The Brexit transition period: a fork in the road for business, not a milestone

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Brexit: the facts to date

On 23 June 2016, the UK electorate voted by a majority to leave the European Union (EU). As a result, the UK will officially cease to be an EU Member State on 29 March 2019. The UK will likely leave the EU Single Market and Customs Union, resulting in a “hard border” between the UK and EU. The EU summit in March 2018 proposed a transitional period through 31 December 2020, during which time the UK and EU will effectively continue to operate under Single Market rules. However, the direction of travel is still uncertain and open issues remain.

So with less than a year to go before the UK leaves the EU, how should businesses planning for Brexit treat the transition? 

  • Should they continue with full Brexit-mitigation plans based on the March 2019 exit date until there is legal — not just political — certainty? That may seem prudent, but it may prove costly. Where does that leave a business if competitors set a less disruptive course, aiming for December 2020, and the transition deal remains?
  • Alternatively, should businesses change their Brexit deadlines until late 2020 to better manage their resources (which may already be constrained delivering business as usual)? That may give them space until there is more clarity on the final agreement for the UK-EU relationship. But what if the political proposals fail, the March 2019 UK exit date holds and these businesses are not ready?

Key factors in making the Brexit-transition decision

Given the importance of getting it right, the decision about transition is a conundrum for senior management to solve.

To help inform that decision, businesses will need to work through where they may have flexibility in different work streams that can offer relief to those delivering Brexit preparedness and mitigation. In doing so, businesses will have to critically assess their plans to identify areas that cannot be deferred, either because of the significant downside risk of political failure or because the mitigation time and effort needed remain unknown. Let’s consider three common examples:

  • Regulatory

    Heavily regulated industries, such as financial services, life sciences, chemicals and food face the biggest risks of political failure. Questions to consider in assessing this risk include: Is your UK business the holder of an EU-wide license? What will happen when the UK leaves the EU? Will you need a license when one isn’t required today? With no license to provide a service and sell a product in a jurisdiction, whether the UK or EU, trade can quickly grind to a halt.

    The regulatory impact of directly controlled transactions is typically well understood by business. More hidden is a potential regulatory issue in tier one, tier two and even tier three suppliers, who may be less equipped to meet the necessary regulatory requirements. This indirect impact could be just as significant and requires much greater effort to identify.

    Meeting regulatory requirements is “mission critical” for impacted businesses. This is something that cannot be risked. The requirement to keep March 2019 as a target date is compounded by the lengthy timelines for transferring or seeking new licenses.

  • Core customs compliance infrastructure

    For companies moving goods in and out of the UK, it is essential that they are ready for a potential border with the EU. If unprepared, businesses risk products being delayed at best and, at worst, products not moving at all. Accordingly, while much of the media debate on customs issues related to Brexit is around the impact on tariffs, the reality for companies is that the biggest impact is keeping their goods moving. This means first ensuring that the necessary master data, customs IT infrastructure and supporting processes are in place on both the EU and UK sides of cross-border flows.

    Preparing for a border is very much a “no risk” decision. All the end-destination scenarios currently being debated for the UK-EU trading relationship (i.e., a free-trade agreement (FTA), a customs union and no deal) involve having a customs border between the two territories. So if businesses prepare for this, the work will not be wasted whether there is a transition or not.

    On a related point, the UK customs authority is migrating away from its existing IT system, Customs Handling of Import and Export Freight (CHIEF), to a new, more robust but more complex system, the Customs Declaration Service (CDS). The schedule for this change is January 2019 irrespective of Brexit. The move to CDS requires all existing traders to adapt to the new system; Brexit preparation could be a marginal effort if combined with CDS-readiness.

    For these reasons, most companies view having core-customs compliance on track for March 2019 as a relatively straightforward decision.

  • Understanding the current contract estate

    Brexit creates a wide range of challenges to contractual terms between parties, whether it be something as fundamental as a contract’s jurisdiction or as detailed as the Incoterm used, whereby the risks and costs in a supply chain are defined.

    Vital to assessing the potential impact and need for mitigation is seeking clarity on the current contract estate held by the business (i.e., what are the terms and conditions of my contracts?).

    Businesses potentially have thousands of contracts that are operational at any time, and the commercial consequences are unknown until they are reviewed. Therefore, reviewing the impact of Brexit on a company’s contracts is a task commercially risky to defer.

    The assessment landscape is also likely to change as the exit negotiations develop. Therefore, ideally businesses should create an electronic repository that facilitates rapid assessment and scenario planning of their contract estate.

 

Making a decision in April

Whether to flex Brexit plans or not is a key strategic decision. With less than a year to go before the UK exits the EU, that decision needs to be made now. By the end of April, businesses must:

  • Form a view of their reliance on political clarity versus legal certainty of the draft withdrawal agreement
  • Critically assess Brexit work streams to determine what can and can’t be flexed leading up to it, including defining the downside consequences if political agreement fails
  • Have senior management decide which path to take

The transition agreement should not be seen as just another milestone on this long and rocky Brexit road; it is a fundamental fork in the road for businesses.


 

EY - Marc Bunch

Marc Bunch
Partner, Indirect Tax
Tel: +44 20 7980 0298