Business leaders warn of pressing need for government to agree plan to minimise risks of chaotic, cliff-edge departure

Ministers need to stop feuding and agree now on the shape of the transitional deal Britain wants to bridge the gap between leaving the EU and finalising its future relationship with the bloc, business leaders have warned.

“There is an urgent need for government to engage properly on the most imminent risk to business from Brexit: what happens, or doesn’t, on Brexit day,” the Institute of Directors (IoD) said in a report assessing transition period options.

Given the “unprecedented nature” of the forthcoming talks and “increasing scepticism” that a future trade agreement can be reached before the article 50 window expires in March 2019, the government must take early steps to minimise the risks to business from a chaotic, cliff-edge departure, the IoD said.

“There are different options for transition,” it said. “For businesses to plan ahead, they need to know what route the government will pursue.” A clear decision would “send a significant signal of confidence to companies that the UK is committed to minimising the need for disruption”.

There are serious government splits over the form of a transitional deal. The chancellor, Philip Hammond, has called for a stable period of up to three years in which the UK’s relationship with the EU should be “similar in many ways” to what it is now.

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Along with other cabinet “gradualists” such as Amber Rudd and Damian Green, Hammond believes that for some time after Brexit day in March 2019 the UK should continue to accept free movement, be part of the single market and sign no external trade deals.

The former Conservative foreign secretary William Hague said this week Hammond’s plan, possibly adopting an existing model such as staying in the European Economic Area (EEA), had “immense attractions” as a means of avoiding potentially “the greatest economic, diplomatic and constitutional muddle in the modern history of the UK”.

But No 10 has ruled out the idea of an “off-the-shelf” model for the transitional period, and supporters of a hard Brexit believe such an arrangement is too similar to EU membership and would involve accepting some form of free movement.

The international trade secretary, Liam Fox, warned last week that “control of our own borders” was one of the key motivations behind the leave vote and allowing continued free movement would “not keep faith with that decision”.

The IoD outlined a range of options for a business-friendly transition including an extension to the article 50 deadline, which it said was “on paper the simplest solution” but “very politically challenging both for the EU” and some MPs.

EEA membership would give the UK a degree of autonomy in implementing EU rules but would be neither straightforward nor swift, it said, while prolonging the application of EU law could be quicker to negotiate and more comprehensive but would probably leave the UK with “less control than EEA membership”.

Britain could also seek a transitional customs agreement, the group said, that would replicate the benefits of the EU customs union. The IoD’s head of EU and trade policy, Allie Renison, said businesses were pleased ministers were “increasingly acknowledging the importance of a transition period”.

But companies urgently needed reassurance that “a smooth and orderly Brexit is on the cards”, she said. “Prioritising the interim arrangements and mitigating the risks of EU exit means eventual opportunities aren’t diminished by short-term, chaotic cliff edges.”