Practical Brexit Advice

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Introduction
So, here we are. We did not think we would have to write this advice, but two years after the referendum result the UK is really no closer to an acceptable deal or a consensus of what an acceptable deal would look like.

Unfortunately, the risk of a Hard Brexit has increased substantially. It does not matter which way you voted, the easiest trade deal in history is now looking quite difficult.

A Hard Brexit could have an impact similar to the 2008 financial crisis - at least in the short-term, before stabilising. If we had collectively seen the 2008 crisis before it happened, we would have probably sought to avoid it. However, here we are staring at an end date for all of our current trade terms with the rest of the EU on 29th March 2019. Also, defaulting to the World Trade Organisation (WTO) trade terms will result in a significant change to existing trade tariffs.

Importantly, we cannot use the same WTO terms as negotiated by the EU with the WTO, the UK will have to go to the default tariffs and negotiate from there. Also, we cannot unilaterally decide not to impose tariffs or decide to change them. Any changes have to be negotiated and agreed with existing WTO members. Failure to follow the default WTO tariffs risks current members of the WTO (and the WTO itself) taking legal action against the UK.

What follows is some obvious practical advice designed to keep you in business, and retain employees and customers.

 

Employees
For the vast majority of businesses, the single largest cost is employees. Employee recruitment, training, management and retention are huge costs. For these reasons, it is tempting to make redundancies to save costs. However, redundancies mean a loss of all that investment, (it also means other employers can recruit and benefit from your lost investment). If there is a need to reduce costs, other steps should be considered first, such as a shorter working week. If redundancies become necessary, seek voluntary redundancies first.

 

Bonuses
Bonuses are usually discretionary in employment contracts, (bonuses are different to sales commission, which is usually seen as part of pay). To manage cash flow, you may want to consider paying bonuses later or paying in tranches.

 

Pay Cuts
Pay cuts should be considered a last resort before compulsory redundancies. Any cut in pay should be temporary, and senior staff should take the cut first to preserve employee morale. It is important that employers still follow the rules on minimum pay and conditions.

 

Contracts
Any commercial contracts you have will (should) include a Force Majeure clause. This clause allows either party to end the contract without penalties where it becomes impossible to service the contract. This clause is usually supposed to cover unlikely events such as civil unrest or war. However, Brexit could become such an event. Where you supply another party, this gives you a way out of a contract you cannot meet. Unfortunately, the same holds true for those that supply you. If for example, you have a supplier based in mainland Europe they could end a contract, because it is too expensive, time-consuming or simply impossible to ship goods or provide services to you.

 

Suppliers
Now is the time to renegotiate commercial terms or request longer to pay. If possible avoid shortening payment times for your own customers, for example from 30 to 14 days, as this risks scaring them off. Alternatively, consider offering discounts for prompt payment or for advance payment on account.

 

Alternative Suppliers & Routes
While seeking to preserve existing supplier relationships and supply chains, it is important to research and secure alternative suppliers and supply routes. This is only proper planning. Most businesses have already done this. Obviously having multiple suppliers for the same products or materials can increase administrative costs, but this is outweighed by a diversity of supply.

 

Relocation
For those businesses that conduct significant amounts of business with other EU countries becoming a third-country after Brexit may well impose new tariffs under the WTO, once the UK leaves the Single Market. These tariffs will introduce new costs to business, (plus the additional administrative burden). For many businesses tariffs will reduce competitiveness and significantly reduce profit margins. The only option for businesses significantly impacted by this to relocate some (or all) of their operations to another EU country.

We would suggest that this is a one-way move - once operations have been relocated (for most businesses) it would be too costly and disruptive to move back to the UK subsequently, should the UK decide to remain within the EU.

Obviously, relocation takes time to plan and execute. Many businesses have now passed the point of no return and have moved or are in the process of moving.

Inevitably relocation means relocating key employees who are willing or able to move, or offering alternative roles in the UK (if possible) or following redundancy procedures.

 

Stock
Again most businesses have already begun stockpiling non-perishable goods and materials. However, for finished non-perishable goods, some businesses have begun running-down stock levels to avoid being left with too much unsold inventory. This particularly applies to big-ticket items such as consumer electronics, vehicles and plant & machinery.

 

HMRC
For businesses that may have difficulty meeting tax commitments we strongly recommend talking to HMRC now and not when the tax is due or after it is due. The level of late payment may well increase over the next 6-12 months. If you believe this is going to be an issue dealing with it now is the best option.

 

Conclusion
Some, (possibly most) will consider the items detailed above as obvious. However, given the current levels of uncertainty, some practical advice is worth having. The main aim should be to get through the initial Brexit phase and still be in business once the worst is over.

Our advice remains the same - businesses should budget for at least six months of disruption and should have sufficient cash reserves to cope for that period.

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