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Political crisis deepens as small businesses ask what next?

Speaking after today’s vote on the Withdrawal Agreement, National Chairman of the Federation of Small Businesses (FSB) Mike Cherry said: “On the day that we were supposed to be leaving the European Union, all we have is yet another political failure to chalk up.

“Responsibility for this deepening political crisis lies squarely at the feet of politicians who have clearly stopped listening to the business community. Our small businesses have been crying out about the significant damage that uncertainty is causing them. These cries have been drowned out by those seeking to play political games.

“Planning has stalled, investment is handcuffed and growth has flatlined. The only question now is what happens next? Small businesses message is simple, stop playing politics, come together and get on with delivering a pro-business deal that secures a transition period, guarantees as frictionless trade as possible and most importantly, avoids a disastrous no deal Brexit.

“Our small firms are sick and tired of politicians debating and dithering over Brexit. They are trying to get on with their jobs and it’s time that politicians get on and do the same.”

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Potential impact of Brexit on the law firm market

With Brexit negotiations continuing in the United Kingdom (UK), there is little clarity as of yet on how businesses will be able to operate both in mainland Europe and cross border once the UK leaves the European Union (EU) in March 2019.

As a regulated profession, law firms potentially face greater uncertainty — the regulations directed by each individual bar association must be carefully considered in conjunction with any agreement reached between the UK and the EU.

What’s happening at present in law firms with UK offices?

Brexit remains high on law firms’ agendas, particularly with respect to the uncertainty surrounding firms being able to provide legal services as normal after March 2019. Conversations around restructuring have been brought to the forefront.

Many law firms, UK-headquartered firms in particular, are approaching their final accounting period of trading before the two year Article 50 process expires in March 2019. For some businesses, it is therefore impractical to wait to see how Brexit negotiations progress and how local countries’ bar associations respond. Any action is likely to take a period of time and require HMRC (and potentially other) clearance or clarification.

What should your law firms be doing?

Each business will need to consider its current legal structure, the tax and regulatory rules (including around management, control and profit sharing) in the locations in which it operates, and the profitability of the local offices.

Some firms will wish to restructure, and those most likely to consider restructuring may have:

  • EU operations held within a UK incorporated entity (i.e. an EU branch of UK LLP);
  • EU operations held within a non-UK incorporated entity (i.e. an EU branch of US LLP); and/or,
  • EU incorporated entities with UK solicitors having a level of management and control.

Despite Brexit primarily affecting UK businesses, it is important to note the impact that this may have on US-headquartered law firms. As a result of current regulations, US-headquartered law firms usually operate as a UK LLP, or a branch of the US LLP depending on the EU country in question. However, a by-product of Brexit could see the harmonization of regulation across EU territories so it is possible that neither of these structures will be permissible post-March 2019.

While not certain, to the extent that any grandfathering provisions are introduced there may be benefits in a firm being established in the appropriate country(ies) in the appropriate form before March 2019.

It should be noted that it is possible that a firm may wish to restructure twice: the first time to satisfy the applicable regulations during an interim period to ensure continuity of operations, and once again after a final agreement has been ratified to give a more permanent solution. As we approach the March 2019 deadline there is likely to be an increasing need to have plans in place to manage the uncertainty and satisfy stakeholders.

Potential tax consequences of restructuring?

PwC UK has noted that firms currently considering restructuring their EU operations may consider transferring their EU book of business into a separate EU legal entity. This could involve a demerger of a business within a UK LLP, which poses a number of UK tax considerations, including:

  • whether there has been a cessation of trade in the UK LLP;
  • for UK income tax purposes, whether this could trigger the closing year and opening year rules of taxation to apply to the equity partners (basis period adjustments). Quantification of overlap profits would be required to understand the funding requirements;
  • a UK capital gains tax event could arise on the equity partners upon transfer of partnership assets to a new legal entity;
  • there may be non-UK income tax consequences, for example if an EU office has to move to an accruals basis of accounting; and/or
  • overseas capital gains tax events may also crystallise on the equity partners.

It is clear that restructuring, if necessary, could result in both “dry” tax charges and an acceleration of tax, which may provide challenges around funding for both the firm and the individual partners.

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When is the real Brexit deadline?

Less than 180 days to go and the pressure is on. Talks between the UK and the EU are at deadlock, with the intractable Irish border problem the biggest stumbling block. But here’s the catch: they must also set aside time for the deal to be reviewed and ratified by both sides.

In the United Kingdom, parliament must vote through the withdrawal agreement into law, while on the European side, it must receive the support from member states and the European parliament.

We all know that the clock is ticking. But political process on both sides means the real deadline is not 29 March itself. So just how much time is there?

On the EU’s side, Danuta Huebner, who chairs the European Parliament’s Brexit committee, has suggested that approval could be granted as late as the 11 March 2019. Meanwhile, the fact that the EU commission has continually updated EU capitals and institutions throughout the negotiations means that they would be unlikely to reject the agreement – even if it were presented to them as late as March.

