Numerous changes under way as the UK prepares to leave the EU

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The negotiations that have been ongoing between the British government and the EU since the triggering of Article 50 in March 2017 have attracted the close attention of global decision-makers and will continue to do so until the deadline for a trade agreement expires in March 2019.

On March 29, 2017 Prime Minister Theresa May submitted the Article 50 withdrawal notification to the EU. That notification submission gives a 24-month legal deadline within which the UK must reach a trade agreement with the EU if it is to avoid a “hard Brexit” scenario in which the UK has no formal trade links with the continent. The main issues are

• Controlled immigration: The UK insists on regulating immigration from the EU;

• Legal form of accommodation of each other citizens: The two sides must guarantee the status of EU members living in the UK, and vice-versa, with the same applying to work visas;

• The European Court: The UK wants to withdraw from the European Court of Judgment;

• Regulating Customs: The UK wants a “Customs union” with the EU, which means both parties will not impose tariffs on each other’s’ imports and impose common tariffs on imports from other countries;

• Regulating trade: This is a mutual need for both sides; and

• The Brexit bill: The EU will require a cash settlement from the UK to meet existing financial commitments. Recent negotiations put the figure at €40bn-55bn. Brexit negotiations will likely dominate the British government’s agenda until March 2019. In addition to the six points listed above, the UK government would also like to address three major topics to ensure a soft Brexit:

• Fixing the terms for a post-Brexit transitional arrangement;

• Giving legal effect to the Article 50 withdrawal deal that was provisionally struck in December 2017; and

• Drawing up an agreed framework for a future trading relationship. Those who oppose Brexit have argued that being part of the EU has a strong positive effect on the UK’s trade, and that if the country left the EU, its trade would be negatively impacted. Supporters of Brexit have argued that the cessation of net contributions to the EU would allow for some cuts to taxes or increases in government spending.

The UK is the largest recipient of foreign direct investment (FDI) in the EU, but Brexit could reduce the attractiveness of the UK as a gateway to Europe. It could also lead to a reduction in investment from the rest of the EU, which is the biggest source of FDI in the UK. It may also become harder to attract corporate headquarters.

Surveys of leading economists show overwhelming agreement that Brexit will likely reduce the UK’s real per-capita income level.

A 2017 survey of existing academic literature found “the research literature displays a broad consensus that in the long run Brexit will make the UK poorer because it will create new barriers to trade, FDI and immigration.”

The impact on UK trade with Europe will depend on the relationship between the UK and the EU after Brexit. In the most likely scenarios – either the Swiss model or a free trade agreement-based relationship – regulatory divergence that adds to the cost of trade is likely to increase over time, damaging bilateral trade volumes and the UK’s position in European supply chains. These costs will be borne by consumers as well as businesses.

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The Report: Bahrain 2018

Accountancy & Tax chapter from The Report: Bahrain 2018

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