Brexit for SMEs: Minimising risk, maximising opportunities

With just months to go before Britain splits from the European Union, for business owners key details of the final agreement are still to be ratified. The uncertainty impacting small and medium-sized enterprises (SMEs) – the backbone of the British economy – should not be underestimated.

The urgency is such that the Institute of Directors (IoD) has called on the chancellor to issue Brexit planning vouchers.

“It’s difficult for many SMEs to make contingency plans because they don’t know what they are planning for. And they don’t have the additional resources to invest in the way that larger companies do. That said, there are key things that finance chiefs at SMEs should be advising on,” says Tej Parikh, senior economist at the IoD.

Some of those involve scenario planning, based on the threats and opportunities of the different possible outcomes, reviewing your own supply chains – as well as those of your suppliers – and ensuring alternate funding is available in the event of an increase in costs, says Parikh.

“The first thing for any business to consider is what exposure their customers have to Brexit. If a company thrives from selling its products overseas or if their business is to sell to other companies or individuals who do, then it’s important to work out what the consequences might be,” says Mark Taylor, director, chartered accountants Duncan & Toplis.

Most owners, says Rebecca Wilkinson, director at Menzies, will be working on contingency planning, but what fewer SME directors may be aware of are the potential tax changes and extra costs and administration that will occur as a result of a no-deal Brexit.

“I don’t think there’s been enough attention on the potential tax implications from Brexit that might impact if you’re part of an EU group of companies. There is likely to be some impact on withholding taxes after 29 March. If we have a hard Brexit, the EU directive on dividends, which exempts us from withholding taxes, will cease to apply overnight,” Wilkinson says.

The UK has double tax treaties with most EU countries but some such as Italy and Germany do not offer the full exemption. The same would apply to interest and royalties’ payments. Presently they are covered by an EU directive and can be paid without withholding taxes in most cases, but if the UK faces a hard Brexit, exemptions will disappear overnight. What this means is that some SMEs would face significant amounts in withheld taxes that could take as long as two years to recoup and, in some cases, may not be recoverable at all, Wilkinson adds.

So, how should accountants help their business prepare?

1. The first step is a SWOT analysis of the threats. A range of different scenarios based on the different potential outcomes is vital. Prepare for the scenario that would cause the most disruption to business continuity in the short to medium term.

2. Scope out alternative funding sources. This will come from an awareness around cashflow. The business may need additional financing. Finance heads should be projecting cashflow for the year ahead and advising directors of spend parameters, and to curb any capital investment plans until the outcome is clearer.

3. Review and understand any tax changes that might ensue following Brexit, in particular withholding taxes.  

4. Consider your supply chain and be aware of any pressure points along the chain. Make sure your suppliers are Brexit-ready, too. Also review business contracts.

5. Tariffs and customs duties could rise. Net importers are likely to experience additional costs due to increased tariffs and potential VAT payable on customs duties. You could also be hit by customs delays and the knock-on effect on your customers and suppliers will be significant.

6. Some FDs could take a more offensive stance and look for new markets. Exporters should be currently taking advantage of the exchange rate and selling more.  

7. Overseas investors might be looking to gain a foothold in UK businesses given the attractive exchange rate. If you’re looking for a cash injection to grow, now is a good time to secure inward investment. Clarity and a strict timeline will be the greatest gifts that the government can provide business in 2019. In the meantime, accountants should be ensuring owners and directors are fully aware of all the risks – and making the most of any benefits.  

‘CORE’ FOCUS

How Henry Howard Finance (HHF), business finance provider, and the largest independent finance house in Wales, is approaching Brexit.

HHF has proactively focused its operations on its core business units, both retail/vendor and asset. The business wound down its commercial property entity, as well as selling its cashflow business earlier in the year. By taking these actions the company has ensured that it is best placed to meet the needs of its partners, directing funding to where HHF can add the greatest value both in the near term and post-Brexit, says Mark Tweed, chief financial officer at HHF.

Tweed adds: “Liquidity risk is driven by funders’ actions around Brexit. HHF has a diversified funding structure across several providers, including the British Business Bank, which allows for flexibility in the route to market (such as broker or by own-book funding), and resilience to be able to look beyond any Brexit-driven market dislocation.

“Business investment confidence has waned through 2018 as Brexit moves to a near-term risk. Upon a smooth Brexit transition, there is a potential upside as confidence returns and businesses move to accelerate investments through 2019,” he adds.

The CFO also recommends giving consideration, among others, to funders, suppliers and customers and their susceptibility to negative impacts. This is as important as assessing one’s own direct exposures.