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Small businesses struggling to expand due to Brexit uncertainty

More than seven in 10 firms in a survey by the Federation of Small Business (FSB) said they did not expect to raise capital spending in the next quarter, the highest figure in two years.

The FSB says the current standstill over Britain’s path to Brexit has left small firms “hamstrung” and struggling to expand, hire and increase productivity.

The FSB survey also suggests growing caution among lenders as signs stack up of a slowdown in the UK economy.

More than four in 10 of its member firms said new credit was “unaffordable,” the highest in more than four years.

Lending to consumers also increased at its smallest annual rate in more than five years in May, according to separate data from the Bank of England.

In the manufacturing sector, a key index of UK performance slid to a six-year low on Monday, as a survey highlighted sinking output and employment levels.

Mike Cherry, national chair of the FSB, said: “It’s impossible for small business owners to invest for the future when we don’t know what the future holds.

“Lifting productivity among the smaller firms that make-up 99% of our business community is a must. But until we have the political certainty that enables us to take risks and innovate, achieving that goal will remain elusive.”

He also took aim at Conservative leadership rivals Boris Johnson and Jeremy Hunt, who have talked up their willingness to lead Britain out of the EU without a deal.

“We urgently need to see both prime ministerial candidates spell out their plans for supporting small firms and securing a pro-business Brexit – one that encompasses a comprehensive deal and a substantial transition period,” he said.

“Fast and loose talk about accepting a chaotic no-deal Brexit in four months’ time is not helpful.”

He said it was “understandable” lenders were more cautious, suggesting they were continuing to offer credit but were upping premiums to cover perceived increases in risk.

UK signs free trade agreement with South Korea

Great Britain has secured its first post-Brexit trade deal after signing an in-principle free trade agreement with South Korea.

The agreement, which International Trade Secretary Liam Fox signed with his South Korean counterpart Yoo Myung-hee in Seoul, seeks to maintain existing trade arrangements with the country after Brexit.

The Financial Times says it “comes amid growing uncertainty over bilateral trade conditions after the UK leaves the world’s single largest economic bloc”. The BBC adds that the agreement is “designed to provide stability under a no-deal Brexit”.

The Korea Times explains that there have been “concerns” that South Korean companies “may no longer enjoy the benefits” of current arrangements if the UK crashes out without a deal.

Great Britain and South Korea will largely maintain the trade terms that are in the current deal between Seoul and Brussels, which took effect in July 2011.

The Ministry of Trade, Industry and Energy said in a statement that the deal includes keeping zero-tariffs on South Korean exports such as auto parts and automobiles.

After the talks, Britain and South Korea also vowed to expand cooperation in emerging technologies such as hydrogen and nuclear energy.

Seoul’s trade minister Yoo Myung-hee said: “The deal is significant as it eased uncertainties sparked by Brexit, amid the already challenging environment for exports on the escalating trade row between Washington and Beijing.”

The two countries plan to ratify the deal before October 31st, the new deadline for Brexit.

Although the UK is South Korea’s second-largest trading partner among the EU members, it is its 18th-largest trading partner, accounting for less than 2% of South Korea’s overall trade.

Last year, South Korea’s exports to the UK were worth $6.36bn. The Asian country exports mostly cars and ships to Britain. Going the other way, the UK exports crude oil and automobiles to South Korea.

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Crafting a small but mighty team is key to moving forward in a positive direction. Even if there are only a small number of individuals, a dynamic team can move mountains when the focus is right. Create a high passion and energetic team which is invested in the future of the business.

If you instil one motto in your team, it should be: fail fast, learn and improve. We love trying new ideas and encourage the whole team to continuously test, especially when it’s outside their comfort zone. The only requirement we set is to approach it methodically, to document the results and to share learnings with the team.

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Nurture your brand ambassadors; your first and most loyal members or customers will be your strongest voices if they can be involved. We’ve been around since 2013 and have built a community that continuously stays engaged. Listen to your members or customers, speak with them every week and make changes based on your insights. As a result of listening to our members, we decided to start hosting events. There is nothing stronger than a real-life experience and it really makes us stand out from the crowd in a competitive market.

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Britain’s 2nd biggest steel maker enters insolvency

British Steel, the country’s second largest steel producer has entered into compulsory liquidation, said British government’s Insolvency Service in a press release on Wednesday.

It said that the High Court ordered British Steel into compulsory liquidation the same day, and the Official Receiver was appointed as liquidator.

“The immediate priority following my appointment as liquidator of British Steel is to continue safe operation of the site,” said the Official Receiver in a statement.

EY has been appointed as special manager by the Official Receiver.

“The company in liquidation is continuing to trade and supply its customers while I consider options for the business,” the Official Receiver said, “Staff have been paid and will continue to be employed.”

The company had reportedly been seeking emergency funds of 30 million pounds (about 38 million U.S. dollars) from the government, blaming “Brexit-related issues” for its difficulties.

The company’s collapse would put its 5,000 employees directly and 20,000 more in the supply chain at risk, local media reported.

