Whether we have a Brexit deal and a managed departure from the EU through a transition (and whatever the details of that), or a 'no deal' Brexit, one thing we know for sure is that Brexit will affect all parts of the economy, and every sector in which the UK operates.
How big the impact will be, will be determined by how hard a Brexit we have; and how sharp the jolt will be, will be determined by the length of the transition period (if any). By definition, if we have a 'no deal' Brexit on 31 October 2019, it will maximise the gap from what we have to what we are moving to - so, creating the biggest effect. It will also maximise the jolt, as there will not be a transition period or any real time to prepare meaningfully for the new environment.
So, some of the economic issues - whichever way they go (for the benefit of UK plc or adverse to UK plc) are going to hit hard and fast.
It is politically contentious, but in fact just the reality, that some of the potential adverse impacts are likely to hit harder and faster than any of the potential positive impacts.
If we have a 'no deal' Brexit on 31 October 2019, and it transpires that we (i.e. UK plc) are not ready, there is likely to be a sharp and adverse shock across many, if not all sectors of the economy. If the markets are not happy, we should expect the value of GB£ to fall, and we should expect the stock markets to fall, and the share values of UK listed companies to fall. Even the government now concedes that there are likely to be some bumps along the way if we have a 'no deal' Brexit on 31 October; as we are not/cannot be fully ready for everything that will entail.
Things that could be effected in the first month or so of an early 'no deal' Brexit - i.e. in the run up to Christmas - therefore include:
The value of investments;
- The value of GB£
- Between those two, the capital adequacies of banks and other financial institutions, therefore lending;
- The ability of companies to maintain their banking covenants (and the willingness of the finance sector to lend further);
- Consumer confidence;
- House prices (even in the quieter winter months);
- Airlines and holiday companies - if Thomas Cook had not already gone…
There may be positives from Brexit, and some of those may be maximised by a 'no deal' (clean break) Brexit… but it is difficult to see these factors positively influencing the economy either as quickly or to the extent that shocks such as these would.
So, UK plc may indeed have new markets to exploit, but that takes time. The failures of old companies may, over time, make way for acquisitions by new, or for new companies who are either more flexible and/or more innovative and/or operating in new markets. It's possible that a UK parliament, free of EU constraints, might be able to legislate to enable a UK for growth; but that takes time (and will likely need a new parliament, as the current one is generally seen - by those within it and outside it - as now too paralysed and divided by Brexit to be fit for the purpose of kick-starting a new era).
The law provides a framework for a thriving commercial environment, but it cannot allow anyone to avoid the consequences of a short sharp shock, if that is what awaits. However, in this note we will look at some of the questions lawyers can be working on with you to help you think through key issues that might lie ahead, and how to plan for these or potentially avoid some.
Are we heading for a downturn, or a recession? Will there be insolvencies?
- Obviously one needs to be thinking about being ready to 'recession proof' one's business, as even if your business is ready, and flourishes, or does not struggle, others may - and they could be your suppliers or your customers.
- For all sorts of reasons, this might mean an enhanced focus internally and likely (or usefully) in dialogue with the bank, on banking covenants and on cash, and on lending facilities where they might be prudent.
- And in addition:
- Be alive to any changes in invoicing or deliveries or timeliness from a supplier - usually requests for payments upfront, or changes to invoicing, or an unscheduled request for a price increase may indicate cash-flow issues. Does the supplier need support from you (if they are critical to you)? Could you start to line up a second supplier, just in case?
- If supplying physical things, check that you have adequate retention of title in your contracts where possible, and start putting them in if not.
- Consider if factoring or invoice discounting can help your successful business better weather the cash-flow issues of others
- Check that you have fit-for-purpose set off clauses in your contracts where possible, and start putting them in if not.
- In project work, keep regular checks on any delays, and the reasons for them - is there risk higher up in the chain (i.e. risk on payment)? Also, if any supplier in the chain is facing cashflow difficulties, customer support from above or sub-supplier support from below can be demanded when the timings are most project critical. Regular dialogue can help - and again, alternative supply can be lined up if needed.
