Brexit: What does ‘no deal’ really mean for business?

13/02/2019

The UK is set to leave the European Union on Friday, 29th March.

The big question at the time of writing is whether the UK will leave with a deal.

If we leave with a deal, we will enter a transition period where most EU law will continue to apply in the UK, and we will continue to negotiate with the EU in terms of our future relationship.  In many ways it will be business as usual.

It appears that a majority of MPs are willing to get behind the deal negotiated by Theresa May’s government, but only if the EU is willing to agree alternative arrangements to avoid a hard border between Northern Ireland and the Republic of Ireland.  It is difficult to imagine what those arrangements might be, and the EU negotiators are clearly unwilling to reopen the text of the proposed withdrawal agreement.

The purpose of this article is to highlight potential legal implications for businesses in the event we leave the EU without a deal.

The no-deal scenario is often referred to as a ‘cliff-edge’, but what lies over the edge?

Goods

In the event of a no-deal Brexit the UK will cease to be a member of the EU single market and customs union.  The fundamental principles guaranteeing free movement of goods, services, capital and people between the UK and the remaining EU member states will no longer apply.

There will be additional requirements on the import and export of goods, which may cause delays at ports and supply chain issues.  The government has sought to reassure the country there will be an adequate supply of food, but some manufacturers are known to be stockpiling goods.  Frozen and non-perishable goods can be stored for extended periods, but it will be more difficult for businesses who rely on the supply of fresh produce to take steps to mitigate the risk of disruption.

Customs duties will apply on UK exports to the EU – we anticipate 3% on average but the rate will be significantly higher for some products, such as beverages and confectionery.  The UK will have to decide what levels of duty to apply on goods coming into the UK.

There is a possibility that the UK could strike a preferential trade agreement with the EU, particularly if the UK is willing to set low tariffs on goods originating from the EU.  European exporters (in particular German car manufacturers who sell a large volume of units in the UK) will undoubtedly wish to see this, but there are other political considerations.

The UK will have to enter into new trade agreements with non-EU countries in order to secure continuity of trade.  We will not be able to rely on the agreements made between the EU and non-EU countries after 29 March unless we sign up to the proposed withdrawal agreement.  While this might lead to disruption in the short term, we would have freedom to negotiate our own trade agreements with non-EU countries and this might be seen as an opportunity.

Services

In a no-deal scenario, rights for UK businesses to provide services in EU member states will depend on World Trade Organisation rules and any additional rules imposed by the individual member states. 

We have a large financial services industry, with strong ties to Europe.  At present, UK registered financial services companies have a right to carry on activities and sell services in other EU countries.  If we lose this right we may see a relocation of offices and jobs to financial centres in Europe, such as Dublin, Frankfurt, Paris and Amsterdam.  This may have a knock-on effect for landlords, businesses providing support services and professional advisers.  It is no secret that individuals with suitable ancestry are applying for passports in other EU countries in order that they can follow the work.

Economic effects

A no-deal Brexit may have a negative effect on the value of sterling.  A business trading or operating in more than one country may wish to consider hedging against such risk.

Uncertainty may have an impact on consumer confidence, which in turn can lead to reduced revenue and cash collection.  Businesses may wish to consider increasing their working capital (if possible) and review the terms on which they are prepared to extend credit to their customers.

Employees

The government has committed to protect the rights of EU citizens already living in the UK on 29 March.  Those EU citizens will be eligible to apply to settle in the UK and be joined by close family members.

EU citizens arriving after Brexit will not have an automatic right to work in the UK or to live in the UK for more than three months without applying for and obtaining leave to remain.

The UK will have freedom to decide which professional qualifications it wishes to recognise and it is expected that the UK will adopt a skills-based immigration system.

Data protection

Everyone’s favourite EU regulation (the GDPR) will cease to have direct effect in the UK, but the government has taken steps to transpose the requirements of the GDPR in domestic legislation. 

Although it would be free to do so, it seems highly unlikely the UK will seek to relax data protection requirements in the future.  We require to have broadly similar rules to the EU in order that businesses operating in both the EU and the UK can transfer data freely between offices.  The government would not wish to create a barrier for investment in the UK by European businesses.

It is certainly worth reviewing privacy notices, customer contracts, data processing agreements and related documents which might refer to the EU rather than the UK, and to check you have a right to continue processing personal data relating to any customers or contacts located in another EU member state.

Trade marks

At present, EU trade marks allow a business to protect its brand in all EU member states.  The European Commission has confirmed EU trade marks will continue to be valid and enforceable in the 27 EU member states remaining after Brexit, but they will cease to have effect in the UK.

The UK government has said it will ensure the rights are enforceable in the UK by providing an equivalent trade mark registered in the UK.  The government promises this will be provided with minimal administrative burden but, even so, it may not be seen as progress.

EU funding

UK organisations will no longer be eligible to receive funding for participating in EU programmes, such as the European Regional Development Fund (which aims to help develop poorer areas of the UK) and Horizon 2020 (which funds research and innovation in scientific and other areas).

However the government has confirmed it will guarantee all funding agreed before our leaving date.  The guarantee ensures that UK organisations, whether universities, other charities or businesses, will continue to receive funding over the project’s lifetime.

Agriculture and fisheries

UK farmers will no longer be able to apply for subsidies under the Common Agricultural Policy but the UK government has pledged to maintain the same level of funding for the time being.

The Common Fisheries Policy will cease to have effect and the UK will control access to fishing in UK waters and quotas.

Conclusion

This article covers a selection of the relevant issues of interest to the author and is not a treatise.  It is clear there are a number of issues affecting businesses, and in the event of a no-deal Brexit some will be affected more than others.  There will be some serious issues to contend with but the news is not exclusively negative.

It is worth noting that a no-deal Brexit may be avoided if the UK and the European Council agree an extension of the Article 50 period, or if the UK unilaterally revokes its Article 50 notice.

The European Court of Justice has confirmed the UK does have power to revoke its Article 50 notice, and you can read more about Balfour+Manson’s involvement in the case here