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The Brexit Column: Which way now?

The Brexit Column: Withdrawal Agreement special

Rolling updates on what the parliamentary endgame to Brexit will mean for business.

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Director, Public Policy

KPMG in the UK

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4:30pm, 15 March 2019

A frontrunner emerges

In this, the most of unpredictable races, a one-time outsider is emerging from the pack in the final straight.

MPs might have voted to extend Brexit last night, but the net effect has been to strengthen the prime minister’s hand, and her deal. Brexit-supporting MPs know if they again reject Theresa May’s Withdrawal Agreement (and the short administrative delay that would come with it), the government will ask the EU for a much longer delay. Many face an agonising weekend deciding whether to settle for something … or risk everything. Remember what ITV news reported overhearing from Olly Robbins, the PM’s Chief Europe Adviser, in a Brussels bar last month: “Got to make (MPs) believe that the week beginning end of March … extension is possible, but if they don’t vote for the deal then the extension is a long one.” If that is the master plan, it might just be working.

Weary business leaders look at the scenarios somewhat differently to politicians in Westminster. They have become increasingly agnostic as to the exact colours of the rider – Theresa May’s deal, Labour’s ‘softer’ Brexit or anything other. As long as the Withdrawal Agreement is signed, transition secured and the pile up of ‘no deal’ is avoided. Winning the next race that will decide the long term future of relations between the EU and UK can be run another day.

So when I talk about “deal” I’m not referring only to “the” Theresa May deal, but “a” deal of some complexion. Theresa May’s deal may well be rejected for a third time next week, but a different looking deal could still emerge and get us across the line at the fourth time of asking.

With that hefty caveat, I put the odds of “a” deal going through at evens (50%). Success next Tuesday could then set in motion something like the following:

  • 20 March: The PM writes to EU Council President Donald Tusk, requesting an extension to Article 50 until June 30.
  • 21/22 March: EU leaders reluctantly grant the extension at their summit.
  • 25 March: Parliament begins passing primary legislation and statutory instruments.
  • 23 May: EU holds European Parliamentary elections without UK candidates.
  • 30 June: UK leaves the EU (though it could come sooner if the UK is ready).

And what if the Meaningful Vote fails for a third time?

  • 20 March: The PM writes to Donald Tusk, requesting a long extension to Article 50, perhaps until the end of the year.
  • 21/22 March: EU leaders grant an extension but it’s not a formality and could come with strings (and costs) attached. If the two sides can’t agree terms, the UK would leave without a deal two weeks today.
  • W/C 25 March: Assuming an extension is agreed, Parliament begins indicative votes to establish a form of Brexit that a majority of MPs can support.
  • 12 April: Deadline for agreement to avoid the UK taking part in European Parliament elections
  • 18 April: Last day for current European Parliament to sign off Brexit deal.
  • 23 May: European Parliamentary elections.
  • 31 Dec: Deadline for UK leaving the EU if extension is to end of the year.

I believe the likelihood of this longer delay (including the possibility of a second referendum) could be something like 7/3 (30%).

The risk for business is that the EU and UK are unable to agree the terms of this longer delay. So, I’d put the odds of a subsequent no-deal crash out in two weeks’ time at about 6/1. One outcome I wouldn’t put much money on is a unilateral UK revocation of Article 50. Even in our current impasse, the PM would surely conclude that the political and social fallout would be too severe. For me, that makes it a 20/1 outsider.

Conclusion: It’s been a tumultuous week and some fancied runners such as the people’s vote have fallen away for now. “A deal” is where the smart money is this weekend, but delay is gaining and no deal remains an outside bet.

Advice: This time next week we should know if cliff edge is off the table. Defer non-urgent decisions until next week if you can. To insure against the financial impact of a ‘no deal’, consider whether it’s worth re-financing and securing extra financial headroom in this brief lull.

 
 

11:30am, 14 March 2019

May’s deal rides again?

