Preparing for Brexit amid COVID-19

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Rowena Morris (RM): Welcome to the latest episode of our COVID-19 Business in Focus podcast, where we explore the business impacts of coronavirus. I’m Rowena Morris, a director at PwC. I help clients prepare and respond to crisis situations, and I’m your host for this series.

Over the past few months, businesses have focused their efforts on responding to the coronavirus pandemic – and rightly so – but this means many of them have taken their eye off the ball when it comes to preparing for Brexit. The government is committed to the current deadline of the 31st of December, which marks the end of the transition period, so time is quickly running out for businesses to prepare for the implications of a new, and very different, trading relationship between the UK and the EU.

In this episode we'll explore how COVID-19 might have impacted negotiations for a future trade deal. We’ll take a look at the likely scenarios that businesses should be preparing for now, and we’ll share some practical advice to help you get ready for each potential outcome.

Today, I'm joined by my colleagues, Panny Lucas and Cara Haffey. Panny is our Brexit lead within our tax business, and Cara is our head of manufacturing and automotive sectors. Welcome to our virtual studio both.

Panny Loucas (PL): Thank you Rowena, great to be here.

Cara Haffey (CH): Hi there Rowena, thanks for inviting us today.

RM: Thanks both. So to kick things off, Panny, can you remind us where we're up to with Brexit negotiations so far?

PL: So having formally left the European Union on the 31st of January this year, we're now in transition period, which lasts until the end of the year. It's important to remember that our withdrawal only represented the end of the first stage of the Brexit process: we've still got two more critical stages to go. Firstly, the implementation of the withdrawal agreement, and then the negotiations to agree what our future economic partnership is going to be with the EU, so what our trade deal will be.

I think it's also important to remember that in parallel with the trade negotiations, free movement ends at the end of the year as well, and the government is busy introducing a new immigration policy, which is going to be important both for employers and employees to understand.

RM: And it's clear that responding to COVID-19 has taken up a huge amount of the government's time over the past few months. How has this impacted the pace of negotiations?

PL: Well, you know firstly there’s just the logistical issue about the inability to meet in person, and I don't think one should underestimate the importance, if you like, of eyeballing the other side. The other thing, as many people will know, is that both negotiators, so David Frost and Michel Barnier, were actually self-isolating at the beginning of the period. Now the rhythm the virtual meetings has been established in there has been a number. But, clearly, COVID-19 has delayed that process, and certainly the latest noises coming out of Brussels and London aren’t particularly encouraging in terms of where we're at.

RM: And of course it's hard to know for sure how things got to progress by the end of the transition period, but if we look forward to January 2021, what do you think the trading relationship between the UK and the EU is most likely to look like?

PL: Well, I think it's pretty clear that it's highly unlikely that there will be an extension to the transition period. The UK government has made it very clear they don’t intend to extend, and in fact, a piece of legislation has been passed to make it illegal for the UK Government to request an extension, so therefore I think it's pretty clear that the transition period will end as planned on the 31st of December this year.

So what does that mean? I think the basic options are either a free trade agreement being established by the end of 2020, which will be a relatively basic deal given the timing that we have, probably covering little more than tariffs and quotas, perhaps a dispute mechanism, and some standard free trade agreement chapters which mirror WTO principles. There's also the possibility of limited provisions on services.

The other option obviously, if we don't get this, if you like, ‘Canada light’ FTA, would be no deal in effect, and therefore trading on World Trade Organization terms. Clearly, I think the one thing to bear in mind with either option is that that is a significant change from the current position, and that is important for businesses to be aware of, and clearly that disruption if you like, or change from current circumstances, will be compounded by the effects of COVID-19.

RM: Cara, over the past few months, how has COVID-19 impacted the Brexit preparations of businesses in the manufacturing and automotive sectors? Have things slowed down at all?

CH: Yes, I think it's fair to say that manufacturing and automotive businesses have been extraordinary affected by COVID-19, as have a lot of other sectors. They diverted attention to helping with efforts on PPE and doing different pieces on the ventilator challenge, so I would say that the whole Brexit preparation will have been delayed across a lot of the sectors that I look at. In some respects, Brexit planning ironically had helped with some of the COVID-19 responses, so where some of our clients had done Brexit planning, that helped them already look at the supply chain issues, and be able to understand their supply chain better, which is quite interesting. I suppose on the more negative front, unfortunately, some workers are still furloughed and therefore people who had been focused on Brexit planning in the future could still be on furlough at the minute, and therefore that preparation across a tight management team is pretty tough at the moment.

RM: I think that's an interesting point around those that have done their Brexit preparations have been almost in a better position, in some cases, as you say around supply chain, but for those businesses that are behind on preparations, what's the risk for them as we move into 2021?

