6 August 2018
Deal or no deal?
In my blog of 30 November last year I explored the possibility of the UK leaving the EU with no deal in place. At the time this seemed unlikely, but now, eight months later, we learn that the government is to publish 70 guidance notes for businesses and individuals advising them of the steps they should take in such an event. It is also planning to run a pilot scheme for 250,000 SMEs who currently export to the EU but not to destinations outside the EU. These organisations until now have not needed to prepare customs declarations but will do in future if the UK does not remain in a customs union with the EU.
The challenge for SMEs
Many large organisations have publicly expressed their concerns over how trade and supply chains will operate after 29 March next year. Most will have the resources and expertise to move operations to mainland Europe or elsewhere if necessary. But large numbers of small and medium-sized firms, typically owner-managed or family-owned, are now exporting routinely to EU countries or form part of these intricate pan-European supply chains. These firms are now faced with the question as to whether they will need some kind of subsidiary operation in mainland Europe.
Those businesses that provide services to EU countries and deliver them remotely will probably find that there are no insurmountable problems in continuing to do so as before. Possible exceptions to this rule will apply to those who provide services to EU government bodies, which are obliged to offer such contracts to firms within the EU. Also, any service that is provided subject to EU regulations will probably be closed to UK suppliers since the proposal for regulatory alignment applies to goods only.
In the absence of so-called ‘frictionless trade’ arrangements, those who export goods to EU countries will face increased paperwork and the possibility of tariffs and border-checks. This will be particularly difficult in the case of components delivered on a ‘just-in-time’ basis. These are the firms who are most likely to consider setting up some kind of base within the EU. There are a number of options:
- Acquire or rent a warehouse in the EU in which to store a stock of goods
- Set-up a joint venture with an existing EU-based company
- Establish a subsidiary in an EU member state in the form of a registered branch office
- Set up a complete trading entity in an EU country
- A complete relocation of all the firm’s operations to an EU country.
These options require careful consideration, especially as nearly all of them will require the employment of locally-based staff or the transfer of personnel from the UK. Not many organisations will have provision in their contracts of employment that allow employees to be permanently relocated in a foreign country. Even if this is possible or desirable staff will have to be compensated not just for their relocation expenses but also for any financial loss due to being taxed under another jurisdiction. The UK currently has one of Europe’s lowest rates of income tax so a move to an EU country might mean that the employee has more tax deducted from his salary. For example the top rate of tax in France is 49%; Germany 47.45%; Ireland 40%; Spain 45%; and Italy 45.84%. However the comparison is by no means straightforward. One also has to consider other taxes such as National Insurance contributions and exemptions such as personal allowances. Some countries have particular quirks: in Portugal for example the rate of tax you pay depends on how many there are in your household.
Costs of employment
There are also taxes paid by a company on the basis of its payroll. In UK the best example of this is employers’ National Insurance contributions, currently at 13.8%. Such taxes tend to be much higher in the larger EU countries, the highest being France. Local employment law also needs to be carefully examined. Although most aspects are standardised across Europe, there remain many local practices which can prove costly. French employees for example enjoy longer paid holidays than their UK counterparts and most are accustomed to having the entire month of August away from work.
If you are considering setting up a trading entity in an EU member state you might be interested in the World Bank’s index of the countries where it is easiest to do business and those where it is easiest to start a business. Only two European countries feature in the top ten for ease of business: Denmark and Sweden. In the index of those where it is easiest to start a business, only Ireland is included in the top ten.
Another factor to consider is the rate of tax your organisation will pay on its profits. The UK corporation tax rate is currently 19%. The European average is 23.3% so most EU registered companies pay more than UK companies. In France the rate is 33% and in Germany it is 28.79%. The outstanding exception is Ireland where the rate of corporation tax is 12.5%.
Of course you will also have to take a view on the political stability of your chosen country of business. Possibly a question that would not have arisen only a couple of years ago and fortunately one that is not within the scope of this blog.
If you are a UK SME that currently does a significant amount of business with EU customers, I would seriously encourage you to consider your options as soon as possible. We are able to offer you expert advice on doing business in whichever country you may choose, via our network of UHY offices in 98 countries. Please get in touch as soon as possible as you may need to be prepared for disruption to business, either by contacting me or your local UHY adviser. Alternatively fill out our contact form here.