Given the rapidly changing world, the many challenges of the COVID-19 pandemic and its economic fallout, it seems that despite Brexit happening on 31 January, there have been no immediate dire consequences for businesses.
The fact remains though that as at 11pm on 31 January 2020, the UK was no longer an EU Member State and its relationship with the EU is now governed by the Withdrawal Agreement negotiated during the withdrawal period.
Exit day marked the start of a time-limited transition period until 31 December 2020. During the transition period, the UK continues to be treated by the EU as a Member State for many purposes, and must continue to adhere to EU law and submit to the continuing jurisdiction of the Court of Justice of the European Union. The UK continues to be part of the EU Single Market, Customs Union and VAT regime.
But, as a ‘third country’, the UK can no longer participate in the political institutions, agencies, offices, bodies and governance structures of the EU (except to the extent agreed). In contrast, the powers of the EU institutions, agencies etc conferred under EU law continue in relation to the UK during the transition period.
As a third country, the UK may begin to operate as an independent trading nation from exit day. This includes negotiating its future relationship with the EU, as well as concluding international agreements with third countries and organisations (even in areas of exclusive EU competence), provided these agreements do not enter into force until after the transition period.
For the most part, little changes in practice during transition. UK nationals resident in the EU and EU citizens resident in the UK before the end of the transition period can enjoy largely the same rights as before, and businesses can continue to trade across EU markets, while also preparing for the end of the transition period.
Maintaining stability depends upon the EU and UK agreeing a trade deal before the transition period comes to a close. The prospects of that do not look good now with progress reported as being slow. Even if a trade deal is negotiated before the end of the year, the rapidly decreasing time still available, means any agreement now reached is not very likely to address the needs of every sector.
A “No deal” could bring significant disruption to day-to-day business operations, so with this in mind, the following points may be worth considering for businesses:
How about any labelling or promotions?
One of the continuations during the transition period has been those common rules for commercial issues such as marketing and labelling. The impending changes mean businesses need to check whether their labelling and marketing practices need to be changed in order to continue to sell products into the EU.
Some rules are sector specific. For example, the EU rules are very specific on labelling requirements for particular foods.
Action may also be needed in order to keep using certain standards or descriptions related to goods.
Exports and permissions
During the Transition Period, it is possible for dual use goods to circulate freely between the EU and UK, effectively under the EU regime. Once that period is over though, some exporters of goods may find themselves requiring licences for their EU bound exports.
This is especially the position for goods subject to the EU rules on dual use goods. “Dual use” products are those which can have either a military or civilian purpose (which may not immediately be obvious sometimes). The scope of this regulation is wider than many realise. Some are surprised to find themselves caught within the regulatory framework. On exit from the single market, the UK will be subject to equivalent dual use regulations, so businesses will need to think about export controls.
In February 2019, the UK government launched an Open General Export Licence (“OGEL”) which, on entry into force, will permit exports of dual use goods to EU destinations without the need for a licence. In order to benefit, dual use goods traders must register to use it with the Department for International Trade. They must also comply with the terms of the OGEL as compliance can sometimes be backed up through DIT inspections.
What about customs and freight?
As set out above, at the end of 2020, the UK will leave the EU Single Market, Customs Union and VAT regime. Any imports from then will need to be accompanied by customs declarations, potential tariff payments and import VAT settlements.
A key point is how much any duties may be? This is goods specific and could be as high as 30% or more for some goods.
Businesses need to work out the impact that this will have on the bottom line with considerations including if customer prices could be increased to absorb the cost.
When looking at who may be legally responsible for paying these import duties, this will depend on the contractual terms between the parties, for example if the parties have agreed to trade on one of the INCOTERMS forms of contract, some INCOTERMS models attribute customs responsibilities to the importer and others to the exporter.
Leaving a common customs area usually adds possible costs and can give rise to bottleneck issues such as delays to clear customs. Businesses can take some practical steps in order to minimise the time it takes though. One suggestion is to apply for “authorised economic operator” status with HMRC (also sometimes referred to as “trusted trader” status). This standard is a quality benchmark which, when met, entitles the holder to certain benefits including the ability to have consignments fast tracked through customs controls. Certain non-European third countries (such as the USA) will also allow AEOs certain preferential treatment through their own customs procedures. Applicants for AEO status will need to undergo a rigorous application status. AEO applicants (or other businesses moving goods into the UK) should ensure they have received an Economic Operators Registration Identification (EORI) number from HMRC, which is needed to send goods to the EU.
Mapping the supply chain
This is the exercise of working out the origins of goods supplied and their constituent parts. This is relevant as part of the preparations for a no deal and helps measure the impact of having no deal with the EU.
Questions can include:
- Will existing suppliers still be able to make timely deliveries?
- To what KPIs or delivery milestones has the business committed itself? Can those still be met given the challenges of Brexit?
- Will supplies from overseas still be viable if hit with attract tariffs?
- Could practical arrangements be made so existing suppliers can still support your business in a way that allows you to meet your own obligations to customers?
- If you are inclined to switch to a UK based supplier, will that supplier itself be impacted indirectly by the same sorts of problems ?
- How “Brexit ready” would any new supplier be?
Conclusion
This is a huge area and I have only picked a small number of the issues which businesses may need to consider to deal with the effects of a no deal Brexit.
Even in the areas referenced above, there are wider considerations than we have been able to set out here (retaining EEA workers and new complications in trade with Northern Ireland are some examples). The impetus to tackle these issues may be hampered at the current time by the impact of COVID-19, which still presents sizeable challenges of its own.
Please drop me an e mail or call if you need any further details and stay safe and well.
Roger
