Time to review your Brexit planning

After three years of uncertainty, the UK is poised to leave the European Union on 31 January 2020 with a withdrawal deal. But that will not be the end of the Brexit story.

The UK will enter a period, known as the transition, until 31 December 2020, in which a new wave of UK-EU negotiations will take place to determine what the future relationship will eventually look like.

Although the UK will cease to be an EU member, during the transition the trading relationship will remain the same and the UK will continue to follow the EU’s rules, such as accepting rulings from the European Court of Justice.

As well as negotiating a UK-EU trade deal, the transition will also allow the UK to hold formal trade talks with other countries – such as the US and Australia. If completed and ready in time, these deals could also take effect at the end of the transition.

Once the UK enters the transition phase, there are three potential Brexit outcomes:

• If a UK-EU trade deal is agreed by the end of next year, the UK could begin the new trading relationship immediately after the transition ends;
• If a trade deal is close but not finalised, the transition can be extended by 12 or 24 months to allow negotiations to continue (although UK Prime Minister Boris Johnson has ruled this out);
• If UK and EU negotiators fail to agree and implement a trade deal by 1 January 2021 and no transition extension is agreed, the UK will then trade with the EU on World Trade Organisation (WTO) terms.

Whatever the outcome, many more months of negotiation lie ahead and the end result will necessarily involve a wide range of new arrangements with the EU and other countries. UK businesses may need to consider restructuring their affairs to allow for them to operate in Europe and beyond.

At Sovereign, we have been seeing an elevated level of enquires from both sides – UK-based firms keen to retain access to coveted European markets and firms from all over the world that have existing EU operations based outside the UK, which risk losing access to the UK market of some 66 million people.

As a result we are seeing a greater demand for UK companies as well as for the establishment of subsidiaries or branches in one or more of the remaining 27 EU member states. Sovereign is located in several EU countries and has close associations in the remainder, so we can assist with setting up any new structure that is required.

Malta, Cyprus, Portugal and Ireland seem to be the most favoured locations, but the specific circumstances of individual businesses will dictate where best to establish to secure rights of access to the bloc’s market after Brexit.

An increasing number of foreign firms are also considering setting up holding structures and Sovereign can advise on the various attractive and advantageous options available.

In reviewing their corporate structures, businesses should ask whether they will need to establish a new legal presence or business presence elsewhere in the EU whether by way of incorporation, branch or by a strategic merger or acquisition.

Businesses need to understand the distinction between ‘doing business with another country’, remotely via internet sales for instance, and ‘doing business in another country’ through having a physical presence there.

In cases where businesses need to establish a presence in another country, they will then need to consider what form it will take. This typically means choosing between having a local branch of a non-resident (eg UK) company or a local subsidiary company.

This choice should not be made purely on the basis of tax considerations -–commercial and practical issues are usually more important driving factors. Matters such as regulatory consents, where relevant, and contract implications will also need to be considered.

Every business is different and how you plan for Brexit will reflect this. Here are some of the main things we believe you should be considering:

• The likely impact of Brexit on your operations;
• The likely impact on the cost of trading in the EU/UK;
• The likely impact on your suppliers and other outsourced providers;
• Terms in existing contracts may no longer be relevant post-Brexit, or may raise legal or practical questions in future;
• Significant currency movements may impact foreign exchange exposure;
• Parts of UK intellectual property (IP) law may change when the UK leaves the EU;
• Potential new opportunities that your business should be leveraging.

Sovereign can help you establish or move forward your Brexit planning process, looking at the risks and the opportunities. We can help you navigate what, for many, will be a period of considerable uncertainty.