The Brexit Column: Don’t bet the house on transition | KPMG | UK

The Brexit Column: Don’t bet the house on transition

The Brexit Column: Don’t bet the house on transition

The Brexit process is like buying a house. Mark Essex explains how not to get gazumped.

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Director, Public Policy

KPMG in the UK

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The Brexit Column: Don’t bet the house on transition - Key in door

The biggest deal you will make, and the biggest deal our country will make in our lifetimes: what can buying a house teach us about Brexit and how we should react to this week’s breakthrough on transition?

The analogy is not exact, but indulge me. If the 2016 vote to leave the EU represented the buyer’s decision to seek a new house, then surely this week's conditional agreement on transition was the moment their offer was accepted.

As anyone who’s bought a house knows, getting to this point is an achievement in itself: first negotiating with our significant others as to what is important, and second getting our offer accepted by the vendor. So we rightly applaud this milestone.  

Sober heads would, however, point out that we are now set for even more punishing negotiations to reach the hoped-for moment of exchange (the signing the withdrawal agreement) and completion (the UK’s actual exit). Who can say with any certainty when, or whether, a deal will be struck? The prospective occupants would be optimistic – bordering on presumptuous – to start ordering furniture or buying kitchens at this point.

And so it is with business and its approach to Brexit.  As long as the agreement is not legally binding, businesses should continue to exercise caution by continuing to make, and where appropriate implement, backup plans. After all, who wants to risk being gazumped after already giving notice on your rental property (where Article 50 demands that the tenancy expires in 12 months’ time)? 

Shaky foundations

Right now the biggest risk to businesses from the transition deal is that the draft agreement strengthens the complacent. Their “less risky” approach is, in reality, the riskiest strategy of all. That’s because …

    a. the agreement could still fall apart, leaving this group defenceless should talks collapse late this year or early next, and …
    b. for many sectors 21 months is little time anyway.

My advice is simple. Don’t stop because of transition. There are countless ‘no regrets decisions’ that you could be taking anyway. For example, making sure your financing can withstand shocks; engaging your EU-born workforce; obtaining trusted trader status. If you were likely to do these things anyway – irrespective of Brexit – then it’s probably better to do so now rather than wait for others to beat you to it in hiring busy specialists. Imagine a sudden surge in demand for the services of property solicitors and surveyors.

Then there are the tactical decisions: actions such as building up inventory, which can be unwound if not needed. The extra working capital required is effectively an insurance against the risk of damaging border delays in a no deal scenario. Like keeping an eye on other houses should your prefered option fall through.

And then there are the irreversible decisions: those costs that have to be sunk and never recovered if things go to plan. These are the most difficult decisions to make and the ones that those preferring to “wait and see” will fight most bitterly. What’s the equivalent for house-buyers? Perhaps that situation when you start to realise the chain won’t work and you will have to move out before your next home is ready.  You put off looking at rental properties but sooner or later you realise that its better to spend the rent money than realise too late that you have nowhere to live.

To people facing these irreversible decisions, James Stewart, our Head of Brexit, summed it up on Monday: “Just as no lawyer would allow you to complete a major deal without a legally binding contract, so it would be equally reckless for businesses to scrap their contingency plans until they have a similar level of assurance.”

The UK is getting closer to unlocking the front door on Brexit. But until we see ink on a final agreement, it would be best not to bet the house on it. 

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders

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