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UK prepares to leave the EU

Immediate effects of the 31 January deadline may be limited, but Brexit could challenge some business models.
European Commission President Ursula von der Leyen speaks at a session at the European Parliament in Brussels, Belgium, 29 January 2020.
European Commission President Ursula von der Leyen speaks at a session at the European Parliament in Brussels, Belgium, 29 January 2020.

The UK is preparing to formally leave the EU at midnight Central European Time on 31 January, following votes by the UK Parliament earlier this month. The European Parliament voted to approve the withdrawal agreement on 29 January with the European Council expected to confirm the decision on 30 January.

The UK government has indicated it wishes to negotiate a free-trade agreement with the EU. UK Prime Minister Boris Johnson is expected to set out in a February speech the country’s trade talk objectives.

Meanwhile, the UK government is striking an optimistic tone about making future trade deals. Stephen Barclay, the UK government’s Brexit secretary, told the BBC on 26 January, “I think it is extremely welcome that so many countries, including the US, want to reach trade agreements with the UK and want to work at pace.”

US Treasury Secretary Steve Mnuchin said the US wanted to strike a trade deal with the UK this year and predicted “significantly more trade between the US and the UK”. He said that many of the UK-US negotiating issues could be dealt with simultaneously with the UK’s negotiations with the EU.

Shane McGibney, FCMA, CGMA, is CFO at Kerry Taste & Nutrition — a division of global food and beverage company Kerry Group, which is headquartered in Ireland. He told FM that while 31 January will be “a milestone date in the evolving Brexit process”, from a practical business perspective, the impact of that date will be “minimal”.

He said that while the Brexit risk for the company remains relatively unchanged, the uncertainty around the future trading relationship between Great Britain and the EU presents risks and potential opportunities for businesses.

He added: “Kerry is maintaining a prudent approach to the potential risks faced by ensuring contingency plans are in place for a worst-case scenario outcome, in which the negotiating parties fail to reach a free-trade agreement by the end of 2020, and no extension to the transition is sought.”

The deadline for the UK to request an extension to the transition period is 30 June, although the UK government has ruled out extending it beyond 31 December.

Steve New, Ph.D., associate professor in operations management at Oxford’s Saïd Business School, said that during the transition period, the UK stays in the EU Customs Union — the single territory for customs purposes — and within the European Single Market.

However, he said one change will be that UK businesses selling digital services to EU customers will no longer after 31 March be able to use the UK’s VAT Mini One Stop Shop (MOSS) service to declare sales and pay VAT due in EU member states. According to revenue and customs authority HMRC, after Brexit companies will need to register either for the VAT MOSS in any EU member state or VAT in each EU member state where they sell digital services to consumers.

Systems changes

For companies importing or exporting to or from the EU or dealing in financial services, New said the result of the UK-EU negotiations will necessarily involve changes to their systems.

He explained that for the trade of goods between the UK and the EU, “any divergence from the Single Market and the Customs Union is likely to involve some systems and checks”. He added: “Those checks might be quite minor, but any changes are going to require changes to infrastructure and systems and procedures.”

He warned that unless these new arrangements are negotiated and resolved very quickly, there will be insufficient time to put in place administrative systems for both the UK government and businesses.

“Companies already operating internationally or who have offices in Europe [will be] very well placed to cope with the new bureaucracy,” he said.

However, he said: “There appear to be in the economy a very large number of liminal businesses. These are often small and medium-sized businesses that haven’t made much profit over many years.” The extra administrative burdens could tip a relatively large number of these businesses into a position where it isn’t profitable for them to continue trading, he suggested.

There could also be a negative “secondary knock-on effect” for a range of businesses that rely on these businesses that operate on the threshold of profitability, he warned.

New advised companies to make maximum use of the information provided by the UK government and to be prepared to respond quickly to unfolding legislative changes.

“The extra costs associated with importing and exporting that may arise after Brexit may well make some fundamental business models unsustainable in the UK,” he also warned.

One example is the car industry, he suggested. “[If there are] delays and complications and increased variability of traffic across the [English] Channel, then it is difficult to imagine some of the car factories we currently have surviving. They wouldn’t leave suddenly … it would be a five- or ten-year retreat.”

Latest economic data

End of January data released by IHS Markit suggested that the UK’s manufacturing and services sectors had both seen an upward bounce. The IHS Markit/CIPS Flash UK Manufacturing Purchasing Managers’ Index was at the highest level since April 2019, while the Flash UK services business activity index was the highest since September 2018.

Chris Williamson, chief business economist at IHS Markit, said in a press statement that the political and economic uncertainty ahead of the general election has started to ease.

He said: “The survey is indicative of GDP rising at a quarterly rate of approximately 0.2% in January, representing a welcome revival of growth after the malaise seen in the closing months of 2019. Hiring has also picked up.”

Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.