FD Intelligence

Brexit planning for business and finance leaders

The people of the UK have taken the decision to leave the European Union. What happens next – and the implications for businesses and organisations in the UK – is less clear.

It is nearly a month since the UK voted to leave the European Union. In that time we have seen both political and market volatility. David Cameron's resignation was followed by the swift appointment of Theresa May. The new Prime Minister has finalised her Cabinet, one that will aim to bring stability and set the course for our future relationship with the EU.

The shape of that relationship is yet unknown. From discussions with our clients it is clear that business requires continued access to talent and desires full access of the Single Market. An obvious solution therefore would seem to be some form of European Economic Area (EEA) agreement, similar to that of Norway. However, with concerns over immigration, a key driver behind the leave vote, political pressure to assert control over borders will likely render the free movement of people, and therefore such a model, unviable.

With this in mind, what relationship might the UK look for?

Membership of the Single Market requires accepting the four freedoms of: goods, capital, services and people. This is something the European Council President Donald Tusk has said is “non-negotiable”. This leaves the UK with a tough balancing act to consider: how much autonomy is it willing to offer in return for market access?

These are political decisions, yet to be made. In the meantime, the UK remains a full member of the European Union and will remain so until negotiations are finalised and a new relationship is established. Theresa May has said that she does not envisage triggering Article 50 – the official mechanism for agreeing a member states exit from the EU – until early next year. Once enacted, Article 50 offers a two-year time frame. While businesses appreciate the need to prepare for negotiations, there is support for beginning formal proceedings quickly, to put an end to the current uncertainty.

Business wants stability. Operating and planning in an uncertain environment is difficult so, as a business or finance leader, what should you be thinking about?

We asked various experts across Grant Thornton to share their thoughts on the key things leaders should be thinking about right now.

Alan Dale, Head of Business Consulting

  • In the short term, as well as stress-testing against various scenarios, finance leaders should focus on identifying any immediate opportunities that their business can maximise.

    An example of this is the potential export growth opportunities due to favourable exchange rates. As uncertainty becomes the new norm, the leaders must remain resilient and agile to navigate their business through a time of prolonged uncertainty.

  • In the medium term, there needs be a review of the working capital position to ensure there is enough cash headroom to absorb any shocks from lower revenue and increased costs. Beyond the financial implications, finance leaders must also put in place a robust and effective engagement plan with their employees to maintain focus on business fundamentals.

  • In the longer term, as the regulatory impact of leaving the EU becomes more transparent, consideration must be given to strategic divestments to fund core business areas, as well as acquisitions/alliances that may give competitive advantage in a post-Brexit landscape. There must also be a plan in place to counter the risk of talent drain through the loss of EU-related employees.

David Ascott, Corporate Finance Advisory Partner 

  • Do not fear, UK financial markets remain open for business so there is the continued opportunity to finance your growth. Private equity funds, debt providers and many corporates have plenty of liquidity to fund your investment plans, and deals continue to happen.
  • Specific economic risks to businesses post-Brexit are being carefully assessed by investors and debt providers. This means that certain cyclical sectors have been hit hard on the public markets, such as property and construction, and a prudent review of your prospects will help to underpin your business plan.
  • Expect some volatility as we learn to live with greater political risk. The vote to leave the European Union has been made but it will take years before the consequences are fully understood so we need to get used to this new environment. Flexibility in funding will be important to allow companies to capture the opportunities in the changing market.

Jake Green, Head of Financial Reporting

  • Management should be stress-testing the budgets and forecasts they use for going concern assessments and impairment testing for the potential impact to their business.
  • If the Brexit vote happened after the entity's balance sheet date, management should also consider what disclosures should be given for this post-balance-sheet event in the financial statements, including whether it has adversely affected asset values and foreign exchange rates significant to the business.
  • Companies will also need to demonstrate in the financial statements that they have considered the impact of the heightened risks to their business model and future prospects, and give an appropriate explanation of those risks in their narrative reporting.
    This is of particular relevance for those companies adopting the UK Corporate Governance code, who are required to set out their assessment of the longer-term viability of the business and the period over which they have assessed that viability. In some cases the impact of the vote will be a big feature of that assessment.

Jonathan Riley, Head of Tax

  • Inflation in the UK may rise some way above the current level of pay increases if sterling continues to be weak. This means that employers may need to think more carefully about how to remunerate employees so that their effective pay rates can be maintained without having an adverse impact on their employers’ finances. 
    Moving away from simple cash salaries is an option that could achieve this. Benefits in kind and equity-based compensation, for example, can be efficient ways of rewarding employees. In addition, where share prices have been adversely affected, equity-based reward may be an especially effective form of incentivising employees where it is expected that those prices will recover over time.
  • For groups where transfer pricing arrangements are based on a certain level of sterling exchange rate, it is worth considering if and how their transfer prices should be revised. Furthermore, businesses that have agreed Advance Thin Capitalisation Agreements (ATCAs) with HMRC may want to model the impact of reduced levels of UK profitability on the amount of interest expense that they can claim as tax deductible. 

To both protect and create value, businesses must be able to learn and adapt faster than the rate of change in their markets. Rarely has this been more starkly relevant than in responding to the risks and opportunities created by the UK's historic vote to exit the EU.

Our CEO Room is a dedicated, stimulating and interactive space for a focused discussion where you will be able to work on the key strategic, financial and leadership issues for your business, free from the distractions of day-to-day operational demands.

For further details or to book a workshop, please speak with your local contact or email us on headroom@uk.gt.com.

As the situation changes, we will be providing insight and analysis, which you can find on Brexit hub