Businesses not ready for 'no deal' Brexit

Out-Law News | 27 Feb 2019 | 12:37 pm | 3 min. read

Businesses are not prepared for the possibility of the UK leaving the EU without a withdrawal agreement, the UK government has said.

In a new note detailing the government's take on the implications of a 'no deal' Brexit for business and trade, the government warned such a scenario "would have a range of significant impacts for the UK".

Lower long-term economic growth has been forecast under a 'no deal' scenario, while it could also lead to disruption to food supplies, higher costs of imports from Europe, and new barriers to UK companies in the services sectors to competing in the EU market, it said.

Brexit expert Guy Lougher of Pinsent Masons, the law firm behind Out-Law.com, said: "The paper doesn’t contain any surprises. It instead highlights certain risks to UK businesses arising from a 'no deal' Brexit, which have been previously discussed, ranging from potential disruption to supply chains that depend on timely movements of goods on the short sea crossing between the UK and France, to the need for UK exporters to get their products tested with EU-based assessment bodies, which will increase their compliance costs."

"By now, businesses trading with the EU should have identified what the particular implications would be for them of a 'no deal' Brexit, and considered how such risks might be mitigated," he said.

In its note, the government said many businesses may not be properly prepared for a 'no deal' Brexit.

"Despite communications from the government, there is little evidence that businesses are preparing in earnest for a no deal scenario, and evidence indicates that readiness of small and medium-sized enterprises in particular is low," the government said.

"For example, without an Economic Operator Registration and Identification (EORI) number, businesses would not be able to complete the necessary customs documentation for goods they are importing. As an EORI number registration is one of the most basic and straightforward parts of the process most businesses would need to undertake to prepare for no deal, this is assumed to be a generous indicator of overall readiness," it said.

Just one in six EU-only trading businesses in the UK had obtained an EORI number by the beginning of February, it said.

"In practice, the UK’s approach is based on, in the short-term, allowing hauliers to pass through the border without stopping, but they would be stopped if taking goods into France without the right paperwork," the government said. "The lack of preparation for EU controls – of which this is an example – greatly increases the probability of disruption."

Lack of preparedness could be attributed to businesses taking the view that a 'no deal' scenario is not "a sufficiently credible outcome to take action or outlay expenditure", the government said.

The government warned, though, that in its "worst case planning assumption", the flow of goods to and from the UK and France via the port of Dover and the Eurotunnel "could be very significantly reduced for months".

The food supply industry is currently unprepared for the impact a 'no deal' Brexit could have, it said.

"One of the most visible ways in which the UK would be affected by delays in goods crossing the Channel is our food supply, 30% of which comes from the EU," the government said. "Although our food supply is diverse, resilient, and sourced from a wide variety of countries, the potential disruption to trade across the Short Channel Crossings would lead to reduced availability and choice of products."

"This would not lead to an overall shortage of food in the UK, and less than 1 in 10 food items would be directly affected by any delays across the Short Channel Crossings. However, at the time of year we will be leaving the EU, the UK is particularly reliant on the Short Channel Crossings for fresh fruit and vegetables. In the absence of other action from government, some food prices are likely to increase, and there is a risk that consumer behaviour could exacerbate, or create, shortages in this scenario. As of February 2019, many businesses in the food supply industry are unprepared for a no deal scenario," it said.

According to the government, the "cumulative impact" of a 'no deal' scenario is likely to be "more severe" and "last for longer" in Northern Ireland than in the rest of the UK. It said the agri-food sector is "particularly vulnerable given its reliance on cross-border supply chains in the production stage and in finished products", and that there could be further disruption in the single electricity market that spans both Northern Ireland and Ireland.

The government further warned that UK businesses exporting goods to the EU would need to get their products tested with EU-based assessment bodies in the event of a 'no deal' Brexit and that this would increase their compliance costs.

It also called on businesses to take action to account for potential disruption to the free flow of personal data between the UK and EU in a 'no deal' scenario. Both the UK government and Information Commissioner's Office (ICO) issued guidance on the issue late last year, while more recent guidance was published by the European Data Protection Board and Ireland's Data Protection Commission.

"To prepare for a no deal scenario, many UK businesses need to work with their EU partners to secure a legal basis for the continued transfer of personal data from the EEA to the UK," the government said. "Businesses are at varied levels of readiness and the government is engaging widely to increase awareness of actions that businesses can take."