Were forex markets right to give sterling a vote of confidence last night? Partly. The pound soared to highs not seen since last June after MPs voted against leaving the EU without a deal. However, in no way does that mean ‘no deal’ is off the table – it would only take one European leader to veto a UK request to scupper the plan or as the EU, collectively, loses patience.

A perhaps more sober assessment of the situation came on Thursday morning when the pound gave up a portion of those overnight gains.

At least last night’s move by Parliament takes a deliberate no deal off the table. With that being the case the prime minister’s deal, or a softer Brexit compromise option, or a long extension all rise in likelihood.

So in what is Cheltenham Festival Week, which outcome should your money be on?

The bookies favourite remains extension and tonight MPs vote on whether to ask the EU for one. Extension could come in two forms, according to the current government motion. It says if a deal is passed by next Wednesday then it would seek an extension until 30 June. But if the deal fails, then a longer extension – beyond the European Parliament elections – will be required.

However, reports out of Brussels this morning suggest that the EU will only accept a short delay to Article 50 if a deal is passed. Otherwise they will only offer a long extension.

That harder EU line is breathing renewed life to a veteran contender. Despite being constantly on the rails and having suffering heavy falls at two earlier fences, the prime minister’s deal is the runner that refuses to accept defeat. It is now increasingly fancied to stage a stunning late victory dash.

Why? Because according to The Guardian on Thursday, the Attorney General Geoffrey Cox is in the process of formulating fresh assurances on the Irish backstop that could be enough for the DUP and Conservative Eurosceptics to back the PM’s deal.

There are other runners and riders too including the possibility that Labour MPs and Conservatives rebels could take matters out of the PM’s hands and insist on a series of ‘indicative votes’ to establish what Parliament does want.

What does this confused picture mean for you and your business? An increasing number of exasperated business leaders, both in the UK and EU, are fatalistically calling for no deal now, rather than delaying another cliff edge two months down the line. For many of them, an extension only puts their warehousing and working capital under strain and delays important business decisions.

For others I say continue to do what you can, while you still can to prepare for no deal. It remains a live danger. As the palpable sense of chaos in the Common’s division lobby proved last night, the situation remains extremely fluid and unpredictable: less an orderly Cheltenham Gold Cup and more a Grand National lottery.

Conclusion: No clear frontrunner yet. No deal remains a live danger.

Advice: Unless you literally have to make a key business decision today, wait for more information tomorrow.

mark.essex@kpmg.co.uk

 

6:00pm, 13 March 2019

Tariff changes are a radical departure

Olivier Sorgniard, Director of Indirect Tax and Customs:

"It’s a sign of the times when announcing the biggest change in the way in Britain's trade policy for 45 years doesn’t get top billing on the news. But that’s what happened today: without a Brexit agreement, in just over two weeks’ time, importers will pay no tariff on 87% of the goods imported into the UK by value."

“There are two very significant points to make from today’s new rules, which run for up to 12 months, while a full review is undertaken."

“First, this is a radical change. Brexit Secretary Stephen Barclay this morning billed this as a “modest liberalisation” but it feels like anything but. Whatever the reasoning, the UK chose not to replicate current EU tariff schedules and instead said it would sweep away tariffs on all but a handful of sectors – most notably some goods produced by the agricultural, automotive, textile and ceramic industries."

"The only other major economy to have taken a similar approach in recent years is Singapore and it will be interesting to see what approach the UK takes when it is pursuing free trade deals after Brexit. For some countries there would be little upside in striking one if they already have near-complete tariff-free access to the UK already."

“Who are the winners? European exporters who I’ve spoken to today are relieved frankly. They still face some longer lead times and costs in customs declarations, but they have escaped a tariff hit and would be able to continue largely as before. In the same vein, UK importers who might have been paying a tariff on, say, chemicals products from the US would see that bill reduced to zero."

“But for a lot of UK producers the implications are serious. Many would face cheaper foreign competition while suddenly also confronting tariffs to access the EU market for the first time. Even those who retain some tariff protection against cheap imports, like meat producers, are likely to see these markets take a big hit."