But there are several reasons why delaying the vote until March would be politically problematic. First, although national parliaments in the EU will not be voting on the withdrawal agreement, some heads of governments may still be still required, in line with their own parliamentary traditions, to discuss the deal before and after the vote takes place. The Danish parliament’s European committee, for example, has a strong tradition of organising hearings ahead of EU votes and, in some cases, has even managed to influence the government’s position.

Second, the EU is conscious that the longer it discusses the terms of the UK’s exit, the less time it will have to discuss the future trade and security relationship. The way negotiations are organised means that discussions about the future can only take place once a withdrawal agreement has been reached. Many predict these discussions to be far more complex and question whether a future deal can be reached during the transition period which, providing it goes ahead, will end in December 2020.

Third, businesses on both sides are demanding greater clarity on the UK’s position after March 2019. For them, the longer the talks last, the less time they have to draw up new plans.

For all these reasons, the EU has provisionally set the date of 17 November to vote on the withdrawal agreement. But it is also in the UK’s interest to reach a deal by the end of the year.

For starters, there is actually a UK legal requirement that the government reach an agreement with the EU by 21 January 2019. In the absence of an exit deal, the UK parliament could put pressure on the government to change course – it is not clear how the prime minister would survive such a vote.

But even if the UK and the EU did reach an agreement by January 2019, there is no guarantee that the UK parliament would support it. Worse still, if it did reject the deal, it is hard to see how both sides could negotiate and ratify new exit terms by March 2019. Faced with such a dilemma, is it time to be thinking about extending talks beyond March 2019?

Legally speaking, this could be possible. According to Article 50, talks can be extended beyond the two-year negotiating framework, although this would require the approval of all 27 member states as well as the UK. But politically, this might prove complicated.

First, it is unclear how long talks would be extended for. The EU parliament elections are planned for May 2019, so a Brexit vote would need to take place either before the elections or after a new parliament is in place. The elections will also lead to the appointment of a new commission in the autumn, possibly even a new president. The EU may be reluctant to vote before the end of the year.

Second, it is unclear what would happen to the transition period. Currently, the transition is due to end at the end of 2020, at the same time as the current EU budget. During this time, the UK would continue to be part of the single market and customs union – although it would have no formal say or vote over new EU legislation. As a consequence, the UK may be asked to contribute to the new EU budget if it wanted to continue accessing the single market and customs union beyond 2020. It is hard to see how UK politicians would accept this.

When voting takes place depends largely on how quickly the UK and the EU reach an agreement. If they fail to reach a deal by 21 January 2019, or if the UK parliament rejects it, then frankly, all bets are off.

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Assets worth $1tn to shift from UK to EU due to Brexit

Assets worth nearly £800 billion ($1 trillion) are being moved from Britain to new financial hubs in the European Union ahead of Brexit, consultancy EY said on Monday.

Britain, which is due to leave the bloc in March, has yet to approve a deal to avoid an abrupt severing of ties with the EU. Although the British parliament is due to vote on a proposed settlement next week, it is unclear if it will be approved.

“The closer we get to March 29th without a deal, the more assets will be transferred and headcount hired locally or relocated,” Omar Ali, UK financial services leader at EY, said.

EY has been tracking the Brexit plans of 222 financial firms since Britain voted in June 2016 to leave the EU. In its latest update to the end of November 2018, it said that 80 firms are considering or have confirmed relocating assets and staff.

The latest estimate from EY says that £800 billion in assets would move, a fraction of Britain’s £8 trillion banking sector.

Frankfurt Main Finance, which promotes the German financial centre, has said it expects €750 to 800 billion of assets to transfer there alone, largely during this quarter.

Around 2,000 new European roles have been created by financial services companies in response to Brexit, with Dublin, Luxembourg, Frankfurt and Paris the most popular locations, EY said.

Forecasts of hundreds of thousands of UK financial jobs moving to the EU have not materialised, and the Bank of England expects about 4,000 jobs to have moved by March 29.

“Whilst roles will no doubt move from the UK, many firms are only moving those employees deemed essential and are hiring locally given the expense of relocation,” Ali said.

Moves so far would be only the “tip of the iceberg” if there is a no-deal Brexit, EY said.

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Brexit has already created 3,500 technology jobs in Brussels

Thousands of tech jobs have moved to Brussels from the UK due to Brexit with expectations of more to come once Britain leaves the EU, according to a sector leader.

As many as 3,500 roles have already been relocated to the Belgium capital, said Juan Bossicard, president of Microsoft’s Innovation Centre in the city.

The stream of tech workers leaving the UK began in the summer of 2016, Mr Bossicard told the New Statesman.

“Since Brexit began, 3,500 jobs have moved here from the UK and we expect far more to come after Brexit officially happens,” he said.

Mr Bossicard said Brexit offered a “huge opportunity” for Brussels, and added the city has a lot of offer UK companies, including single market access and good links to other European countries.

