What is the potential impact of Brexit for European companies and how can they prepare to manage risk or look for opportunities? PwC's Mark Smith points out in this video that many British companies are far more interdependent on European imports and exports than many realise. He gives the example of an iconic British car, the Mini, a subsidiary of BMW. The majority of components used to manufacture a Mini aren't made in the UK at all – 59 per cent come from the EU. And only 28 per cent of Minis made in the UK are then sold to the UK market – the rest are exported. The consequences of Brexit on business for the manufacturers of Mini cars are that:
- the 59 per cent of components that are imported from the EU will cost more, partly because the value of sterling has fallen – companies therefore have to consider foreign exchange rate risk;
- imports will also be subject to potential tariffs that didn't exist in the Single Market;
- and when it comes to exports, Minis that are sold to the EU will potentially be subject to tariffs and taxes not applicable in the Single Market;
- companies also need to consider logistics and regulations, whereby there may be more lengthy processes to move goods across borders into the EU and more documentary requirements.
Don't 'wait and see'
Passporting rules facilitate doing business in another European country without needing further authorisation in each country. When these passporting rights no longer apply to businesses in the UK, this could mean that UK banks and other companies have to reconsider their strategy – i.e., they would have to assess the impact of the UK being treated as a non-EU country. PwC's Mark Smith says companies should also consider the possibility that high-skilled workers might leave the UK and that investment into the UK might also be affected. Smith says: “Uncertainty around the negotiations output is contributing to a climate of high volatility and low investor confidence, negatively impacting competitiveness.”
4 likely outcomes of Brexit negotiations
He also says that 'wait and see' is a problematic strategy as it reduces flexibility and available options for businesses – so companies are urged to prepare now to operate outside the EU within two years. To help the planning scenarios, companies should bear in mind the four possible outcomes of the Brexit negotiations:
- the UK remains a member of the European Economic Area and keeps the four freedoms (freedom of movement of people, of capital, of goods and of services);
- the UK negotiates a free trade agreement with the European Union;
- the UK agrees a deal that allows it to remain in the Customs Union; or
- no agreement is negotiated.
So how can companies prepare for Brexit?
- Stay focused: there is much that is still within your control and you should keep your eye on the objectives and keep morale high.
- Reach out: engage with the UK government and local and national levels; also try to engage with business groups that wish to engage with EU bodies to discuss challenges for business and build a strong case for your arguments.
- Analyse and assess: try to assess each of the likely outcomes on your business, including the potential tax implications for each of the possible scenarios. Companies should develop contingency plans looking at if they moved their office to an EU location compared to remaining in the UK under the likely negotiation outcome scenarios. How would their employees be treated after Brexit and what would be the cost and tax implications?
- Look ahead: in the short term, most things will appear uncertain and gloomy, says PwC's Smith – but companies should focus on the long term as well as this will help them to prepare and see opportunities ahead.
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