The minister for Brexit has warned cabinet colleagues that their departments should prepare for the “unlikely scenario” that no deal can be agreed between the EU and the UK when the two year notice period expires, after Article 50 is triggered later this month. Probably, this may go down as the first bit of Brexit contingency planning by a government minister since the referendum of June 2016 and it marks the first public acknowledgement from government that things could go horribly awry if the continentals don’t see things the British way.
It remains unclear if the EC/EU will insist on the “letter of the law” over the UK’s withdrawal from the EU. In theory, no discussion of the future relationship between the UK and the EU can occur until the UK has completed the process of leaving the EU (for the very good reason that the EU cannot negotiate a trade deal with a member of the EU). The UK hopes that it will be possible to outline a post Brexit trade deal during the two year notification process for obvious reasons.
If the UK delivers notification of its intention to leave the EU on 31/3/17 (the latest date that meets its self-imposed deadline), then on 1/4/19, the UK would cease to be a member of the EU (unless a unanimous extension is granted) and it would face a “cliff edge” scenario where none of the trading regulations that underpinned UK-EU trade had legal standing; particularly since Mrs May is insistent that the UK will leave the jurisdiction of the European Court of Justice (which would arbitrate trade disputes). Customs regulations would come into force with EU states being required to treat UK exports as being from a source external to the EU which means inspection is required and certificates of origin would need to be produced. Obviously, the UK is keen to see a transitional deal struck, but it is not within their gift.
The Brexit bill which will grant the government parliamentary approval is currently with the House of Lords. It is widely expected that the Lords will pass amendments to the bill, probably ensuring rights for EU citizens in the UK and possibly insisting on a meaningful vote at the end of EU/UK negotiations (before the same deal is put to the European Parliament and the EU member states and regional parliaments). Should this happen, the bill would be returned for further debate in the Commons.