Leveraging no-deal Brexit preparation

EU leaders on 28 October agreed to grant an extension to the Article 50 deadline until 31 January for the UK to leave the EU.

The extension agreed in principle is a flexible one — the UK could leave the EU before that date if the UK Parliament voted to accept the terms of a Brexit deal. The deal would also need to be ratified by the European Parliament.

EU Council president Donald Tusk said in a tweet: “The EU27 has agreed that it will accept the UK’s request for a #Brexit flextension until 31 January 2020. The decision is expected to be formalised through a written procedure.”

Meanwhile, MPs in the UK Parliament’s House of Commons have voted on legislation for a general election to be held on 12 December. It is expected to be passed by the UK Parliament’s House of Lords, and then Parliament would be dissolved on 6 November as election campaigning accelerates.

As uncertainty continues, Simon MacAllister, FCMA, CGMA, a partner in EY’s Transaction Advisory Services and the firm’s Brexit lead for Ireland, said: “We’ve definitely seen an increase in our clients' and … the private sector generally accelerating … some of the planning they have done over the last three or four months.”

“Dublin has done very well from relocations from the financial services sector. Very little of that has been located in the rest of the country, so those parts are not getting any of the offsetting benefits of any of the negative Brexit impacts,” he explained.

MacAllister said the rural Irish economy relies on agri-food and tourism — the two sectors that would be most impacted by Brexit worst-case outcomes.

Larger agri-food businesses have done a lot of work to understand their supply chains and the logistics issues around them, he said.

Some businesses have invested in new production equipment to move out of products with heavy exposure to the UK market and into products that would have a better chance of selling into Europe, he explained.

As an example, MacAllister said that as the UK is one of the three main cheddar cheese markets together with Ireland and Russia, “Cheddar producers in Ireland have been looking at what other types of cheese or … dairy-based products could they produce that would have a better chance of selling internationally.”

Leveraging no-deal preparation

In the UK, most large businesses have done a reasonably good level of no-deal preparation, he said. “The interesting part … is how quickly can people leverage the work they have done on no-deal … starting from a position of worst-case scenario and then work back to where you may end up with a free trade agreement. And working out what the practical implications of a free trade agreement would be.”

The role of the private-sector management accountant in the event of a still possible no-deal exit, MacAllister suggested, would be to take advantage of their connectivity with all parts of the business — including commercial finance, operations, and financial reporting. They can then “pull together some of the conclusions that those teams will come up with, whether it’s production … or supply chain … or tariff knock-on impact”.

He added: “They can be the one who sits at the centre pulling all that together to work out what’s the impact going to be on profitability … working capital facilities [and whether] we have issues with our debt covenants.”

Management accountants create an overall message that the business can start to act on, he said.

In the event of a no-deal Brexit, the level of disorder in most businesses would be significantly more amplified, MacAllister said.

“At that point it would be a question of all hands to the pump. You’re going to need to rely on people who can be very quickly analysing the situation as you have it, prioritising the areas of most concern … and be the ones who are very clearly able to message what should be done.”

‘Macroeconomic’ impact

In addition to practical supply chain readiness — for example, the customs forms needed or warehousing requirements — there is also the “macroeconomic” impact to consider, MacAllister said.

“For most people, the bigger impact medium term will be if the economy goes into a very significant recession, which is possible … and then what’s going to happen to underlying consumer demand?”

Businesses, he said, need to understand what the underlying demand impact could be and then how that flows through the business — what it means for production, the cost base, working capital, and bad debt risks.

He advised companies to consider creating a playbook for Brexit. This would mean “having a couple of sensible scenarios … around particularly a no-deal outcome … and what are the levers we would pull in our business.”

He added: “If we have a pay review coming up, do we go to 0% or 5% reductions? Are we looking at reducing headcount? What investments to pull that would save cash that wouldn’t stop the business?”

David Noble, ACMA, CGMA, is finance director at UK-headquartered Cory Brothers Shipping Agency, the logistics division of Braemar Shipping Services Plc. It employs around 170 staff globally.

He said the company had been planning for Brexit for 12–15 months.

Staffing issues

Balancing staffing with the short-term profit requirements has been a challenge, Noble said.

“We have had to be careful to balance our staffing requirements because if we have a sudden increase in the requirements for customs clearances activity, that will increase our headcount requirements,” he said.

However, as the business isn’t a high margin one, “we can’t just have people sitting around on the off chance that we may have a hard Brexit scenario or a Brexit scenario that leads to higher volumes of work”, he said.

He added that the company was supporting EU nationals working in the UK — including covering the charge that was originally made for them to apply for settled status in the UK.

The company had benefited from the devaluation of Sterling, but the change in VAT accounting in the event of a hard Brexit would negatively hit cash flow, he said.

Balance sheet stress-testing and cash flow planning have become more important in the run-up to the end of October, he added.

“In the run-up to the … March deadline we did see a [favourable] spike in activity … because people were stockpiling,” Noble said.

“We then did see a lull, and we haven’t seen so much of an impact in the run-up to the 31 October deadline.” This, he said, could be due to warehouses being already full of pre-Christmas products.

Advice for businesses

Noble offered the following pieces of advice to businesses in the run-up to Brexit:

• Brexit provides an opportunity to prove your credibility and deepen relationships and ties with your customers.
• Keep in contact with key customers in order to provide them with advice and to gain “visibility” of their plans and how they could be built into your own revenue forecasts.
• Brexit could be an opportunity to grow your revenues, for example, by customers seeing that you are doing a better job than competitors.
• There could be the opportunity to take on work currently being done by customers in-house.
• To move goods in or out of the UK from or into the EU, businesses need an EORI (Economic Operator Registration and Identification) number starting with GB in the event of a no-deal exit. This is a unique ID code used to track and register customs information in the EU and is obtained from HM Revenue and Customs, the UK government’s tax and customs authority.
• UK businesses importing from the EU should have registered for transitional simplified procedures (TSP) with HM Revenue and Customs to simplify the process in the event of a no-deal Brexit. TSP would mean a reduction in the amount of information that needs to be given at the border when goods are imported.
• The role of the management accountant as a business partner is important. As well as having “one eye on the financial statements, the cash flow planning, the forecasting of the revenue streams, the compliance piece”, Noble said being a genuine partner in the business is critical at this time.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.