Brexit talks: what if it's no deal or a last minute deal?

With only 10 days to go until the end of the Brexit transition period, a trade deal with the EU continues to prove elusive.

Even if a deal is reached before the end of the year, businesses could still face a period of effectively having to trade with the EU on WTO terms. Here's a reminder of what that means in practice. We also discuss the likelihood of an extension of the transition period and the prospects for provisional application of a last minute deal, given that there is unlikely to be time for ratification before 1 January 2021.

What no deal means

In broad terms, no deal is likely to have two main impacts as compared with the position if the EU and the UK had managed to agree a free trade deal of the type which has been under discussion:

Tariffs: no deal is likely to mean that tariffs will be applied to UK-EU goods trade. In some sectors, such as automotive or food, the tariffs will be significant and may undermine the viability of some businesses.
Lack of cooperation/facilitation measures: equally, if not more importantly, no deal may well lead to a lack of cooperation/facilitation measures, exacerbating the difficulties and disruption that businesses will face across a range of areas, particularly in relation to goods supply, data flows and service provision (especially services involving a physical presence in the EU).

The CBI has recently produced a list of 48 measures which it believes would help to mitigate the disruptive impact of Brexit (whether or not there is a deal). These measures will be all the more important in a no deal scenario – but the risk is that fewer of them will be made available.

For more detail, see "Brexit: what difference does no deal make?" and Brexit Q&A: WTO rules.

IMPLICATIONS OF A LAST MINUTE DEAL

Even if a deal is reached in time, businesses are now unlikely to have time to put the necessary measures in place to comply with key aspects of it, such as proof of origin requirements on goods (which will be needed to avoid tariffs, at least on entry to the EU). Businesses affected by that issue – or their customers, as the case may be – may need to be prepared to pay tariffs in the short term in order to ensure that goods get through in time (we recommend keeping detailed records with a view to ensuring that, if customs authorities are prepared to allow tariffs to be reclaimed retrospectively on compliance with relevant origin rules, the possibility of such a claim is preserved).

Provisional application of a last minute deal

What if a deal is reached by 31 December but, as seems highly probable, there is insufficient time to ratify it? For example, although the UK appears to be confident that it can ratify the deal in a matter of days, the European Parliament's deadline of Sunday evening to allow sufficient time to scrutinise the agreement ahead of a vote to ratify before the end of the year has come and gone. It appears that the EU's "fallback" position in the event of a last-minute deal would be to apply any trade deal on a provisional basis, as was done in relation to the EU-Canada free trade agreement, pending ratification. Provisional application is possible based on a decision of the EU Council (i.e. the Member States), without the European Parliament's involvement.

An extension of the transition period?

Although the UK Government continues to insist that there will be no extension to the transition period, there continues to be speculation about a possible extension (and some backbench Conservative MPs have argued in favour of it). Most commentators take the view that legally, extending the transition period would be very difficult for the EU, given that (despite the additional complications caused by COVID-19), the UK decided not to take up the option in the Withdrawal Agreement to request an extension earlier this year (see this briefing). However, the current crisis in the negotiations has been compounded by a material worsening of the COVID-19 situation in the UK, which could be regarded as a sufficiently exceptional circumstance as to justify exceptional measures – albeit that the legal basis for this (at least on the EU side) remains somewhat unclear. An alternative, as discussed in this briefing, would be for the UK and EU to take similar unilateral measures with a view to preserving certain key aspects of the status quo on a temporary basis. But as we have advised throughout, businesses should not assume that such measures will be forthcoming and should continue to plan for the worst, whilst hoping for the best.

If you are reviewing your Brexit planning ahead of 31 December 2020, use our Brexit Readiness Portal to check that you have addressed all the key issues.

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