BREXIT HELPING YOU FIND YOUR WAY ONE STEP AT A TIME

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1 BREXIT HELPING YOU FIND YOUR WAY ONE STEP AT A TIME

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3 HELPING YOU FIND YOUR WAY ONE STEP AT A TIME BREXIT 01 INTRODUCTION THE UK S VOTE ON 23 JUNE 2016 TO LEAVE THE EU HAS SENT SHOCKWAVES AROUND THE GLOBAL ECONOMY. Immediately after the vote the financial markets were hit hard and sterling fell sharply to a 30 year low. Since then share prices have recovered and markets have started to calm down and volatility is lower. Focus is now shifting to the impact on growth in the economy. The UK economy is growing better than anticipated immediately following the referendum but the devaluation of Sterling is causing an increase in inflation which will impact consumer spending and business profits. Undoubtedly, there will be uncertain times ahead and market fluctuations will still occur but with uncertainty there is also opportunity. Over the next few pages we will spell out some of the changes that are on the way and will explain some of the uncertainty. It will also highlight some of the opportunities that your business should be aware of and the issues you need to manage.

4 02 BREXIT HELPING YOU FIND YOUR WAY ONE STEP AT A TIME WHERE ARE WE NOW BUSINESS AS USUAL BUT WITH HEIGHTENED VIGILANCE SINCE THE REFERENDUM RESULT WAS ANNOUNCED YOU WILL HAVE UNDOUBTEDLY HEARD THAT MOST BRITISH OF PHRASES: KEEP CALM AND CARRY ON. And with good reason. The clock doesn t start on leave negotiations until the UK government invokes Article 50 of the Lisbon Treaty. Article 50 must be invoked in accordance with a country s own constitutional requirements. The Prime Minister has stated that the UK will give notice by 31 March However a recent High Court decision has established that the Government cannot give notice under Article 50 without reference to Parliament. The Government has stated that it intends to appeal the High Court decision and the matter will be considered by the Supreme Court with a judgement likely in January The Government says it intends to stick to its March timetable but the Parliamentary process could cause delay as well as result in the introduction of amendments and conditions on Brexit negotiations. In the meantime the EU is not prepared to enter into any pre-article 50 discussions or negotiations. Once invoked, there is a minimum of two years for the UK to negotiate an exit from the EU and therefore the status quo remains throughout this period. Until then the UK remains within the EU and all that it entails. There is also likely to be a transitional period between the end of negotiations and the signing of a Free Trade Agreement between the UK and the EU. EU membership is based on four pillars of freedom: The free movement of goods The free movement of services and freedom of establishment The free movement of persons (and citizenship) including the free movement of workers The free movement of capital. These four freedoms are intended to improve the competitiveness of all 28 EU member states involved in the single market. And it is this which is set to continue for at least the next two years. But it won t quite be business as usual. The political debate will continue as Theresa May sets out her negotiating position on Europe. There may still be pressure for a general election and the referendum result has also raised questions about another Scottish and a possible Northern Ireland independence referendum. There are also 5 elections across Europe in the next twelve months, including France, The Netherlands and Germany, all of which could result in significant changes to the ruling governments in those countries. Uncertainty seems to be the only certainty for the next few years.

