Impact of Brexit on Northern Ireland

With great change comes opportunity, says Michael Farrell

Figures published by the Northern Ireland Statistics and Research Agency in May 2017 show that total sales of NI products and services amounted to just short of an estimated £66.7 billion in 2015. Exports amounted to £9.1 billion of which £3.4 billion went to the Republic of Ireland, £1.9 billion to the EU, and £3.8 billion to the rest of the world. While Northern Irish businesses rely heavily on the local economy, the export sector is critical for growth and the creation of a viable and sustainable private sector. In this uncertain period it is vital that growing export businesses and their advisors work in partnership to overcome challenges and take advantage of the opportunities that will inevitably present themselves as the Brexit jigsaw is put together. This however is only half of the story as the importing of raw materials and components sourced outside of Northern Ireland, typically from the Republic of Ireland or the UK, will present further challenges for these businesses. Nowhere is this more apparent than in the food sector where the supply chain for higher value finished products often depends on high volume low value cross-border trade at an earlier stage in the process.

 

Meanwhile, the UK continues to be an important market for Northern businesses and one where ambitious companies see opportunities to expand. In 2015, NI sales of goods and services to GB amounted to an estimated £13.9 billion, more than four times sales to the Republic of Ireland and seven times sales to the rest of the EU. The strength of the trade relationship with the UK and a common currency have insulated Northern Ireland businesses from the worst impact of Brexit, but that is not to say that there are not other concerns. In the food sector, for example, profit margins are well below potential tariff levels and hiring of non-UK staff is becoming more difficult because potential employees are worried about their future residency rights.

 

Dependency on cross-border trade is particularly evident in the agri-food sector, with Ireland the destination for 53% of NI export sales according to an additional data paper published with the UK Government’s Brexit position paper on Northern Ireland in August. Bord Bia figures show that 37% of Irish agri-food and drink exports went to the UK market in 2016. There is plenty of cross-border activity in other sectors too.

 

Commenting to the UK House of Lords European Union Committee on the significance of the UK-Irish economic and trading relationship, John McGrane, Director General of the British Irish Chamber of Commerce, said that it accounted for €60 billion a year in two-way trade and directly supported 400,000 jobs.

 

Given the volume of trade and traffic, it’s not surprising that the question of border controls has been at the forefront of Brexit discussions. However, the issue will be difficult to resolve. Michel Barnier, the EU negotiator, recently dismissed the notion of a ‘frictionless border’ and Irish foreign minister, Simon Coveney has said that a technical solution involving cameras and pre-registration will not work. A proposal to have a border in the Irish Sea was not popular either and although UK and EU officials have said they want to preserve the Common Travel Area, it is as yet unclear how this might be achieved.

 

While the negotiations continue, businesses across Ireland have little option but to plan for the worst while hoping for the best.

 

To mitigate Brexit-related risks, some NI businesses are exploring relocating certain functions out of the region. PKF-FPM are currently working with a number of clients who are exploring strategic alliances to mitigate potential supply chain and market entry risks associated with Brexit. Successful and progressive businesses leaders are identifying risks and actively looking at innovative solutions.

 

Across the island, agile businesses are exploring all options to maintain access to the UK market and/or to access passporting rights, international talent and the ability to pursue government tenders in EU member states.

 

However, where Brexit prompts businesses to restructure, there are a plethora of issues to consider. Tax must be high on the list as changes to functions or profit earning activity will alter a business’s effective tax rate while changes to an entity’s legal structure may affect losses brought forward in the UK or elsewhere. Exit charges where functions are moved out of one jurisdiction into another may trigger taxable gains or require transfer pricing adjustments. Similar issues will arise for the disposal of assets. Supply chain changes potentially impact VAT and businesses also need to factor in the potential cost of tariffs changes to inter-company terms and IT systems. There will be capital acquisitions tax issues for Irish farmers whose land straddles the border as the existing regime for agricultural property relief refers to agricultural land being land situated in the EU. Similarly, the Irish CGT exemption for investment property bought in the period 7 Dec 2011–31 Dec 2014 and held for at least seven years refers specifically to property within the EEA. Other potential problems are that non-residents wishing to establish an Irish company must have an EEA resident director under current legislation and that UK/Irish social security legislation currently refers to residents/workers in EEA countries. Many clients are worried by the uncertainty about the enforceability of UK judgments and potential legal conflicts in contracts and cross-border matters.

 

Across all sectors, regardless of whether businesses plan to restructure, relocate, source new markets or concentrate on the UK, there are concerns about currency, financing, grants, data protection and various sector specific issues. Yet, amid the talk of problems, there is also talk of opportunities. Of the estimated £66.7 billion total sales of NI products and services, 65 percent (£43.7 billion) is accounted for by sales within Northern Ireland, with the UK the next biggest market. Unlike the Republic of Ireland, where the devaluation of Sterling has had a major impact on exporters, the Sterling-based NI economy has not felt any significant adverse impact. In the services sector, for example, which accounts for over £18 billion of sales, most small and medium service businesses find their customers locally.

 

NISRA estimates that sales of goods represented almost three quarters (72.8%) of total sales in Northern Ireland in 2015. Sixty-two percent of these goods were sold within Northern Ireland. Ambitious NI businesses see opportunities to expand their trade with the UK on the one hand, and potentially to retain access to EU markets by establishing cross-border alliances or restructuring. Similarly, we are seeing some Irish businesses actively exploring opportunities to establish in Northern Ireland.

 

History shows that with great change comes opportunity. In the coming months businesses will need to continue to review business models, supply chains and existing markets, and look for new markets to de-risk where their existing models are adversely impacted by Brexit. The recently negotiated EU trade deals with Canada (CETA) and Japan (and commitments that a similar UK post Brexit trade deal with Japan) present new opportunities and it is likely that further EU and Non-EU deals will be negotiated in the future. In the meantime businesses must focus on being agile, flexible and look at planning strategies to reducing risk and secure new markets and opportunities.

 

Michael Farrell is a Director of PKF-FPM Accountants Limited, a multi-award winning island practice that was recently appointed a Brexit Service Provider for InterTradeIreland’s Brexit Advisory Service.

 

 

Get in touch with Michael Farrell via email m.farrell@pkffpm.com