27/05/2021 Lengthy negotiations and an unprecedented health pandemic put many business owners and managers on the back foot when it came to Brexit planning. With the UK’s exit official, they should now consider adapting their business models to match the new trading landscape, says Gareth Jones, Partner and Global Head of Privately Owned Business, Mazars. Below he discusses setting up new subsidiaries, supply chains and how the new UK-EU relationship will soon be ‘business as usual’.
How have privately owned businesses (POBs) prepared for Brexit so far?
Delays in the deal, negotiations that went back and forth and the impact of Covid-19 meant a lot of businesses essentially put off preparing for Brexit. It was a ‘wait and see’ situation where business leaders chose not to act until the final agreement emerged.
Since January, when goods were delayed at borders and supply chains broke down because of the new legislation, POBs have been looking for ways to make the process easier. For medium-sized businesses, that has potentially involved setting up a new subsidiary on the continent and preparing for tariffs and customs duties.
However, setting up a subsidiary is not always straightforward: you need to choose a country based on your supply chain, your customers’ locations, your tax arrangements and recruitment opportunities. Plus, if your leadership team spends a lot of time on the continent to get the business up and running, then anticipate possible issues around transfer pricing rules. Tax authorities are likely to start looking more closely at where business owners and managers are spending their time and making their money.
Of course, not every company can set up a subsidiary and the Federation of Small Businesses recently revealed 25% of UK SMEs had stopped exporting because of the additional cost and paperwork. That’s a worrying finding that advisers and governments need to ensure they help rectify.
How are POBs affected differently by Brexit?
It depends on the sector and service of the POB. If you run an international company that delivers services, for instance, then you could be affected by indirect tax changes. In contrast to their larger counterparts, some POBs will have less resources dedicated to compliance but they still need to carve out time to understand changes so they are not caught out down the line. That is a real challenge for POBs, which typically manage a lot of competing priorities at once.
If you’re a POB owner or manager, do not bury your head in the sand. Support in the form of advice as well as grants is out there. Speak to your adviser as well as chambers of commerce and regional development agencies.
My team recently worked with a client facing major supply and sales delays because of border issues. Rather than opening a subsidiary, they took a different route and partnered with an EU supplier, which meant the client’s goods did not need to enter the UK and they could trade solely within the single market. You might lose some margin in the short-term doing this, but you’ll maintain your customer base.
Have you had conversations about clients leaving Europe all together?
For organisations already trading on the continent, it’s unlikely to make business sense to pull out. It might be useful to focus slightly more on domestic markets but leaving would rarely be advisable. Lots of businesses should still reconsider how they work with the EU from the ground up. Some industries, particularly heavy distribution and FMCG, need to work out new ways to manage their supply chains and business models. In my view, those businesses that have flourished in recent years are those that got to grips with the admin side early on and were able to focus on strategic growth areas despite the ongoing Brexit developments.
The Mazars Brexit Radar covers six key business areas, which areas have you worked on most with POBs recently?
Global mobility comes up a lot. Business owners are used to travelling for work and asking their teams to regularly visit clients and suppliers in Europe. Ease of travel could change, and businesses will consequently be more reluctant to travel unless necessary.
Indirect taxes like VAT are also a key concern, particularly from an administrative perspective. Taxes are by nature backward-looking and businesses still don’t know what exact duties they’ll be liable for in the near future. If you’re operating in the UK, be aware that HMRC will be looking at how people have set up their cross-border transactions. If you don’t do it right to start with, you could be three or four yearly quarters down the road, doing it incorrectly, and then face significant liability for tax.
What would you advise POBs to put on their Brexit agenda next?
For those that have weathered the Brexit storm, you’ve probably got through it from a trading perspective and admin perspective, now it’s time to think about what suits your business going forwards, including optimising your operations and profitability. Think about where you want to be in five years. Ask yourself: where will your customers, suppliers and trading opportunities be?
If you think your business trajectory is going to change, start planning for it. Some businesses may have to move parts of their operations out of the UK to best serve their customers and their bottom line. Brexit has shifted the dial in some areas and businesses need to be strategic about how they react. For POB owners and managers, the business is your asset – if you don’t change how it’s done then no one will.
Are you optimistic for POBs moving forwards?
Yes, the challenges of the last few months are likely to come to an end as Europe and the UK settle on the deal. Tariffs, for instance, could become the norm and businesses will train teams to be able to deal with them. The harder bits will get easier and the new relationship will become business as usual.
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