"The second significant point in today’s announcement relates to what happens to goods which do still attract a tariff such as cars or beef and the rules concerning trade across the Irish land border. To avoid imposing a hard border, the plan says these import tariffs will “not apply to goods crossing from Ireland into Northern Ireland”.

"On the face of it, that means a company exporting textiles from Turkey into the UK could now route them via Dublin, across the border to Belfast and from there ship them to England or Wales – tariff free. For companies importing high-value goods and which face a sizeable tariff, it might be worthwhile reconfiguring supply chains, if the rule were to be confirmed."

Advice for UK importers: Analyse the relevant tariff schedules on intermediate and final goods. Importers of Italian shirts face a tariff hike but importers of US-made chemicals could see their customs bill drop. Whether you’ve been paying tariffs or not historically, the plan evens out treatment of EU and non-EU product. Should you now source from beyond the European Union?

Advice for all producers of physical goods in the UK: Understand what tariff protections you have had against imports up to now and whether that protection remains.

olivier.sorgniard@kpmg.co.uk

Note: This is the latest in a series of updates to the Brexit Column over the next few days. Check back here soon for more.

 
 
 
 
 
 

10:15am, 13 March 2019

Peak uncertainty. Peak risk. 

With Parliament rejecting the government’s Brexit plan again last night and just 16 days until the UK leaves, we are entering the moment of peak uncertainty, and peak risk.

“Mayhem”, “Despair” and “Out of control” were just three of the headlines that will have got Brits spluttering over their morning coffees on Wednesday. 

And it is hard to disagree. The defeat by 149 votes (a third less than in January, but still a thumping) means we still have no clear sense of where Brexit will end up. MPs have again told us what they are against but not what they are for. With critical votes coming up today and tomorrow on leaving with no deal (which is highly likely to be rejected) and on Thursday, whether to ask for an extension, we are now at the most critical juncture in Brexit two and a half years after the referendum. The future conditions under which businesses trade for years to come could turn on what happens in the next day or two. As of this morning all options remain live:

  • Leaving with no deal on 29 March
  • Receiving a short delay of up to 3 months, but with the risk of another cliff edge thereafter
  • A longer delay of more than nine months and possibly up to two years
  • A deal before the 29th (but with a small administrative delay of a couple of weeks afterwards): either Theresa May’s plan after a third (or even fourth vote) or something closer to Labour’s plan for closer relations, including a customs union with the EU.

The key point for business is that ‘no deal’ remains a clear and present danger: MPs voting to take it off the table this evening does not take it off the table.

That’s firstly because a successful motion rejecting ‘no deal’ is an instruction to the government. It is not law and therefore does not reverse the 2018 law that set the clock ticking on the UK’s automatic exit at 11pm on 29 March.

Second, an extension – both its length and its aims – has to be agreed by British MPs and then by the leaders of EU27 states, unanimously. Though the signs from European capitals are encouraging in that respect, we should not assume it’s a done deal. The potential for mischief and mishap remain.

Conclusion: The final direction of Brexit is still unknown with 16 days to go.

Advice: Strengthen your last-minute efforts to plug any gaps in your no deal plans.

Note: This is the first of several updates to the Brexit Column over the next few days. Check back here soon for more Brexit business insights following tonight's (Wednesday) vote.
 

4:30pm, 16 November 2018

Don’t bin it just yet

Is the draft Brexit treaty dead in the water? The verdict is mixed.  Some say it is only a matter of time – the parliamentary arithmetic points to no other conclusion.  Others say the Prime Minister’s tenacity has been underestimated before.

So have diligent Brexit geeks who’ve been locked away for the past three days slogging through the 585 page paper been wasting their time? Fortunately for them, I believe it’s been time well spent.

My reluctance to read last rites to the draft Withdrawal Agreement is based on a couple of factors. 

