Preparing for the challenges of Brexit

The biggest question facing Northern Ireland’s business community is what Brexit will look like.

Only when answers to that begin to emerge will it be able to assess the challenges – or opportunities – ahead. The good news, for a region that mostly voted to ‘Bremain’, is that Northern Ireland knows about challenges and how to overcome them.

“Cross-border trade has more than doubled since the Good Friday agreement,” points out Aidan Gough, director of strategy and policy at InterTrade Ireland, an all-island promoter of cross-border trade.

“It got knocked back with the financial crisis and the collapse in construction, but it bounced back from both of those too. It has proved to be very resilient and will bounce back from Brexit as well,” he says.

Anecdotal evidence from InterTrade Ireland members suggest all intend to continue trading across the border. But a survey indicates 97 per cent have no Brexit plan in place. “That has to change. Businesses have to prepare,” says Gough.

In the absence of other indicators, his advice is for firms to take prevailing World Trade Organisation (WTO) tariffs as a worst-case scenario, and at least crunch those numbers to see if they can make it work.

Looked at through this prism, the sector most likely to be vulnerable is agri-food, typically hit by WTO tariffs of up to 60 per cent. With more than 50 per cent of cross-border trade on the island accounted for by agri-food, such levies will be hard to digest.

Further uncertainty is added by the fact that more than 80 per cent of NI’s farm income currently comes from the EU.

On the manufacturing side, Ulster Bank Northern Ireland’s PMI, an index that uses activity purchasing as an economic yardstick, shows business activity returned to growth in October. However, this was supported by the weakness of sterling, it points out, which had the additional effect of pushing up input costs.

Positive indicators

While economic growth has been sluggish, there are positive indicators. Unemployment is at 5.6 per cent and business development agency Invest NI exceeded its job creation targets for the 12-month period to summer 2016, supporting 5,550 new jobs across the region, against a target of 4,000.

This took place against a backdrop in which responsibility for local business starts had only recently been transferred to NI’s new council structures, and where, thanks to EU rules, Invest NI is no longer able to support job creation as part of large company expansions. In a post-EU world, those rules would, of course, no longer apply.

In the meantime, the risk is that NI businesses will hold off on investment in R&D, hiring new staff, or targeting international markets, while they wait for clarity. “It is imperative, therefore, that barrier-free trade is a key component of any deal struck with the EU,” says Johnny Hanna, partner and head of tax at KPMG in Northern Ireland.

Developments on the tax front are more encouraging.

“If we consider Northern Ireland today from a FDI perspective or indeed that of indigenous business, simply in terms of taxes on workers, taxes on entrepreneurs and corporate tax on businesses profits, the fact is that Northern Ireland already has one of the most competitive tax offerings in the world,” says Hanna.

That overall tax offering should be enhanced even further from April 2018 with the introduction of a 12.5 per cent corporation tax on regional trading profits.

“There is obvious uncertainty about the possible ‘dampening’ impact of any wide-ranging US tax reforms under a new President Trump, including a 20 per cent, or even 15 per cent, federal tax rate – not to mention the possibility of even more radical tax reform,” says Hanna.

“From a Northern Ireland point of view, the recent comments by the prime minister that the aim of the UK government is not simply to have the lowest corporation tax rate in the G20 but also to have a tax system that is ‘profoundly pro-innovation’ has provided much-needed certainty to existing Northern Ireland-based businesses, and pipeline FDI, that a highly competitive tax policy will continue to be a vital tool in supporting the priorities around improving productivity and promoting growth in Northern Ireland and right across the UK,” he says.

In the meantime, exporters and retailers are experiencing a fillip thanks to currency fluctuations – particularly the latter as shoppers head north for their Christmas shopping.

Within the last 12 months, sterling has moved against the euro from 70 pence to 93 pence, before settling at around 85 pence.

“All of that makes it an extremely difficult time to be cross-border trading north and south,” says Bryan McSharry of Moneycorp, a currency service provider.

Very few businesses have the margin to cope with swings of such magnitudes, particularly low-margin sectors such as agriculture.

“The only way to cope is to build certainty through hedging. Businesses should never look at currency as a profit centre or a loss centre,” he says.

Hospitality sector

The fall in sterling had positive impact on the hospitality sector, however. Figures from Tourism NI show a 12 per cent increase in the number of visitors in the first six months of this year, compared with the same period in 2015.

Visitors from south of the border, which had fallen by 28 per cent over the previous four years, rose again this year in a move which “is closely correlated to currency exchange rates”, says Tourism NI chief executive John McGrillen. “But you can’t build a tourism strategy on the back of an exchange rate.”

Hotel occupancy levels are high, tipping 88 per cent regionally in August and 92 per cent in Belfast. Six new hotels are currently under construction. Even the B&B market is up. Reversing a decade-long decline, B&B nights are up 23 per cent this year, a result of the ‘Airbnb’ effect allied to Northern Ireland’s growing appeal to the FIT (free independent traveller) market.

Overall tourism spend in NI has grown 33 per cent in the last three years, enabling the sector to create about 10,000 new jobs.

There are clouds on the North’s labour market horizon, however, if movement is curtailed post-Brexit. Right now, about 20 per cent of NI’s hospitality sector employees come from other EU countries. Restrictions risk putting upward pressure on wage costs, as it would in agriculture and food production too.

To address this, and other possible implications of Brexit, Tourism NI has set up an industry task force of key figures from the tourism sectors north and south to look at how best to maintain competitiveness on an all-island basis.

All fear a hard border. “Around 70 per cent of visitors who come to Northern Ireland from off the island come to us via the Republic, so we would really hope to see the free movement of people across the border to continue,” says McGrillen.

War for talent

Northern Ireland is well positioned to deal with the war for talent being felt across many industries, believes Johnny Hanna, partner and head of tax at KPMG in Northern Ireland.

While workers south of the border have had to cope with increased income tax and USC charges in recent years, the UK has already cut its top rate of income tax from 50 per cent to 45 per cent, and increased band allowances.

As a result, a software manager earning €75,000 would be €6,000 a year better off living and working in Newry than in Dundalk, and in Belfast rather than Dublin, he says. A more senior employee on a salary of twice that would benefit by €11,000 from living in Northern Ireland.