CH: Yeah, so I think for us, this is really coming rather quickly now: I think for anyone who can have went on to lockdown like myself, I can't believe it's June, so I think the piece for us is that people really need to get focused on this, and really, I do believe that this is going to compound the disruption that we've experienced through COVID-19. A lot of our businesses will be very affected by the Brexit challenges and the Brexit changes, I'm not convinced that all businesses really understand the scenarios at play for them, so I would really encouraged them to look at that, and accelerate their plans for dealing with that disruption. Some of it, they will have learnt in their own supply chains from COVID-19, and the pandemic, and therefore looking at how that affects it will have helped them plan for the future, but it is now the time to really review those Brexit plans, maybe consider using the same team that you looked at from a COVID-19 point of view, how you prepared for that - use the same team to now take that on through Brexit planning, and keep going, keep the energy up and take action now to be ready.

RM: Picking up on what we were talking about around scenario planning, Panny, if we think about those scenarios that you outlined earlier, what's the practical advice that you have for businesses to help them prepare for each of those outcomes?

PL: Well the first thing is that it's important that you are preparing for all the possible outcomes. So the two main ones I talked about was a no deal, or a relatively light trade deal, so it's important to understand what do each of those specifically mean for your business.

I think the specifics are important: it is really important that each business looks at how it will personally be affected and what specific preparations it needs to make. The hugely big difference is that there will now be a customs border between the UK and the EU, and the details of tariffs and quotas, although that isn't going to be known precisely before a trade deal is announced, we do know, because the government announced it a few weeks ago, what the general tariffs will look like, so again, it’s important to understand those and how they could impact your business.

Clearly, many of the things that need to be done are sector specific, so financial services, hugely important as to whether equivalence will be granted. With pharma, regulatory changes will be important to understand. So some firms are pretty well prepared in terms of that planning, but there are a number I think that still need to look to what do these specific changes mean to them, and it’s very important they do that sooner rather than later, given we do have not much more than six months to go.

RM: Thanks Panny, and so from Cara, from your perspective, what practical advice do you have for businesses?

CH: I think the key for me is going back to the ‘no regrets’ decisions that we as a firm published what feels like a while ago now, but for me those still remain really really relevant and something that I think we should focus on, so we do need agility in our businesses to really look at this, and I think all of our clients have shown a lot of agility over the last three months as they've worked through the pandemic, so I think it goes back to the point around keeping that going. Supporting your people: people have been through a huge amount, but actually supporting, particularly on your EU people, how people plan for this? Supply chain is really really key, so giving alternatives, understanding how the transport’s working, understanding where you can get other goods in the future, and just making sure that you really understand the differences there, of all the routes that you have, logistics into your businesses. The one thing I suppose we have seen is the continued need for the data, and this has come up with lots of clients where we've worked through what the customs scenarios might be, actually getting the data within the business is really really important, so if people aren't focused on that, please get focused on it: you will need a lot more data potentially, and therefore that is an area where people can spend really quality time and be quite effective in planning for this. So yeah, lots of things there. Contracts, I suppose, are the other point Rowena I would just end on, which is understanding your contracts, the terms of those, if we do get disruption where are you on your obligations to other people, or where you can have thoughts in your contracts for other people if you need to switch supply or on your customers if timing is going to become harder, how do you stand in those contracts?

RM: I think having that eight, ‘no regrets’ decisions framework is really really helpful, thanks for going through that Cara. So Panny, to sum up, what are your top tips for businesses as they prepare for Brexit?

PL: Firstly for those businesses that have done Brexit planning, don't sit on your laurels: make sure that it's refreshed and up to date. Circumstances have changed, particularly due to the current pandemic. For those businesses that have done little or no Brexit planning, start: don't wait for what you think will be certainty. A number of businesses I know have said, things are still relatively uncertain. Well, I'm not sure they're going to get much more certain before the end of the year, so do start your planning now.

The final thought I would have is, those businesses who are best prepared are likely to have a commercial advantage over those who aren't as well prepared.

RM: And how about you Cara?

CH: I think for my three tips, I suppose number one would be really focus on your people, and help your people through this, particularly your EU colleagues. I think it has been a troublesome time that we've gone through, people's travel has been curtailed, so people will be feeling it and therefore, I think making sure that your culture and your people comms is key. I go back to supply chain – I probably would give in the sectors I focus on, but really know your alternatives in your supply chain, and make sure you understand everything that comes into your operations and the timing around that. And then I suppose number three, maybe to just change the dynamic slightly, in a more positive way, I would try not to use energy on worry. I think we've all seen how resilient business can be over the last three to four months, so what I would say is roll with that's what's coming, adapt to the situation and I think that gives you an outline of how successful you could be in the future and therefore that agility point, and getting used to change is really key.

RM: I really like that last point of trying not to use up your energy on worry, and rolling with the punches and adapting. Thanks so much both for sharing these insights, and of course thanks to everyone for listening. If you'd like more practical advice, visit our website which is pwc.co.uk/covid19, and on there, this is where you'll be able to find all of our latest insights including our Strategy& Where Next series, which is an industry-by-industry look at where we are today, what we're learning, and how to respond to new challenges and opportunities. And you can also find out about our eight no regrets decisions in our blog on preparing for Brexit in a COVID-19 world, also on our website. Thanks everyone, and until next time, stay safe.

Participants

  • Rowena Morris, director, PwC
  • Panny Loucas, Brexit lead for tax, PwC
  • Cara Haffey, head of manufacturing and automotive sectors, PwC
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