5 HELPING YOU FIND YOUR WAY ONE STEP AT A TIME BREXIT LEAVING THE EU A MESSY DIVORCE? Leaving the EU will be a long drawn out process. Politics will dictate the timetable. A fundamental issue underlying the process from a UK perspective will be whether the UK can negotiate a new relationship with the EU whilst negotiating an exit. EU trade commissioner, Cecilia Malmstrom, has been clear that under current EU law there are two distinct sets of negotiations exiting and trade. She has made it clear that in her view trade negotiations cannot begin until the two year exit process is completed since the EU is not able to agree individual trade deals with any of its members. In practice it is in all party s interests for these discussions to run concurrently. With this in mind there are four main stages to a Brexit (with a fifth set of indirect issues running alongside it). The legal separation process including matters such as the UK s future contributions to the EU budget to cover matters such as pensions of EU civil servants who are UK citizens, ongoing EU development projects A trade agreement with the EU and on what terms Cooperation on security, intelligence and defence matters Interim arrangements after the two year negotiating period has expired. During the two year negotiating period the remaining 27 EU nations will meet to discuss the UK s withdrawal. Following negotiations a draft deal will be put to the EU Council. Any deal needs approval from at least 20 nations covering at least 65% of the EU population. The deal will then need to be approved by the EU Parliament. It will be very challenging to get sufficient agreement across the various EU member states. At the end of the two year period, negotiations can be extended if all 27 member states agree. If there is no extension and no agreement, then Article 50 states that the EU Treaties simply cease to apply to the UK. The Brexit process is enormously complex and will consume significant Civil Service resource. A new Government Department, the Department for Exiting the European Union has been established with responsibility for overseeing the negotiations to leave the EU and establishing the future relationship between the UK and the EU. David Davis is the Secretary of State for Exiting the European Union. The Department s immediate priorities are: Ensuring the government is able to take initial decisions on the UK s withdrawal on the basis of the best possible advice Strengthening capability across government in preparation for the work ahead Reaching out to stakeholders in order to understand and capture their views Establishing the Department and setting it up to succeed. The European Commission has set up a Brexit taskforce, known as the Article 50 Task Force, to conduct negotiations with the UK. It is headed by Michel Barnier, a former French foreign minister and EU Commissioner, with Sabine Weyand, a senior German trade negotiator, as his deputy.

6 04 BREXIT HELPING YOU FIND YOUR WAY ONE STEP AT A TIME GOING AT IT ALONE? WHAT THE FUTURE HOLDS A number of prominent UK politicians have stated that they want the UK to continue to have full access to the Single Market, but yet take greater control over its borders and to make no further contributions to the EU budget. This does, however, feel too close to a have cake and eat it scenario, that history has shown is very unlikely in EU negotiations. No other country has ever got this type of deal from the EU. Making any compromises on any of these three principles will be extremely difficult and painful for the new UK Prime Minister as doing so will infuriate large sections of the population and / or business community. However, compromise is inevitable. If the UK economy really does suffer extensive damage with rising unemployment and reduced business investment and the public finances suffer as a result, then public opinion may be willing to make more compromises on free movement and the EU budget in order to protect our economic wellbeing. THE EXISTING MODELS FOR NON-MEMBERS ARE: EUROPEAN ECONOMIC AREA (EEA) MODEL SWISS MODEL TURKISH MODEL Remain in the free trade area like EFTA members Norway, Iceland, Liechtenstein but requires: Free movement of people Financial contribution to EU Series of bilateral interdependent sectoral tariff agreements with the EU but requires: Free movement of people Financial contribution to EU Only a partial Customs Union for goods but: Excludes services, agriculture and public procurement CJEU supremacy CANADA MODEL Comprehensive Economic and Trade Agreement although not 100% coverage but requires: Financial services and some other goods and services excluded WORLD TRADE ORGANIZATION ONLY Tariffs agreed under WTO rules but requires: No free trade access There is an enormous amount of discussion and debate about what Brexit really means and what type of model the government will seek to negotiate so called hard Brexit and soft Brexit options. These terms are ill defined but hard Brexit is broadly interpreted as meaning a relatively swift exit, with no or very limited free movement of people post exit and a trade agreement which is unlikely to involve full access to the single market. Soft Brexit broadly means retaining full (or near full) access to the single market with an acceptance of the conditions that that is likely to bring, such free movement of people and a significant ongoing contribution to the EU budget. Sources inside the EU suggest that they will not allow any splitting of the four pillars in order to gain access to the single market. The government has talked about seeking a bespoke trade agreement while retaining strong border and immigration controls. It is not yet clear precisely what this will look like but it seems increasingly unlikely that the government will push to retain full access to the single market. Of course politics both in the UK and across the EU will be the key determinant. Following the recent US election and with elections due in 2017 in both France and Germany, all one can say is that uncertainty, political upsets and unexpected outcomes are the new order.