- In all of these scenarios, a review of contracts might be wise to check on exclusivity provisions and for appropriate insolvency/step in/termination clauses.
- It may be too late, but is credit insurance available (and/if still affordable)? Or can a guarantor be sought and put in place?
- And the financial woes of others may also represent an opportunity: to acquire businesses, or parts of businesses, or assets, or good people looking for better job security.
- If in difficulty yourself, then:
- Two things that are always important for directors to do, given the duties they owe, are: to take advice; and to keep proper records of decisions made, and why they were made.
- Options might include defensive mergers, or business sales to focus back on the core business, where the business may be most resilient.
VAT is a European-based tax - will it change after Brexit?
- No-one expects the UK VAT regime to change immediately after Brexit.
- But that does not mean that the rates won't change over time - a rise to increase tax take, or a fall if the economy needs a spending boost.
- In the longer term, outside of the EU, the UK could of course scrap VAT altogether, and look at a sales tax instead - that would be not dissimilar to the US, but realistically must be at least a short while away, as likely just too big a change to try for now.
- But what will likely change immediately is how VAT is charged (or not charged) on sales of goods and services between the UK and the EU - at the moment, the seller charges 'home' VAT, and the buyer gets to use the 'credit' for paying that as input tax in its own VAT returns. But once the UK is outside the EU, that may well change, and no VAT will be charged (just like on a sale to or from the US today). That may be a boost to exports (as of course would a falling exchange rate).On other taxes:
- On Capital Gains Tax (CGT), on current party manifestos, one could think that the rate could be dropped under a Conservative government, or hiked (to 40%/50%) under a Labour one! We have recently seen a 'Corbyn clause' asked for by an individual seller of property to our client buyer - a price variation to preserve his net sale price expectations should CGT be hiked before the sale completed!
- On Corporation Tax (CT), there has been much recent chatter of that being reduced by a Conservative government to stimulate business and sales: both from existing businesses, and as part of the Global Britain initiative, providing a business friendly environment to encourage inward investment. But CT would, again, likely rise under a Labour government - and especially at risk might be banks and global IT companies (the Google Tax issue).
What about exchange rate risk, and can bad or pricey contracts be avoided?
- Brexit may or may not be a frustrating thing; but it is very unlikely, as a matter of English law, to be a frustrating event. Contracts governed by English law are unlikely to be frustrated, therefore void, by reason of a Brexit impact. First, because for any contract entered into in or after 2015, Brexit was foreseeable, and so the law will assume that the parties allowed for their risk in their contract, and the cost will fall where the contract provides for it to fall; second, because performance must be rendered 'radically different' for a contract to be frustrated, and more expensive has consistently failed to pass that test in English cases. So: frustration - no. A better option is if there is a helpful Change in the Law clause, or a Material Adverse Change clause.
- It would be wise to review contracts now - if not already done - to identify the risks (on exchange rate/ tariffs impact/ any transit delays crossing borders).
- Again, it may now be too late, but can exchange rate risk be hedged?
- If there are issues, and claims to be made, if we have a no deal Brexit, then we lose the benefit of EU regulations on some of the taken-for-granted processes that apply today on an intra-EU but cross-border dispute: on service abroad, on jurisdiction and governing law; and on enforcement. All of this can still be done, of course (just as any non-EU based claimant can currently sue an EU based defendant), but it will not be as smooth, or as quick (if such an adjective can be applied) as it is today. UK-based claimants suing in the EU will have to find out the pre-1973 ways of dealing with these things - and it is almost certain that that will be clunky, slower, and more costly than as at today. Anti-suit injunctions and Italian torpedoes may well return to the legal lexicon.
- Meanwhile, however, those difficulties for UK-based claimants may not be such an issue for UK-based defendants, as it works exactly the same, in reverse, for EU-based claimants wanting to sue a UK-based defendant.
- For some contracts, it may make an arbitral jurisdiction (with enforcement under the New York Convention) more attractive than a Court jurisdiction. Something possibly to think about in more detail than usual for future contracts.
Where to go for more information?