|Brexit Jungle: Businesses are looking for the light with some working through the uncertainty and taking action|
Through conversations with businesses in the UK, Europe, and indeed worldwide, KPMG is very much aware that Brexit is on everyone's mind.
To further gauge opinion, earlier this autumn, KPMG UK and International Tax Review conducted a survey to assess the opinion of businesses in the initial aftermath of the UK's decision to leave the EU. We asked respondents to comment on their organisation's response to Brexit, both for the broader business and in respect of the potential tax implications.
Even at this early stage, a number of themes are emerging:
- Brexit has thrown businesses, wherever they may be located and regardless of the sector, into an environment of uncertainty. There is evidence that for some this uncertainty has led to a tendency to do nothing – 41% of businesses are waiting for further clarity before assessing the broader business impact of Brexit, even at a high level;
- There are indications that some businesses are working through the uncertainty and taking action, in particular in the financial services sector and those organisations that are headquartered outside both the UK and EU. The challenge for these businesses is what course of action to take when details of the overall Brexit plan are sparse – will this lead to the emergence of the "pick your own" Brexit model?
- At the time of the survey, only a limited number of organisations had appointed Brexit-specific strategic leadership, although over half of respondents considered that Brexit specialists had an important role to play in their organisation;
- When we examined the tax impact of Brexit it was clear that the organisations were generally more advanced in their thinking: three quarters of respondents had undertaken some form of assessment, with indirect taxes (customs duties and VAT) topping the list of areas of concern; and
- It is clear that while Brexit (and more recently, the result of the US presidential elections) may have come as a surprise, businesses are changing their strategic outlook to anticipate the unexpected – whatever that may be.
The effect on businesses
Before we look at tax specifically, the wider impact of Brexit on the business sector must be considered.
The implications of Brexit will affect all businesses in some way, and for the majority, we expect this impact to be broad and to challenge many aspects of their existing organisational and operational structures.
Survey respondents agreed: almost half reported that their business had started to assess the impact of Brexit, with a further 12% having looked at it in detail.
Two thirds of respondents considered that Brexit would require changes to their organisation's structure, and of these, 14% considered that the changes required would be major.
If Brexit took many British and European organisations by surprise, the recent US presidential election has arguably surpassed that. For many, these two events have been a learning experience in anticipating the unexpected
Although the geographical and sector spread of the responses to this question was fairly balanced, it is notable that over half of those considering that major change would be necessary were from the financial services or asset management sectors. This reflects our experience of these sectors being ahead of the pack in considering the impact of Brexit on their operations.
In order to deal with the realities of the impact of Brexit on an organisation's day-to-day management and its strategic direction, we expect to see the emergence of the "Brexit task force": 56% of respondents considered that it would be important for their organisation to have a specialised Brexit team to help with the challenges ahead.
Finally, it is perhaps only right to consider whether Brexit brings opportunity as well as challenge, and so we asked respondents whether they felt that in the medium to long term Brexit would benefit their business: 29% agreed with this view. One interpretation is that this is an encouraging number, but let us not forget that it is substantially lower than the 52% who voted for Brexit in the Referendum. It is our view that if we were to unpack the responses to this seemingly straight-forward question, we would uncover a much more complex picture. In essence, these questions asked people to unbundle their corporate attitude to risk, opportunity and strategic thinking from their innate emotional response. For some subject matters this is relatively easy to achieve, but Brexit is a topic that has been so divisive and so emotionally charged that we suspect that for many, it may be some time before truly objective strategic thinking is able to emerge.
Through the tax lens: the rise of the indirect tax specialism
Turning to tax, it is again unsurprising to hear that businesses were concerned about the impact of Brexit across all aspects of the tax function – from corporate taxes, to employment taxes, to indirect taxes. Overall, 41% of respondents considered that Brexit would result in their organisation paying more tax.
However, consistent with both KPMG's experiences of talking to clients and anecdotal evidence, it is in indirect tax that we are seeing businesses focusing their attention and resources: by far the greatest proportion of respondents specifically identified customs duties and supply chain (24%) and VAT (18%) as being areas they are working on.
Also high up the agenda is the impact of Brexit on employees. Over two thirds of respondents worked for an organisation with a strong dependence on an internationally mobile workforce. This again ties with our experience that this is a policy area that is being closely monitored by businesses as Brexit discussions play out. However, it does seem that for our respondents at least, there is confidence that an appropriate deal will be reached to protect the ongoing mobility of staff, with 80% of respondents concluding that they did not expect their business to suffer an increase in employee turnover as a result of Brexit.
However, we are beginning to see a divergence in the concerns of businesses when it comes to people matters. There will be some sectors, such as agriculture and hospitality, which rely on a high number of employees but with lower levels of skills. For them, immigration policy and the availability of visas for medium to long term time periods will be important. However, for those sectors that rely on a more specialised and highly skilled employee base, the focus is likely to be on what sector-specific quotas or carve-outs may be available, and the continued ease and flexibility of international business travel.
With many tax functions being historically rooted in a corporate tax specialism, Brexit brings the need for many to expand and enhance their skills base. Only 20% of respondents considered that their organisation would have the necessary resource and experience for coping with the impact of Brexit – and the most common areas where assistance is expected to be sought are customs and supply chains, as well as regulatory matters. We expect that over the next couple of years, the composition and skills base of the average tax function of a multinational company (and indeed, tax authorities) will change quite significantly, and we expect to see much more breadth of knowledge, as well as a much clearer understanding of some of the historically "niche" areas, such as customs duties.
The bigger picture: expect the unexpected
Based on the results of this survey and our insights from many discussions with clients, what do we see as the bigger picture takeaway?
Firstly, watch out for geopolitical risk taking a much more prominent position in the strategic plans of companies. If Brexit took many British and European organisations by surprise, the recent US presidential election has arguably surpassed that. For many, these two events have been a learning experience in anticipating the unexpected. It is clear that nothing is impossible, both when it comes to the clearly signposted political events in the calendar (for example, the various European elections of 2017) and those which are just bubbling away (for example, a possible second Scottish Referendum and the broader rise of nationalist sentiment). There are then wider global indicators which may feed into and influence these, such as the performance of the global economy and the pace of technological change. No company, whether domestic or international, can afford to sit back and assume the status quo.
Secondly, as the Brexit model becomes clearer, we expect to see the formation of new tribes and alliances – and not necessarily along the sector lines that you might expect. For example, we are already seeing a number of similarities between the financial services and life sciences sectors as both grapple with the impact of Brexit on their regulatory frameworks. One theme may be the physical dependence of an organisation on the UK – some sectors have no option but to stay put (e.g. infrastructure), whereas others will be much more mobile (e.g. technology). A large group will sit in the middle – arguably not tied to the UK, but so well established that they will not be able to make a sudden change to their structure or a bold gesture as a negotiating tactic.
Over the coming months, there will various survey and opinion polls, insight columns and thought leadership pieces. There will undoubtedly be events on the horizon that will further challenge the stability of the business and broader world. However, we will start to see further patterns and correlations emerging, which will help us all to make sense of the changing environment, and over time adapt to the new political, economic and indeed tax landscape.
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