Business Secretary Greg Clark called it a “deeply worrying time” for employees and local communities in a statement on British Steel Wednesday.

However, he noted, “The government can only act within the law, which requires any financial support to a steel company to be on a commercial basis. I have been advised that it would be unlawful to provide a guarantee or loan on the terms of any proposals that the company or any other party has made.”

“In the days and weeks ahead, I will be working with the Official Receiver and a British Steel support group of management, trade unions, companies in the supply chain and local communities, to pursue remorselessly every possible step to secure the future of the valuable operations in sites at Scunthorpe, Skinningrove and on Teesside,” he added.

The government admitted that it has already provided the company with a 120 million pounds (152 million dollars) bridging facility to enable it to meet its emissions trading compliance costs.

In 2016, Private equity group Greybull Capital purchased the company from Tata Steel for a nominal 1 pound (1.27 dollars) during the depths of the steel crisis.

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Political crisis deepens as small businesses ask what next?

Speaking after today’s vote on the Withdrawal Agreement, National Chairman of the Federation of Small Businesses (FSB) Mike Cherry said: “On the day that we were supposed to be leaving the European Union, all we have is yet another political failure to chalk up.

“Responsibility for this deepening political crisis lies squarely at the feet of politicians who have clearly stopped listening to the business community. Our small businesses have been crying out about the significant damage that uncertainty is causing them. These cries have been drowned out by those seeking to play political games.

“Planning has stalled, investment is handcuffed and growth has flatlined. The only question now is what happens next? Small businesses message is simple, stop playing politics, come together and get on with delivering a pro-business deal that secures a transition period, guarantees as frictionless trade as possible and most importantly, avoids a disastrous no deal Brexit.

“Our small firms are sick and tired of politicians debating and dithering over Brexit. They are trying to get on with their jobs and it’s time that politicians get on and do the same.”

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Potential impact of Brexit on the law firm market

With Brexit negotiations continuing in the United Kingdom (UK), there is little clarity as of yet on how businesses will be able to operate both in mainland Europe and cross border once the UK leaves the European Union (EU) in March 2019.

As a regulated profession, law firms potentially face greater uncertainty — the regulations directed by each individual bar association must be carefully considered in conjunction with any agreement reached between the UK and the EU.

What’s happening at present in law firms with UK offices?

Brexit remains high on law firms’ agendas, particularly with respect to the uncertainty surrounding firms being able to provide legal services as normal after March 2019. Conversations around restructuring have been brought to the forefront.

Many law firms, UK-headquartered firms in particular, are approaching their final accounting period of trading before the two year Article 50 process expires in March 2019. For some businesses, it is therefore impractical to wait to see how Brexit negotiations progress and how local countries’ bar associations respond. Any action is likely to take a period of time and require HMRC (and potentially other) clearance or clarification.

What should your law firms be doing?

Each business will need to consider its current legal structure, the tax and regulatory rules (including around management, control and profit sharing) in the locations in which it operates, and the profitability of the local offices.

Some firms will wish to restructure, and those most likely to consider restructuring may have:

  • EU operations held within a UK incorporated entity (i.e. an EU branch of UK LLP);
  • EU operations held within a non-UK incorporated entity (i.e. an EU branch of US LLP); and/or,
  • EU incorporated entities with UK solicitors having a level of management and control.

Despite Brexit primarily affecting UK businesses, it is important to note the impact that this may have on US-headquartered law firms. As a result of current regulations, US-headquartered law firms usually operate as a UK LLP, or a branch of the US LLP depending on the EU country in question. However, a by-product of Brexit could see the harmonization of regulation across EU territories so it is possible that neither of these structures will be permissible post-March 2019.

While not certain, to the extent that any grandfathering provisions are introduced there may be benefits in a firm being established in the appropriate country(ies) in the appropriate form before March 2019.

It should be noted that it is possible that a firm may wish to restructure twice: the first time to satisfy the applicable regulations during an interim period to ensure continuity of operations, and once again after a final agreement has been ratified to give a more permanent solution. As we approach the March 2019 deadline there is likely to be an increasing need to have plans in place to manage the uncertainty and satisfy stakeholders.

Potential tax consequences of restructuring?

PwC UK has noted that firms currently considering restructuring their EU operations may consider transferring their EU book of business into a separate EU legal entity. This could involve a demerger of a business within a UK LLP, which poses a number of UK tax considerations, including:

  • whether there has been a cessation of trade in the UK LLP;
  • for UK income tax purposes, whether this could trigger the closing year and opening year rules of taxation to apply to the equity partners (basis period adjustments). Quantification of overlap profits would be required to understand the funding requirements;
  • a UK capital gains tax event could arise on the equity partners upon transfer of partnership assets to a new legal entity;
  • there may be non-UK income tax consequences, for example if an EU office has to move to an accruals basis of accounting; and/or
  • overseas capital gains tax events may also crystallise on the equity partners.

It is clear that restructuring, if necessary, could result in both “dry” tax charges and an acceleration of tax, which may provide challenges around funding for both the firm and the individual partners.