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Article 50: What does it mean for SMEs from a legal point of view?

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Philip Ball              

Prime Minister Theresa May has triggered Article 50, officially beginning the two-year period of Brexit negotiations before the UK’s eventual exit from the trading bloc.

The UK200Group is the UK’s leading membership association of chartered accountancy and law firms, whose members act as trusted business advisers to over 150,000 SMEs. With so many questions about the UK’s ongoing relationship with the EU left to be answered, it’s a time of uncertainty for businesses of all sizes in the UK. With that in mind, the UK200Group has asked Philip Ball, Corporate Commercial Solicitor at member firm Myerson Solicitors, for his view on the impact on the business community.

“For anyone who was still in doubt as to whether the UK would leave the EU, the question was settled by news that Theresa May has sent the letter under Article 50 of the Treaty on European Union to trigger the formal exit process. This means that – barring an unlikely unanimous agreement between all EU member states to prolong the process – in two years’ time the UK will no longer be a member of the EU, whether or not a deal has been reached as to the UK’s future relationship with the EU.

“There remains uncertainty surrounding what deal, if any, can be reached before the two-year negotiating period expires. Earlier in March, the House of Commons Foreign Affairs Committee published a report highlighting that the risk of reaching ‘no deal’ is real enough to justify planning for it and to fail to do so would be a dereliction of duty by the Government. Even if there is a deal in place in two years’ time, its contents are subject to negotiation. Overall, this makes it very difficult to know the environment in which UK businesses will trade in two years’ time.”

What can business owners do?

Philip Ball continues, “From a legal perspective, businesses should consider whether they need to include provisions dealing with the risks inherent in Brexit within any new contracts they are entering into – ‘Brexit clauses’. Some contracts will be more obviously at risk than others, such as those involving cross-border trade or which are dependent on exchange rates, however the ramifications of Brexit are likely to be far-reaching. For example, it will be necessary to consider the impact on a business’s supply chain and whether Brexit could impact the ability of the business to comply with the contract and the contract’s ultimate profitability.

“Brexit clauses can take a variety of forms: they can deal with specific risks that the parties envisage as being potential issues, such as changes in law, changes in tariffs, currency fluctuations outside of defined parameters, or they can simply refer to adverse effects that are caused by Brexit. Once triggered, a Brexit clause will normally give rise to a right to renegotiate, which may also lead to a right to terminate if no agreement is reached. The purpose of a Brexit clause is therefore to mitigate the risks that may arise upon, or possibly before, the UK leaving the EU. As you can imagine, a Brexit clause itself can lead to uncertainty.

“For contracts that are already in existence, businesses should consider the risks posed by Brexit and whether there is any way of mitigating them. This could be in the form of practical steps, such as taking options or futures in relation to currency exchanges or their supply chain or products, or in the form of legal steps, by evaluating whether there are any ways to renegotiate or terminate contracts that have the potential to be particularly costly or onerous.

“In general, throughout the exit process businesses will need to keep a close eye on what will be necessary for them to remain compliant with the law under which they operate and on the regulations that determine whether or not their goods or services can be sold into the EU.”

Concluding, Philip Ball said, “Although there is a large degree of uncertainty as to the UK’s relationship with the EU upon leaving the EU, by taking an active approach to ensure compliance and mitigate risks, businesses can minimise their exposure to the risks posed by Brexit and put themselves in a better position to exploit any opportunities it presents.”

The UK200Group, established in 1986, represents a significant group of trusted, quality-assured business advisers – chartered accountants and lawyers – who have over 150,000 SME clients in total. As such, the UK200Group acts as the voice for 1,899 charities, over 12% of all registered academies, more than 3,887 farms, 800 healthcare businesses and over 4,000 property and construction professionals. The organisation remains impartial on political matters, and presents the individual views of its members.

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