First, Theresa May remains the prime minister and now has a coterie of loyal ministers around her. As I write this former Home Secretary Amber Rudd has just rejoined the Cabinet – the rebuilding has begun and we have a lull (if perhaps the storm rages again. We still think things will get more difficult politically before they get easier again – see yesterday’s update below).

Second, as Europe’s reaction to the backlash in Britain has shown over the past 24 hours, leaders in Brussels, Paris and Berlin are in no mood to veer from the current draft. Whoever the prime minister is in two weeks’ time, a deal will be very substantially be based on this text. The only area where there may be more scope is on the seven page annex outlining principles governing the future relationship. 

And lastly, even if the UK does walk away from the table the UK and EU are still highly likely to seek a ‘mitigated no deal’ – i.e. that is one that keeps the lights on and the planes in the sky. What will that ‘no deal deal’ be based on? Provisions contained within the current draft Withdrawal Agreement. 

Time to find those reading glasses … 

 

6:40pm, 15 November 2018

A day of drama but we haven’t hit Peak Risk yet

We’ve all been inside the ‘Westminster bubble’ today via our phones and TV but it’s worth asking what the view looks like from outside. Specifically, how is this drama viewed in Europe? From their perspective, other EU leaders might be wondering whether the EU summit on the 25th is still a good idea: will they have a British leader sat opposite them who can sign off the draft deal on behalf of the United Kingdom? 

We can’t answer that today. We are still 14 news cycles from that point and things could change radically. What does seem more certain, unfortunately, is that political volatility is likely to rise further over the coming days. We haven’t reached Peak Risk yet. 

Given that, I think it’s worth every business asking itself whether it’s prepared for what may come over the next few weeks, and to put some prudent mitigation plans in place to deal with the current political situation.

So, for example, what are the things that (in two weeks’ time) you’d wished you’d put in place today? What research will you wish you’d undertaken? Don’t get caught in the political minutiae – I bet that Googling the leadership election rules of the 1922 Committee won’t be one of those things you’d wished you’d done.

Have a fully fleshed out strategy to communicate to staff, and investors if necessary, and agree protocols on making decisions based on a range of political events that could affect you.

In times of extreme political uncertainty it can be tempting to say “nothing can be done”. It’s worth reminding ourselves that we need to stay focused on our business rather than the business of what’s happening in Westminster. 

 

6.50am, 15 November 2018

Having watched the news carefully yesterday evening, so far, there have been no Cabinet resignations so the first test of the deal appears to have been passed - it is has been backed by the Cabinet.  

And the text has been revealed - 585 pages of legal text and 7 pages on the outline political declaration which sets the scope for the new deal.  Let’s start with the shorter document. The warm words within the political declaration are welcome. But businesses have been on a crash course in British politics over the last two and a half years and will be wary of committing to future plans before this is fleshed out. I look forward to seeing more detail. For example, for my firm, we want to know more about the “appropriate arrangements on professional qualifications”. We understand that intensive work starts now on developing this document much more in time for the next EU summit on 25 November.

Now the withdrawal agreement itself. From my initial read there is much to be encouraged by. First, the most important thing about the withdrawal agreement is not the contents but the fact that the negotiation teams have agreed a text. Remember, the breathing space provided by the transition period only comes into force if the withdrawal agreement is signed. Without that, businesses face the disruption that comes from a no-deal Brexit. How bad could that be? We just have to look at the EU’s no deal planning, published yesterday to see that there could be significant disruption at ports, particularly Dover/Calais.  

Second, the UK has the right to extend transition. This reduces the likelihood of businesses having to make two sets of changes. If the future relationship isn’t agreed by the end of 2020, the UK can extend. This will be reassuring to businesses who would otherwise fear a second cliff edge at the end of transition. Once the withdrawal agreement has been agreed, this will unlock the main problem for business and its removal can allow businesses to plan for the future and release investments that have been on hold.