Ahead of the EU referendum, job losses linked to Brexit were forecast to be in the hundreds of thousands but since the vote these projections have been curtailed.

However, the Bank of England has said that Britain is set to lose 5,000 financial services jobs by 29 March next year, a prediction backed by the Treasury.

MPs are set to begin debating Theresa May’s Brexit deal, with a vote on the agreement due to take place in the coming days.

On Tuesday, an official at the European Court of Justice said Article 50 could be unilaterally revoked, sending the pound up against the dollar and the euro.

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Brexit negotiators have agreed on a deal

The United Kingdom and European Union negotiating teams have agreed on a Brexit withdrawal deal which Prime Minister Theresa May will present to her Cabinet on Wednesday.

The UK government confirmed reports that May’s most senior ministers would read the details of the draft agreement on Tuesday evening before a special Cabinet meeting at 2PM on Wednesday.

An agreement between the UK and EU over how to prevent a hard border on the island of Ireland as a result of Brexit was reached during intensive negotiations held on Monday and Tuesday, sources told Advisory Excellence.

Brexit talks had for weeks been at an impasse over the question of how a hard border between Northern Ireland and the Irish Republic could be avoided no matter the outcome of negotiations.

UK and EU negotiators agreed that there would be a UK-wide “backstop” if they fail to negotiate a trade deal that negates the need for border checks on the island of Ireland before the end of the two-year Brexit transition period.

The backstop will take the shape of a UK-wide customs union with the EU, with Northern Ireland sticking to some of the European single market. This would guarantee no border checks between Northern Ireland and the Republic.

However, the backstop is set not to come with a fixed end date, as demanded by pro-Brexit MPs, but with a “review clause” for deciding when it can come to an end.

Brexiteers are concerned that this arrangement will leave the UK trapped in a customs union with the EU for years to come, unable to sign new free-trade deals. The UK would also have to continue following numerous EU rules in areas like the environment, employee protections and state aid.

Jacob Rees-Mogg, the leader of the European Research Group of pro-Brexit Conservative MPs, said the deal amounted to a “failure to deliver on Brexit” and would make a “vassal state” of Britain. His Conservative colleague Boris Johnson, the former foreign secretary, described the draft deal as “unacceptable,” adding, “For the first time in a thousand years, this place, this Parliament will not have a say over the laws that govern this country.”

Labour leader Jeremy Corbyn said his party would “look at the details” of the deal, “but from what we know of the shambolic handling of these negotiations, this is unlikely to be a good deal for the country.”

He added: “Labour has been clear from the beginning that we need a deal to support jobs and the economy — and that guarantees standards and protections. If this deal doesn’t meet our six tests and work for the whole country, then we will vote against it.”

The breakthrough in negotiations means EU leaders might be able to ratify the deal at a summit in Brussels later this month. EU ambassadors are set to meet on Wednesday to discuss the next steps in the Brexit process.

What’s next?

Brexit Secretary Dominic Raab reportedly belongs to a handful of Cabinet Brexiteers who are prepared to resign from the government if the Brexit withdrawal agreement doesn’t meet their demands.

Advisory Excellence reported last month that the Cabinet members Andrea Leadsom, Penny Mordaunt, and Esther McVey were all prepared to resign if May accepted a backstop with no fixed end date.

Leadsom said on Sunday that MPs would not accept a backstop which the UK cannot leave without the EU’s permission. She told the BBC: “I don’t think something that trapped the UK in any arrangement against our will would be sellable to members of Parliament.”

Downing Street understand that ministers could quit their positions over the details of the deal.

However, the prime minister has pressed on despite the high-profile resignations of former ministers like Johnson and David Davis and would be likely to do so again.

The European Research Group of pro-Leave Conservative MPs met following the news. A Tory MP who attended told Advisory Excellence the group was “absolutely shell-shocked” because none of May’s “promises” to it had been kept.

Trade Secretary Liam Fox, Leadsom, and Mordaunt “all campaigned with us for Brexit and need to stop this from ever reaching the Commons,” the MP said.

The biggest challenge facing May will come in the House of Commons’ vote on the deal.

Most Labour MPs are set to vote against it, as well as Conservative MPs from the pro-Brexit and pro-EU wings of the party, and possibly the 10 MPs from the Democratic Unionist Party which props up May’s government.

The DUP’s Nigel Dodds said the party “couldn’t possibly vote for” the deal. Pro-Brexit Conservative MP Iain Duncan Smith said May’s days are numbered as prime minister if she goes ahead with it.

Owen Smith, a champion of the anti-Brexit group Best for Britain, said the deal would leave “the British people worse off, and our country weaker as a whole” and urged May to put it to another referendum.

He added: “It’s not enough for May to secure support for her deal from Cabinet, or even from Parliament. This deal will dictate the course for our country for generations to come, and it must be put to the people for their approval or rejection.”

The leaders of the four main opposition parties, including Corbyn and The Liberal Democrats’ Vince Cable, have jointly written to May demanding a “truly meaningful vote” on the deal.