The day after a no-deal Brexit. The ambiguity of the possible outcomes leaves considerable uncertain
In 2017, when the UK government invoked Article 50 of the European Union Treaty, Brexit was somehow clear (at least in terms of the formal exit date). Now, with almost a month until the official exit, the ambiguity of the possible outcomes leaves considerable uncertainty for both business and citizens, according to KPMG.
The UK’s Withdrawal Agreement, in the form negotiated by the British government and the EU, was rejected by the British Parliament, fueling a whole series of debates on various amendments to the Brexit process.
The UK’s Prime-Minister has publicly declared her intention to go forward and reanalyze the terms of the Withdrawal Agreement especially with respect to the Northern Ireland backstop solution, while EU officials are firmly stating that negotiations will not be reopened. In the meantime, both the EU and the UK are preparing and widely publicising their contingency plans for a disorderly withdrawal that is gradually becoming more likely.
Although two years have gone by since the start of the negotiations, EU and UK companies are still not entirely certain what to expect starting from 30 March 2019 or what the actual impact on the two economies will be.
Currently, there are several plausible scenarios for the outcome of Brexit. In particular, there is still a possibility on the table for the United Kingdom to unilaterally decide to remain in the EU, as well as the scenario in which the UK leaves the EU on the already agreed terms.
Lastly, the scenario of a hard Brexit (No Deal scenario) is just as plausible. In this case, starting from 30 March 2019, the UK will be regarded as a third country by the remaining EU27 and the relevant legislation will apply in this respect. This means that for a European economic operator, acquiring goods from the UK will be the same in terms of customs duties and formalities as purchasing goods from Russia.
In the more and more likely event of a “No Deal” exit, the impact on trade is the most direct effect which will result from the UK’s exit from the EU. More specifically, Brexit will cause an increase in trade costs both for EU and UK companies, as well as for UK companies trading with third countries. This is because the Free Trade Agreements negotiated and agreed at EU level and based on which reduced or nil customs duties on imports are applicable, will no longer include the UK.
Once the principle of the free circulation of goods, one of the EU’s pillars, is no longer in place for EU-UK trade, supplies and acquisitions from the UK to the EU and vice versa will be considered as exports and imports respectively. As a consequence, trade will suffer serious disruption caused by the required customs formalities, border checks or tariff measures, all of which will translate into additional costs to be supported by companies, and ultimately by consumers.
Moreover, companies that have not carried out customs formalities up to now should register with the customs authorities and perhaps conclude an agreement with a customs broker in order to be able to continue trading with the UK. Also, in addition to customs duties, for each import of goods, companies will have to pay upon importation the related VAT and excise duties, as appropriate. Hence they will be faced by increased costs and a less favourable cashflow position.
According to a study concluded by the UK authorities, sectors such as food & drink, automotive and electronics will be most affected but, in addition to the outcomes that companies trading with the EU will face, the impact will not spare the other participants in the supply chain, such as transporters or distributors.
Similarly, the financial sector is expected to suffer just as much from Brexit. The disorderly withdrawal of the UK will result in the loss of the right for financial operators established in the UK to provide their services in the EU27 Member States. Since EU financial services passports for UK based firms will no longer be valid starting from 30 March 2019, this could cause risks to financial stability in the EU, for which urgent measures such as transferring contracts, setting up branches and subsidiaries or merging with EU27 firms should be taken in order for firms to be in a position to continue providing services to their clients.
According to a study realized by the UK authorities, the UK provides annually a large amount of the financial, insurance and pension services of the EU.
Correspondingly, activities of EU financial operators in the United Kingdom will be subject to UK law. Thus they should take action as soon as possible in order to comply with the relevant legislation.
Furthermore, other sectors of activity are affected by Brexit, and the consequences are especially severe for the UK. For example, the UK will no longer have access to EU funding and it is expected to experience a loss in employment given that the UK’s access to high-skilled labour from the EU could be reduced. Foreign investment is also likely to decrease in future years.
In terms of direct taxation, once the UK exits the EU, the favorable tax treatment for payment of dividends, interests and royalties between affiliated entities will no longer be applicable.
As a consequence, unless other arrangements are agreed between the UK and Romania, the relevant tax rates for dividends, interest and royalties will range between 10 percent and 15 percent.
With respect to issues related to citizens of the EU and the UK, both parties stated that both EU Member States and the UK should take a generous approach to the rights of citizens who are already resident in their territory, and that in no circumstances will citizens pay the price of Brexit.
Consequently, the aim is to allow EU citizens in the UK and UK citizens in the EU to enjoy the same treatment as nationals of the countries where they live in relation to access to employment, education, and core social benefits, provided that certain conditions are met.
Finally, the general consensus seems to be that Brexit is still an ongoing process and there is still enough time left for both parties to negotiate their terms. However, very few appear to grasp the idea that the clock is about to strike midnight and that the Brexit confusion will slowly unfold and descend, leaving both citizens and companies baffled and puzzled as to what the British government has done for the last two years.