And for those whose biggest concern is trade friction, the backstop arrangement - namely UK-wide membership of a customs union - means that even if there is no agreement on a future deal, and there is no extension of transition then firms will still be able to move goods across the Channel without tariffs or customs inspections.  

Then for EU nationals and their employers, they have a double lock. The withdrawal agreement guarantees their rights if it is approved. And the EU and the UK have both committed to allowing citizens to remain in their host countries in their no deal plans. That will be welcomed by firms who employ significant numbers of EU workers. That’s a good reason for employers to make sure their staff are informed of these developments.

Is it the perfect deal? No. But was that ever on the cards? Companies which trade in goods will feel better about this than those who export services, who will want to see much more detail on the future arrangement, particularly around financial services. But there is lots for businesses to be positive about. But we must remember: the draft withdrawal agreement is a contract written but not signed. My advice to businesses is that you should not pause on your no-deal contingency plans - the deal has a number of hurdles still to overcome both in the UK Parliament and in the EU. The sooner we see legal certainty, the sooner my clients can get back to their day job, unpause investment and help drive growth for the economy.

 

3.45pm, 14 November 2018

Another big day for Brexit and events are moving quickly. After a false start at the weekend we may be hours away from seeing the draft text of the deal which will underpin Britain’s withdrawal from the EU.

Right now details remain thin on the ground. Negotiators have agreed a text for the Withdrawal Agreement but only a select group of ministers and officials have seen the 500 page tome. No leaks so far it seems. 

For businesses which just want some sort of deal, events of the last 24 hours are clearly positive. The first hurdle has been cleared and this is, as many have already intoned from Churchill “The end of the beginning”. However, that is a million miles away from saying this is a signal that Brexit is being put to bed peacefully. 

First the text has to be approved by the Cabinet, which, as this note is being published, is still going on. I expect an announcement from the Prime Minister later this evening (Wednesday) which will along the lines of “Let’s get on with it”. Her strategy appears to be “plan versus no plan”. That is to say, in the absence of an alternative, her deal is better than no deal.

Then, EU leaders need to be satisfied.  We understand that Brussels is making it clear that the text is a draft and not final. Clearly there is some potential for iteration before the deal must be formally agreed at the EU summit currently trying to be arranged for the end of November.

Then the prime minister must gain support from the House of Commons via a Meaningful vote (required as part of the Withdrawal Act), and both houses of parliament must back the legislation needed to leave. And finally, the deal then needs to be agreed by the European Parliament. That’s not a formality as many thought until recently: the more concessions the Prime Minister persuades Chief EU Negotiator Michel Barnier to make the higher the chance of a surprise from the European Parliament.

Clearly Parliament looks like the highest hurdle. We’ve already seen today at PMQs a pretty sharp attack from Conservative Brexiteers. On the other side of the chamber Jeremy Corbyn seemed in uncompromising mood. Can the Prime Minister put together a coalition that will back her deal?

With the government now tethered to terms set down in a written document, the room for constructive ambiguity is reduced considerably. So while the government may yet be able to offer today’s opponents something to back the plan, as of today it would be imprudent for our clients to rely on Parliamentary approval for the deal.

It is also noteworthy – and I doubt entirely coincidental – that today, Brussels has released its no-deal communication to businesses throughout the EU. They are noticeably less detailed than the UK equivalent and are based on principles. While planes being allowed to fly point to point is a welcome development, the European approach will see them require members to impose tariffs and customs declarations, together with regulatory inspections on, for example, phytosanitary requirements. Without further intervention this has potential to cause significant disruption at ports, particularly Dover/Calais. The European Commission reserves the right to act but only within the rules which they have set out – business must not rely on those rules being bent.

The cost of no deal then remains high, and as the machinations around trying to get real legal certainty show, cliff edge remains a real possibility – I think the deal hangs in the balance right now - but with momentum towards a deal rather than not. 

In short then, my advice when it comes to planning for a disruptive no-deal Brexit is not even break stride.

 

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