U.K. lawmakers’ rejection of the Brexit agreement reached between Prime Minister Theresa May and the European Union puts businesses in peril of higher trade tariffs, value-added tax and EU withholding taxes, as a no-deal Brexit now looms larger, tax advisers warned.
“The result of today’s meaningful vote shows that the certainty businesses are seeking is still out of reach. Until a way through can be found, it is important to remember that ‘no deal’ is the default outcome,” said Andrew Gray, PwC’s global head of Brexit for financial services.
He said businesses in the U.K. and EU need to accelerate their no deal contingency plans. “For those who haven’t started implementing no deal actions, there are still steps they can take to minimize disruption. But the longer they leave it, the more difficult this will be,” Gray warned.
Confederation of British Industry Director General Carolyn Fairbairn said that every business will feel no deal is hurtling closer. “A new plan is needed immediately. This is now a time for our politicians to make history as leaders. All MPs need to reflect on the need for compromise and to act at speed to protect the UK’s economy.”
The government’s loss has been decried by tax advisers who worry that a no-deal Brexit would damage the U.K.'s economy. The government’s own figures estimate that failure to reach an agreement with the EU before the March 29 exit could wipe 10.7 percent off the U.K.'s GDP over the next 15 years.
Despite the danger of a no-deal Brexit, legislators voted 202 to 432 against the agreement after May failed to convince members of her own Conservative Party members to vote for the withdrawal agreement.
Plan for the Worst
Tax practitioners said key parts of the withdrawal agreement—a provision to extend EU tax rules until December 2020, and a provision to avoid a hard border in Ireland after this period ends—could mean the U.K. temporarily remains within the EU Customs Union.
“Things are complex and uncertain and we are urging clients to plan for the worst case scenario and build in contingencies for this. Even if we get the very best deal, this will leave them in a more prepared and more effective position,” said Stuart Lisle, a tax partner at accounting firm BDO.
May has previously vowed to re-introduce the withdrawal agreement as many times as necessary, arguing that the deal is the only way the U.K. government can deliver on the 2016 EU referendum result.
Opposition Labour party leader Jeremy Corbyn swiftly called for a no-confidence vote against the government, which has been scheduled for Jan. 16.
A loss would trigger a general election, likely to happen ahead of the March 29 Brexit deadline, by when the U.K. must leave the bloc.
But the EU could vote to postpone Article 50 to allow for an election. This would require unanimous support from all EU member countries.
“Not that a lot of people were very surprised by the result, but it’s made clear that while everyone wants to avoid a no deal that there is a very real chance it could happen within 73 days left until the exit date, and not a lot of time for another option beyond it,” said PwC’s Gray.
Some members of parliament have taken the opportunity to call for Article 50, the official process under which a member country can leave the single market, to be rescinded.