Brexit crunch week for U.K. departing the EU

Register now

The United Kingdom is set to leave the European Union, the world’s largest trading bloc of 28 states, on March 29. Brexit will have a major impact on U.S. international trade, as the U.K. is home to over 50 percent of U.S. company headquarters in Europe, and Brexit will mean a major disruption for trade, tariffs and taxes.

The tax risks of the U.K. leaving the EU without a Brexit agreement run into the billions. This will hit many U.S. businesses that have made the U.K. their EU trading hub. With immediate effect, all movements of goods between the EU and U.K. become subject to tariffs at World Trade Organization rates. For the U.K., this is typically 5 percent but can range up to 10 percent for automotive and up to 40 percent for common agricultural goods. This would clearly wipe out most business margins.

Additionally, import VAT would apply for the first time on the same movements. VAT is neutral for businesses, and they would be able to reclaim it through their next VAT returns. But nevertheless, it will create further billions in tax cash flow delays.

These are now clear and present dangers with the departure date having nearly arrived. In a series of three votes this week, the U.K. government lost the first vote Tuesday for an orderly departure, including a transition period until December 2020. Two more votes are scheduled to take place this week: on Wednesday, March 13, on a no-deal crash out of the EU at the end of this month, and on Thursday, March 14, to request an extension from the EU for the departure date.

The detailed exit arguments have become a febrile environment for nationalism and the surrender of sovereignty in a globalizing world, stirring the threat of renewed violence in Northern Ireland. Political party loyalties are crumbling, and the U.K.’s informal constitutional settlement has been ridden over roughshod by all sides.

A simple vote to leave stirring centuries of complex emotions

In 2016, a slim majority of just 52 percent of the British voting population voted to leave the EU. There has been much speculation over the surprise result, but large-scale immigration into the economically successful U.K. was probably the major factor. Since then, over two years of unproductive negotiations have predictably failed to square the “Leave” campaign promises of unfettered global freedom with the demands of the “Remain” camp to continuing free access to the EU’s 500 million consumers.

Three votes and you’re out

The U.K. Parliament is now one vote into a series of three proposals this week to finally determine how, when and indeed if the U.K. will depart the EU:

U.K. Parliamentary vote

Tuesday, March 12

1. Rejected — Parliament votes against Prime Minister May’s proposed Withdrawal Agreement

This would have taken the U.K. out of the EU with a 21-month transition period. However, no solution has been found to having no border controls between Ireland and Northern Ireland, the U.K.’s only EU land border. Northern Ireland would then remain inside the EU customs border. This is known as the Northern Ireland Backstop clause. This would have served to preserve the 1997 Good Friday peace deal, which ended decades of violence over the territorial claims between nationalists and republicans. But British nationalists feared it could start a movement toward the reunification of Ireland.

Wednesday, March 13

2. Will Parliament accept a “no-deal” Brexit?

This would result in the U.K. leaving the EU on March 29 without any transition period for businesses or citizens. The U.K. would be free to pursue its own trade negotiations around the world. However, it would leave the EU Customs Union, Single Market and VAT regime with immediate effect. This would impose billions of pounds in new tariffs on the trade of goods between the U.K. and EU, mean millions of pounds in new customs declarations and raise significant VAT (sales tax) obligations for trade. It would threaten the business models of many U.S. businesses that are using the U.K. as their trade bases for Europe.

It is highly likely this vote will fail given the threatened chaos for businesses in the U.K. as a result of the customs and tax changes.

Thursday, March 13

3. Will Parliament ask for a delay to Brexit?

This would give more time to formulate a departure agreement that the U.K. Parliament and EU member states can agree on. It may only be granted by the EU until May as it is keen to move on. So, the U.K. may have to promise the EU a new U.K. election or even a referendum to secure even a short delay.

Could it all still be reversed?

The third vote may not win, but it is the most likely to lead to a better result than the second, a crash out no deal. In this case, further motions will come forward for a new Brexit referendum. This could put forward a choice of the Withdrawal Agreement (vote 1, above), and to stay in the EU.

The polls now (slightly) favor a Remain rerun of the referendum. Hope in that camp is gaining, and the Leave camp is very nervous. But remember, the polls said exactly the same in 2016.

For reprint and licensing requests for this article, click here.
Brexit Trade agreements International business Avalara