December’s general election has broken parliamentary deadlock, giving the Conservatives a significant majority. With that majority position, business now has certainty that Brexit will happen and the UK is set to accelerate towards a new future trading environment.
The Withdrawal Agreement Bill was approved by the House of Commons and we expect it to be fully ratified by both the UK and EU Parliaments this month. The UK will legally leave the EU on 31 January and enter a Transition Period on 1 February 2020. During the 11 months to 31 December 2020, the UK and EU must negotiate and agree the detail of the terms of their future trade relationship.
Quite what the terms of the new Free Trade Agreement (FTA) will look like is unknown; but one thing that seems certain is the UK will leave both the EU Single Market and Customs Union. Business will need to consider at an early stage what this will mean for their operations, begin designing and implementing new systems and processes, and perhaps implement new business models.
The UK’s exit from the EU will also have implications for trading relationships with third countries. During the Transition Period, the UK will no longer automatically benefit from EU FTAs, but all major FTA partners have informally indicated they will continue to reciprocate and treat the UK as if it were an EU member for the purposes of existing trade deals. So they ‘roll over’ for a period of time. Where the UK has not yet succeeded in agreeing a continuity FTA, e.g. as in the case of Japan and Canada, they will need to do so before the end of the Transition Period for the preferential trade terms to continue applying.
The UK will need to negotiate its own trade relationships with the rest of the world, including the US, Australia, New Zealand and the Pacific Rim. Business will therefore need to not only prepare for the future economic partnership between the UK and the EU, but also between the UK and other countries.
1 February 2020 – will we see any changes?
Whilst the UK leaves the EU on 31 January, the Transition Period means the status quo is preserved in almost every regard for businesses. There will be some immediate consequences in the relations between the UK and the EU, and a couple of examples are highlighted below. Whilst they will have limited impact for business, they are important to be aware of:
- EU institutions: The UK will no longer be represented in the EU institutions, i.e. the European Council, the Council of Ministers and the European Parliament, as well as the EU’s agencies. Any participation will be on a case-by-case basis provided the presence of the UK is necessary and is in the interests of the Union, or where the discussion concerns acts addressed to the UK and its citizens. Exactly how this will be defined in practice remains to be seen. While the UK and the EU might at times have different interpretations, the EU view is expected to prevail given these are EU meetings. Business will have to consider how to engage with rule-making bodies during this period.
- Leading authorities: Perhaps the main direct consequence to impact business will be around the UK’s regulatory agencies. Certain agencies, such as the Medicines and Healthcare products Regulatory Agency (MHRA) and the Veterinary Medicines Directorate (VMD), will not be able to act as ‘leading authorities’ for some approvals and assessments. This means they will no longer have the authority to conduct e.g. quality and safety assessments which will inform decision-making processes for the approval products to be used or consumed within the EU. Businesses should check with the individual agencies and they may have to lodge applications for new products with leading authorities in an EU member state.
However, let’s be clear the Withdrawal Agreement between the UK and the EU is a bilateral one – it does not necessarily bind third countries. Broadly speaking, third countries are expected to continue with current arrangements during the Transition Period (e.g. the EU-US Privacy Shield for personal data and, as we’ve outlined above, with FTAs).
One exception we’ve identified so far is a niche, but interesting point in relation to US tax. UK-headed groups with US investments could see an increase in US withholding tax (WHT). This could arise, for example, where intra-group lending is undertaken to a US company by an EU finance company. A provision in the relevant US Double Tax Treaty (DTT) reducing WHT on interest payments to nil typically applies where the listed parent company is resident in an EU Member State. From 1 February 2020, as UK parent companies will no longer be resident in the EU, this mechanism for accessing US DTTs will no longer apply. Therefore, additional WHT may become payable in some cases if businesses don’t take steps to review their position.
For most businesses then, operations will continue as normal during the Transition Period. However, the changes that take effect at the end of the Transition Period will undoubtedly have a broad and often fundamental business impact. And there is a very short timeframe to design and take action.
Early identification of the “known knowns” – those areas that will change irrespective of whether or not a FTA is agreed – is an important first step in preparing for the post-Brexit landscape. For example, we know sales of goods will become imports and exports, the VAT reporting and simplifications will change and new product markings will be needed. And there are the “known unknowns” – those areas where the extent of change will be dependent on what is agreed between the UK and the EU on the future economic partnership. Preparations will require a methodical approach.
Many businesses are likely to have to factor in such changes to their financial forecasting. When preparing financial statements on a going concern basis for December 2019 year-ends and beyond, directors will need to remember the Transition Period will likely end within 12 months of signing the accounts.
Prioritising the key impacts early will also prepare business for engaging with government on business critical issues in the months ahead.
Our advice remains to start planning early, identify those known areas of change and start acting now.
We’ll be posting throughout 2020 to help you navigate the Transition Period and beyond. Never miss a blog, subscribe to have our Brexit blogs delivered straight to your inbox as soon as they’re published.
For support in assessing or establishing your Brexit related plans, you can email us.