Brexit – Deal or No Deal Action Plan for SMEs – Contracts and Pricing

Parliaments continued struggles to agree a Brexit contract should not distract SMEs from their own review of all those business contracts which will be affected by Brexit and the potential implications Brexit may have for their pricing strategy.

The contracts affected by Brexit will not only be those key customer and supplier contracts for businesses selling or sourcing goods or services from the continuing EU member states but to all business not just through their own supply chains but also including increased mobile phone roaming charges, increased medical and travel insurance and higher charges for all financial transactions.

The impacts of Brexit, Deal or No Deal, on every SMEs can come directly or indirectly from a range of sources including:

• Exchange rate changes whether from falls in the value of sterling such as those which followed immediately after the referendum or as is occurring daily as markets react to the most recent political manoueverings
• Tariffs on EU trade which may apply under WTO rules in the event of a No Deal Brexit and the impact of tariff rates changes on trade with non-EU countries. The WTO rules are estimated to leave 83% of goods currently imported unaffected however those goods which are affected, such as for example agricultural products and car parts, will result in increased costs across the economy
• VAT costs on imported goods and services and recovery of VAT incurred in EU counties
• Border control costs including the cost of border control checks and the cost of potential delays at the point of entry if the UK ceases to be part of an EU customs union
• Labour availability and cost not only for those industries which are heavily reliant on EU workers, such as construction, agriculture or health care, but also the consequent impact of wage inflation costs of goods and services in all sectors which might result.
• Relocation of businesses, entirely or in part, which are currently carried on in the UK to the EU, such as is threatened by Airbus, or to non-EU countries, such as Dyson is undertaking, to retain business and contracts

These impacts may lead currently profitable contracts and business models to become loss-making or more difficult to perform. They may also offer new opportunities for those businesses which are prepared and react to the changes when these are implemented.

For those businesses which already have written contracts any review should include determining:

• if Brexit causes a termination of the agreement. Many contracts have Force Majeure or “material adverse change” clauses however the recent case where the European Medicines Agency sought to avoid paying £14million a year on a lease with 20 years to run was held not to be “frustrated” by Brexit and therefore would remain in place.
• the “territory” definition in the event it is defined by reference to the EU for example if the sales area is the EU or data retention has to be within the EU
• the regulations covering the contract are EU regulations covering matters such as compliance for food safety, trade descriptions, data protection or anti-money laundering regulations
• which party is responsible for the costs of customs and border formalities and any border control issues
• whether pricing changes to adjust for potential import/export duties and costs are included,
• the billing currency
• the provisions dealing with VAT
• the dispute resolution mechanism and whether this will be under EU or UK law
• other termination provisions if alternative sources are found or the cost of meeting the contract is unduly onerous.

For key customer or supply chain contracts where no written contract is currently in place, SMEs should consider whether a contract will assist in reducing any business risks. However the timing of any written contract, or amendments to a current contract, should also be considered as this may result in a different legal outcome before and after Brexit.

A written contract can be extended to a single transaction, where for example a business has a significant capital expenditure which has a key element from the EU or the business intends stockpiling from a current EU supplier whilst and alternative non-EU source is secured.

Where EU trade is highly significant for an SME, consideration should be given to more radical restructuring such as setting up a subsidiary or branch in a continuing EU state. This may be to take assignment of a current contract so that it can continue post Brexit or to ring-fence the risks of the terminating the contract if it proves unsustainable. Whilst Brexit may seem to imminent for such radical moves there is still time to implement these changes particularly if, as seems increasingly likely, the UK requests a further extension before Brexit.

All SMEs should be reviewing the mechanisms for pricing changes, given the potential for new import tariffs, VAT changes and other costs of trading whether from direct trading with the EU or the flow through effects from elsewhere in their supply chain.

The pricing review may be limited to checking whether and when current contracts allow for adjustments to reflect changes in costs or to flagging up the potential price increases and timing to allow customers to plan and to reduce the shock factor when Brexit finally arrives.

The political uncertainty looks set to continue however SMEs should take every step possible to reduce the uncertainty of the impact on their business and their future success in the post Brexit world.

Next we will consider the steps SMEs can take to secure the intellectual property in the business from trade marks and copywright to patents……