The UK Government is publishing the first of around 80 guides on planning for a No Deal Brexit. In advance of that, here’s a bluffer’s guide to No Deal:
- How would No Deal happen?
- What will it mean?
- How likely is No Deal?
How would ‘No Deal’ happen?
As always with Brexit, this is not simple! There are two types of No Deal!
No Deal version 1: 29 March 2019
The UK and EU governments are aiming for an agreed ‘deal’ in good time before ‘Brexit day’ (29 March 2019). The only legally binding part of this ‘deal’ will be:
a) The ‘withdrawal arrangement’: the divorce. This covers how much the UK pays the EU to settle outstanding bills and liabilities, the rights of EU and UK citizens and how avoid a hard border in Northern Ireland. The Northern Ireland border could prove to be the stumbling block.
b) agreement on a ‘transition period’ from 29 March 2019 until December 2020: whereby the UK stays in single market and our relationship with the EU markets is unchanged except that we no longer have a vote on new legislation. Originally intended as a period for business to prepare for Brexit this is actually a “negotiation period” as the UK and EU will not have agreed any detail on our future relationships (including our access to EU markets and vice versa).
This deal may also include some principle on the future UK-EU trade relationship but the EU is clear that this will not be legally binding (the only legally binding trade deal is a much more detailed agreement that won’t be agreed until after March 2019). Note that any deal before 29 March 2019 will not include a binding agreement on the future EU-UK trade relationship.
If EU-UK talks break down or if the UK or EU parliament rejects a deal agreed by the UK and EU heads of state, then we face “no deal” on 29 March. Under this scenario, there is no transitional period; there is no agreement on the Northern Ireland border; and no agreement on EU and Uk citizens rights. The UK trades on WTO terms straight away from 11pm on 29 March 2019.
No Deal version 2: 31 December 2020
Under this scenario, the withdrawal agreement and transition agreement are fully agreed (see above) and the UK leaves the EU in March 2019; enters a transition period which minimises disruption for business; and the UK and EU start negotiating the detail of their future relationship (in time for the end for the transition period on 31 December 2020). The aim is to agree a further ‘deal’ on the future UK-EU relationship. These talks could also fail to reach agreement or fail to be ratified at any time between March 2019 and December 2020. Under this scenario, we would have no preferential trade terms with the EU from 1 January 2021 and would trade on WTO terms (see below).
What are the biggest implications of a ‘No Deal’ scenario for business?
Any version of No Deal has a variety of implications for any organisation. Our detailed scenario planning model looks at 48 changes to the business environment (and this increases when you assess sectoral impact). Some of the headlines include:
Markets: We can expect an economic downturn which will affect any organisation with UK customers. The UK government’s own economic analysis predicts an average reduction in GDP growth of 8% over the longer term (with a greater impact in some regions – e.g. 12.5% lower in Northern Ireland); this will be on top of any cyclical or global downturn we may experience over the same period. Other counties will also see an economic impact: for example, the IMF have suggested that a No Deal outcome would lead to economic growth in Ireland being 4% less by 2030.
Tax and customs: We would leave the customs union with no new customs agreement in place with the EU. This would not only introduce tariffs on EU-UK trade both ways but would also introduce customs declarations. In terms of corporate tax, there would be no transfer of losses between UK and EU subsidiaries and blanket EU exemptions from withholding tax will end, subject to country-by-country agreements.
Supply chains: As well as additional cost, this would create some initial chaos, as officials in different places would be applying different rules and we may see delays at borders.
Finance: We can expect an initial shock in financial markets, exchange rate volatility and a tightening of credit availibility. Business should make sure their balance sheet is as resilient as possible in advance of No Deal happening.
Data, legal and regulation: cross border transfer of data will be more difficult and businesses may need to use one of the GDPR’s alternative transfer mechanisms. For regulated businesses (such as financial services) operating across the EU-UK border, without a contract continuity agreement (grandfathering existing contractual commitments), existing contracts may not be legally binding. UK products would need additional testing in the EU before they could be sold; regulatory approvals would be needed for UK services to be provided in EU countries and in many cases subsidiaries would need to be set up in the EU.
Location: businesses with subsidiaries in the EU or UK will be affected in different ways, including tax (see above). No Deal may mean that there is no agreement on the Northern Ireland border, creating continued uncertainty for businesses both sides of the border.
People and workforce: visa requirements, temporary work permits & social security insurance will be required for assignments to EU and from the EU into UK.
These implications will be felt by all UK businesses in some form and by any EU business trading with the UK. This means that the UK and EU governments and regulators would be compelled to quickly put in place agreements to address the worst disruption and over time further arrangements and market access might be put in place. Businesses need to plan for initial disruption and chaos and over the longer term more stable trading conditions, with reduced EU-UK market access and increased costs.
Looking on the positive side, there will be opportunities in areas such as non-EU markets; services and products that help address some of these issues; and any aspects of your business model that give you a head start over your competitors (e.g. existing EU subsidiaries).
Is a ‘No Deal’ situation now the most likely outcome?
I have always said it is 50/50, even a year ago when other commentators were saying that No Deal was a 30% probability. Now the same commentators are saying it could be 60/40 in favour of No Deal. I will stick with 50/50 but I advise people to plan for No Deal: as the scenario with the biggest impact and the least amount of time to respond. Plan for the worst; hope for the best!
The UK Government has prepared No Deal contingency plans; so should you.
The government is set to publish the first in a series of technical notices designed to prepare the UK for the possibility of a no-deal Brexit. The notices will include advice for businesses, citizens and public bodies.