The UK triggers Brexit

On 29 March 2017 the United Kingdom formally notified the European Union of its withdrawal by invoking Article 50 of the Treaty, which opened a two-year negotiating period. It was the formal step that companies and investors had been waiting for since the referendum the previous year, and it marked the start of a withdrawal process of enormous complexity. That complexity explains why many of the questions being asked still had no clear answer.

With the notification a countdown began in which the terms of the separation had to be agreed and, in parallel, the foundations of the future relationship between the two sides. Until those terms were clear, uncertainty over matters as concrete as tariffs, customs or the position of people and companies would continue to weigh on the decisions of those with interests in the United Kingdom. That wait forces decisions to be made with incomplete information, which is common in economics but particularly demanding in this case.

What Article 50 is

Article 50 of the Treaty on European Union sets out how a member state can leave the bloc. Once the intention is notified, a period opens to negotiate the terms of exit and the future relationship, which can be extended only with the agreement of all parties. It is a short procedure in the text, but of enormous complexity when applied.

Two years may seem a long time, but separating decades of common rules, institutions and agreements is a task of great scale. Each pending subject — trade, services, movement of people, technical standards — has its own deadlines and interests. It was therefore reasonable to expect long negotiations and, in some areas, transitional solutions giving companies time to adapt. Even so, no deadline guarantees that everything will be settled, and companies should be ready for various scenarios.

The uncertainty it creates

During the negotiation nothing formally changes in trade, but companies do not know what rules will apply afterwards on tariffs, customs, movement of people or recognition of standards. The pound, long-term contracts and investments in the country are the first to be affected by that lack of clarity, because commitments signed today may have to be fulfilled under a different framework. The lack of clarity affects those who export to the UK as much as those who import from it or who have workers and assets in the country.

That uncertainty costs money even before any real change takes place: investments are postponed, currency hedging becomes dearer and planning of staffing and supply chains becomes harder. Companies that work with the United Kingdom live with a double risk, that of the final outcome of the negotiation and that of how long it takes to be known.

Preparing scenarios

Anyone who sells to the UK, buys there or has employees or property in the country should identify their exposure and review price, currency and dispute-resolution clauses in their contracts. It is useful to note what would happen to the business in different scenarios, from a very close trading relationship to a more distant one, and what room for manoeuvre exists in each case.

Planning scenarios is more useful than trying to guess the outcome. With a plan for each case, the company can react quickly when the picture clears, without having frozen its activity in the meantime. Consulting legal, tax and customs advisers helps to spot weak points in time, and to decide what is worth adjusting now and what is better left open. What matters is knowing who decides what, and with what information, when the picture changes.

With long negotiating periods, gaining time to prepare for each scenario is already an advantage.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.