Planning for Brexit

The transition period is not the same as simply extending the status quo. Under the withdrawal agreement, the UK will no longer be a member state of the EU from 29 March 2019, but will be treated until the end of 2020 as if it were still part of the EU (but with the UK being excluded from EU decision-making procedures). This should work to ensure that there is no immediate change to the regulatory environment in the EU27/UK as from next March but there are question marks over whether the transition period will apply as far as third countries are concerned. The EU has a variety of free trade and economic partnership agreements and bilateral agreements on specific sectoral issues, covering around 100 countries in all. In some cases, third countries may argue that the transition does not apply to their agreements. This would mean that the UK would be bound by EU law to comply with the terms of those agreements but would not necessarily get the benefit of them.

Even if most impacts of Brexit are deferred until the end of the transition period, the UK has accepted that it cannot continue to have the same benefits as it currently gets as a member of the single market. Changes to the likely future relationship between the UK and the EU, and the UK and third countries, look set to have significant impacts on businesses and the way they operate. In particular, businesses should expect new tariff and non-tariff barriers for trade in goods and services between the EU and the UK from January 2021. In practice this may mean that goods are more expensive or slower to move around, with more red tape and compliance systems needed, while some services may no longer be provided within existing organisational structures.

These changes may have direct impacts on your business, which can be planned and mitigated for. More difficult, perhaps, will be working out indirect effects, such as how your customers, service providers and suppliers will be impacted by, and react to, the changes that Brexit brings. For example, a UK exporter might decide to move manufacturing operations to the EU27 to be able to meet the needs of customers there and avoid exposing them to risks to just-in-time delivery and rules of origin compliance, but such a move may expose UK customers to those same risks.

There are many other issues to consider. Regulators have pointed out that systemic risks may arise unless long-term grandfathering arrangements are agreed, so as to allow continued performance of contracts such as derivatives and insurance contracts. Businesses that share data across the EU are anxious to see agreement to allow continuity of current arrangements, which may require specific agreement on the adequacy of the UK’s data protection regime. The wider macro-economic impacts of changes in the market for recruitment of talent and foreign investment against a background of evolving and potentially diverging regulation will also need to be considered in assessing the likely impacts of Brexit.

To conclude, our recommendation to businesses is that they should not give up preparing for worst case scenarios, albeit they can take some comfort from the fact that they are now more likely to have two years and eight months rather than just one year to plan for the impacts of Brexit. For more information see our Brexit microsite.