Brexit - Navigating through uncertainty

The UK has decided to leave the EU as per 29 March 2019. For what scenarios should you be ready? Our Brexit team gives you insight in the consequences of Brexit and how to prepare.

Every day there is a lot of media attention for Brexit. An agreement has been reached about the United Kingdom's withdrawal from the European Union, but has been overwhelmingly voted down by the UK Parliament. As 29 March 2019 draws ever closer, the outcome of Brexit becomes ever more uncertain. Until a way through can be found, it is important to remember that 'no deal' is the default outcome. Businesses in the UK and EU need to urgently activate their no deal plans, while still preparing for both a deal and no deal outcome.

We advice businesses to accelerate their no deal contingency plans. For those who haven’t started implementing no deal actions, there are still steps they can take to minimise disruption. But the longer they leave it, the more difficult this will be. The time to act is now.

Below you can read how to prepare for the possible scenarios.

Through the article 50 process, the United Kingdom (UK) will automatically leave the European Union on 29 March 2019. There have been extensive negotiations to determine the conditions for withdrawal. This ultimately resulted in a voluminous agreement in which matters such as the financial settlement, the Northern Irish border and other matters related to the UK leaving the EU were settled. The agreement has already been approved by the heads of state and government in the EU27, but is pending approval by the European Parliament and was recently rejected by the UK Parliament. And as things stand, there is a reasonable chance that the UK Prime Minister will try to renegotiate the deal and bring the new deal before the UK House of Commons. Below are a few scenarios:

The UK Parliament does not approve the exit deal

If the UK Parliament ultimately does not approve the Withdrawal Agreement, the UK will still leave the EU on 29 March 2019 , but will do so in a disorderly fashion. There will be no transition period and no prior (trade) arrangements. This scenario would be very disruptive. But really, why is everyone so afraid of this? After all, with the US and China, we do not have any trade agreements either, and are we perfectly able to do business?

The most important element herein is the international interdependence of the supply chains of many companies, leading to large trade flows in just-in-time supply chain and manufacturing processes. Without corresponding infrastructure and personnel in place, the checks of goods at the border or the completion of legal formalities could lead to delays and additional expenses. We notice that companies are already preparing themselves to cope with this disruption. Companies are for example already building up emergency stocks around the Brexit date, in order to prevent not being able to fulfill their contractual delivery obligations, or that a business process would temporarily stop.

Despite the fact that both the EU and the UK are working hard to prepare for a ‘no deal’ Brexit scenario, the question remains whether individual national governments will be ready for this outcome. Even if authorities are ready, disruption will be hard to prevent. In most instances, companies are to-date insufficiently familiar with new customs checks and formalities and they are likely to remain uninformed until they arrive at customs. Just imagine a line of trucks ready to board a ferry to the UK, and then it is found out that several trucks are not compliant with the new customs regulations. Is there any infrastructural capacity to park these trucks? What is the effect of delay for other trucks that transport fresh products, for example? Each company has to assess whether these questions are relevant or in any case applicable for their businesses. In the scenario that the UK Parliament does not approve the withdrawal agreement, the EU and the UK could unanimously decide to extend the withdrawal and negotiation period to give businesses and themselves additional time to prepare. This alternative does not seem unlikely to us, given the how close we are now to the deadline. The extension can be agreed upon right up to the last moment.

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The UK Parliament approves the deal (eventually)

If the UK Parliament does approve the Withdrawal Agreement (perhaps after several votes), the UK will leave the EU on 29 March 2019 in an orderly fashion. A transition period will then enter into force, so for most aspects the UK would be treated provisionally (until 31 December 2020) as if it were still an EU member. This includes all rights and obligations of EU membership which means, among other things, that the free movement of persons and goods will continue to apply during the transition period. After this period, the UK will become a third country, as a result of which the European agreements on the free movement of goods and persons will no longer apply. However, what a new trade relationship between the UK and the EU will look like after the transition phase is currently unclear and is expected to remain unclear until late into 2020.

It also remains unclear whether the EU and  the UK would be able to conclude a free trade agreement during the relatively short transition period. Effectively, both parties have just over a year to negotiate a trade agreement, which is very ambitious to say the least. It is therefore possible that either the term of the transition period would be extended, or if both parties are unable to come to an agreement within the limited time frame, that the UK will leave the EU without an agreement on the new trade relationship. Then the fiercely criticized backstop will enter into force, with de facto Northern Ireland having to continue to adhere to a large part of  EU legislation and the regulatory alignment between both parts of the island of Ireland will remain in place.

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A new referendum?

The Brexit negotiations have shown that anything is possible. The option of a new referendum in the UK can therefore also not be excluded. We consider the chance of a second referendum rather small. There may instead be a slightly higher chance that a second referendum would be held on the question of whether the present agreement should be adopted, or if the UK should leave the EU without an agreement. In sum, we do not expect the Brexit to be reversed by a new referendum.

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What do we actually know for now?

For businesses, Brexit represents a high degree of long-term uncertainty. It is unclear how things will develop in the near future, but a number of matters seem clear:

  • The UK will soon cease to be a member of the EU. It will continue to enjoy its rights and obligations as an EU member during a transition period, but will eventually become  and will therefore be a third country to the EU, creating hard borders between the EU and the UK (this is now estimated at 2021);
  • The new trade relationship will most likely be in the form of a free trade agreement, resulting in increased trade barriers compared to status quo (formalities and levies);
  • The free movement of persons will be restricted, and may for example affect staff availability.

What’s the impact on your business?

The impact of the above developments on your business can be very significant. Think for example about the following questions:

  • Are you familiar with customs formalities and additional expenses? Do you have the expertise and properly organised IT systems to deal with these new processes?
  • How disruptive is it for your business if the flow of goods to and from the UK is considerably delayed around the end of March 2019? Will there be delays in your supply chain and/or can customers recover damages from you?
  • What did you legally arrange for the allocation of additional expenses with your suppliers and customers?
  • To what extent are you dependent on employees with an EU nationality in the UK and/or UK nationality in the EU, and will the decreasing number of such employees pose a potential problem for your business?
  • Are your partners / suppliers / customers well prepared for Brexit or do you run the risk of becoming a victim of their insufficient preparation, which in turn will hinder your business processes?
  • How much exposure do you have towards the pound sterling and what a would be the consequences of a further fall in the pound sterling on your business?
  • Do you have a clear overview of what will change in the area of direct and indirect taxation when the UK leaves the EU, and what the potential consequences are for your business?
  • Is there a need to build up stock in the UK to act as an emergency stock for the period around 29 March 2019?
  • What about your expatriates, project workers and business travelers that spend time in the UK on behalf of your company? Can they stay/travel after Brexit?
  • And have you thought about the long term consequences of Brexit? Will the UK market after Brexit still be suitable for your business and how? Are there other local UK suppliers available that could have a competitive advantage in a post-Brexit landscape?

All these questions are highly relevant for companies that do business with the UK. There is a lot of uncertainty about the final outcome of Brexit, developments are expected to move quickly in the coming months. We therefore advise companies to prepare themselves thoroughly for all possible scenarios and to accelerate their no deal contingency plans in the case of a ‘no deal’ Brexit on 29 March 2019. The longer companies wait, the more difficult it will be to get this done in time.

Of course, our multidisciplinary Brexit team will be happy to assist you with a Brexit impact scan, for example, or to map out the necessary workflows and actions together with you and your Brexit team so that your organisation will be well prepared ahead of 29 March 2019.

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Jan-Willem Thoen