ensure you comply with the law.

How will Brexit affect the workforce?

A key challenge many businesses face are concerns recruiting and retaining staff from the EU countries, especially those in the hospitality, healthcare, food production, retail and construction industries, which employ a higher percentage of workers from EU countries.

If you have employees from the EU

If you have employees who are European Economic Area (EAA) nationals, you may want to ensure they are aware of what they need to do. The EU Settlement Scheme Employer toolkit is a good place to start. In short, they will need to:

• Make a free application under the EU Settlement Scheme
• Provide their identify with email address, phone number and current passport
• Apply before 30 June 2021 (or 31 December 2020 in the case of a no deal Brexit) to continue working for you and living in the UK.

If you wish to recruit workers from overseas

A new immigration system is being developed which will change how businesses can employ EU and non-EU nationals. The new system may be much like the Australian-style-points-based immigration system to enable the UK to attract the “brightest and the best”. This could impact your recruitment efforts, especially if you need unskilled or low-skilled workers.

Basically, most of the current immigration rules that previously only applied when recruiting non-EU nationals, will now apply to EU nationals. For example, it is likely that you will need to apply for a Tier 2 sponsor licence (which you currently need to recruit non-EU workers) for new EU hires post 1 January 2021. As a sponsor you may also need to pay an Immigrant Skills Charge of £1,000 for each skilled worker, which will inevitably make hiring more expensive for some employers.

If you are used to recruiting non-EU nationals, the changes to the system may be great news. The changes include:

• The removal of the Resident Labour Market Test (RLMT). This required employers to advertise the job vacancy for 28 days in the UK to ensure there were no suitable workers here. You will however need to demonstrate you are seeking to fill a genuine role.
• Removal of the cap on the number of people who can come into the UK as sponsored works
• Lowering the skills threshold Regulated Qualifications Framework (RQF) Level 3 to cover more roles
• Lowering of salary threshold and some flexibility if they fit other criteria

There are still a lot of unknowns currently, but if your business relies on employing EU nationals, please get in contact with us to ensure you are prepared for the new immigration system.

The CIPD (the Chartered Institute of Personal and Development) have also produced detailed guidance on how to adapt your workforce planning, which you can download here.