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UK heads into a third Brexit extension

The Brexit process has evolved rapidly in recent days, resulting in a busy week for MPs and pundits.

After intense negotiations, on 17 October the UK and the EU announced that they had agreed a new Brexit deal.

The Prime Minister urged MPs to approve the deal when Parliament sat on 19 October, the first Saturday sitting in the House of Commons since 1982. Unfortunately, for those of us waiting for an epic Brexit moment, events took a different course. Parliament instead approved the so-called Letwin Amendment; this effectively withholds approval for the deal until the whole of the legislative process has been completed.

As the deal wasn’t approved by the UK Parliament by 19 October, the Prime Minister was forced to write to the EU requesting an extension to Article 50, as required by the Benn Act. On Monday 28 October, the EU granted the UK a further extension, this time a ‘flextension’ which gives Parliament until 31 January 2020 to pass the Withdrawal Agreement. The UK could leave earlier, on either 30 November or 31 December if the Agreement is ratified sooner.

All of that said, some progress has been made. On Tuesday 22 October we saw the first signs of a Brexit breakthrough in that MPs expressed support for the deal in principle with a 30 vote majority – a first positive result in Brexit deal voting history. However, the next vote saw Parliament decline to support the Prime Minister’s preferred timetable for scrutinising the (admittedly technical and lengthy) legislation of just three days, resulting in the Prime Minister ‘pausing’ the ratification process for now.

What happens next is still very much up in the air. Today (28 October) Mr Johnson will request Parliament approves a general election on 12 December, with more time to scrutinise and potentially amend the Withdrawal Agreement Bill – but Parliament may not agree. An alternative election date of 9 December has been proposed by opposition parties, so we can expect another busy week ahead in Parliament.

What’s in the new deal?

The new Withdrawal Agreement is broadly similar to Theresa May’s deal, but completely replaces the ‘backstop’ with a new legally operative solution in the shape of the Northern Ireland/Ireland Protocol. If ratified, it would become the default position until such time as the Northern Irish Assembly and Executive ever choose to reject it in future, with the inclusion of a new consent mechanism and provision for a vote in Stormont every four years. The remainder of the Withdrawal Agreement - citizen’s rights, the financial settlement, and the transition period – is largely unchanged.

Predictably enough in a Northern Ireland/Ireland Protocol, the most significant changes concern Northern Ireland. In a bid to ensure no hard border or infrastructure on the border between Republic of Ireland and Northern Ireland, the UK and EU developed a unique solution that hasn’t been seen before in any trading arrangement. The whole of the UK leaves the Customs Union, and legally Northern Ireland would remain inside the UK’s customs territory. But, it would remain aligned to the EU’s rules for goods, and enforce EU customs tariff rates and rules in respect of goods entering its territory and at risk of moving into the EU.

Further, Northern Ireland would apply UK standard VAT rates, but EU regulations and VAT rules to physical goods. There’s an interesting provision included to allow reduced VAT rates to apply in Northern Ireland but not the rest of the UK, to align with the Republic of Ireland rates as an option – but there’s no vice versa.

This arrangement could give Northern Ireland unique beneficial access to both the GB market and the EU market – but the price for this would be increased administration and compliance complexity.

The Political Declaration has also changed, with the future relationship shifting from an Associate Agreement model to a more traditional Free Trade Agreement model. It also now includes the ‘level playing field’ provisions for areas like employment rights and environmental standards, moved from the original Withdrawal Agreement.

During a recent Brexit Update webcast to an American audience, we took the opportunity to poll the over 4,500 attendees, 39 percent of whom identified as C-Suite or executive level, on this point.

How is all this uncertainty affecting investment into the UK?

Whilst nearly a third of the 1,750 people who answered the question said they have continued with their planned investments in the UK, another third have held off from making any investment decisions. Add the 20 percent who have not invested at all, or as heavily, in the UK since the referendum, and the 14 percent who have invested elsewhere in the EU as opposed to the UK and we have nearly two-thirds of this particular audience who have scaled down investment plans in the UK. Just four percent have increased their investments though, as a result of a weakened sterling.

I asked Debapratim De in Deloitte’s Economics team, for his thoughts on what this latest extension will mean to the UK economy:

“An extension will reduce the immediate risk of a no-deal Brexit, but uncertainty is likely to remain at elevated levels.

“The new deal, in its current form, doesn’t rule out a cliff-edge exit next year. In the event of a general election, betting markets expect a hung parliament to be the most likely result, with the Conservatives winning the most seats. As such, an election may also fail to provide clarity on Brexit.

“The uncertain environment for businesses, and the resulting squeeze on investment, will likely continue until a resolution of the persistent political deadlock over Brexit.”

What next?

While preparedness varies across business sizes, sectors and geographies, many have extensively planned for no deal on two occasions in 2019 (not including the 12 April date), including expensive stockpiling, plant closures and restructuring for regulatory reasons. And most will not relish the prospect of preparing for a third major deadline in the future.

But, not being prepared, and not following UK government Brexit guidance, is not an option. Assuming the UK does leave the EU, it will not be a waste of resource to understand what the Single Market and EU Customs Union means to your business today. There is very little provision for services businesses in either the Withdrawal Agreement or Protocol – so understanding whether EU membership gives you access to the services market, and understanding regulatory environments is key. Even in a transition period, there could be some change on day 1 if the deal is ratified by Parliament if your business relies on an EU trade agreement for exports.

The detail of the future relationship between the UK and the EU may change, but given the limited time set out in the Withdrawal Agreement for transition, an early understanding of any costs, opportunities and practical issues is advised without trying to second guess the exact trading arrangements. For instance, businesses should be mapping the movement of goods against the increased burden of extra checks at ports and checkpoints and addressing the requirements of EU Customs Duty and processes to determine origin. Building in systems requirements often takes months, if not years, so an early understanding is key to avoiding the need for time consuming manual interim measures.

No matter what happens next, there is still everything to play for once the future relationship negotiations start. The date the UK leaves the EU will mark the start of a significant period of change for the UK in terms of regulation, immigration and trade policy. So businesses will need to be ready to adapt to change and willing to engage with government to influence and understand the future landscape.

You can watch our Preparing for Brexit videos here and read our series of Brexit industry insights here.

For support in assessing or establishing your Brexit-related plans, you can email us.

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