7 HELPING YOU FIND YOUR WAY ONE STEP AT A TIME BREXIT 05 YOU AND YOUR BUSINESS THE BDO BUSINESS CHECK LIST LEAVING NO STONE UNTURNED With so much uncertainty ahead it is vital that your business stays as flexible and vigilant as possible to meet any challenges but also to take advantage of any opportunities that will be created through these changing times. Different organisations face different challenges and the threats and opportunities of a Brexit will be unique to each one. Now is not the time to make final decisions but you can start to prepare for what might lie ahead by working through our business checklist of key questions and actions: BUSINESS STRATEGY Set up a Brexit task force within your business. The team should be made up of senior leaders within the business including those responsible for P&L, HR, external and internal communications, legal and risk. Its function is to keep the business informed of developments, identify risks and opportunities and advise on how best to react Analyse how different post-brexit trading models will affect your business Build flexibility into your business plan Engage with your trade organisations to help understand the potential impact of Brexit as well as to help ensure the needs of your industry sector are communicated to government. OPERATIONAL CONSIDERATIONS How would total costs (including duties) compare from EU suppliers versus potential non-eu suppliers? What is the impact of the devaluation of Sterling on your business? For example, a greater opportunity to export and/or increased cost of imports? Are sales within the EU large enough to justify moving manufacturing and operations to an EU site to avoid a customs duty hit on margins? Review your data sets; are you hosting some in the EU? PEOPLE Your people are your greatest asset. In a communications vacuum employees will fear the worst. Review the potential impact and give what reassurances you can This is even more relevant to employees of EU or non-eu origin. Be sensitive to their worries and encourage open and supportive dialogue. Internal communications tools like Yammer can be hugely helpful to encourage debate and discussion Review employee contracts and consider what action may be needed to ensure that non-eu and EU talent is protected and retained If you currently use seasonal workers from within the EU what are the cost implications for your business should free movement of labour cease? TAX The UK s fiscal landscape will change as Government seeks to maintain our global competitiveness. Over the past 40 years, our tax laws have become entwined with the regulations within the EU, which look to ensure a level playing field for companies across the union and therefore support the four pillars of freedom for members. As the UK government works through the economic impacts of Brexit and how they might be able to cushion the downside and support the upside through fiscal incentives, they will also need to unwind the complex connections between domestic and EU laws. We explore what we consider to be the key tax changes and other economic changes that may impact the tax position for UK businesses in order to help them plan for Brexit and maintain their competitive edge. To help you navigate the uncertainty however, we have considered the following questions as part of our checklist. Keep focused on any changes in tax rules that emerge following negotiations and keep in mind the following questions: How are you going to manage your VAT registrations and administration costs across the EU post-brexit? How much more working capital will be needed to finance the VAT cash flow costs of imports and exports post-brexit? As negotiations begin it will be important to keep a close eye on any changes to UK transfer pricing rules: -- Are your transfer pricing policies still valid? -- Will your current group structure now trigger withholding tax costs post- Brexit? REGULATION With the UK leaving the EU, there will be laws and regulations that will need to be repealed, reformed or retained but it is too early to know which one and any implications. Does any element of your business within the other EU member states include services within a regulated sector? If your business is operating within the regulated industries, should you consider transferring functions within the EU in order to continue to benefit from the passporting across the single market? If so, you should consider the following: Any business transferred will need to take place at arm s length following the transfer. Existing transfer pricing will likely need to be revised to reflect the change in trading and the new cross border transactions.

8 FOR MORE INFORMATION: IAIN LOWSON BDO PARTNER +44 (0) ANDY BUTTERWORTH PARTNER, TAX +44 (0) SCOTT KNIGHT PARTNER, AUDIT +44 (0) STUART LISLE PARTNER, TAX +44 (0) PETER HEMINGTON PARTNER, CORPORATE FINANCE +44 (0) This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. November 2016 BDO LLP. All rights reserved. HB008617