It would be lovely to be able to write a blog that helps inform businesses clearly about what to expect as Brexit looms into view.
Liam Fox stated in 2016 that securing a free trade agreement with the EU would be “one of the easiest in human history”, and of course as recently as this time last year the prime minister waxed lyrical about his “oven ready deal”.
Unfortunately with only weeks to go before the end of the transition period, the outside world has no idea as to whether there will be free trade and other agreements between the EU and the UK, or whether the UK will trade with the EU on WTO terms.
If Brexit means new rules what are they, and when will business get told?
Although we might all want to throw our arms up in despair about this lack of clarity as to what the landscape is going to look like in January, this should not stop us considering some of the commercial problems raised by Brexit and thinking about ways to provide businesses with at least a fighting chance of circumventing some of the potential problems.
With an eye therefore on the short term, here then is a checklist of commercial issues that businesses who trade with the EU should think about.
- UK Border Controls – in June the UK government announced that goods coming in from the EU would not be subject to full UK border checks. Instead there will be a 6 month transition period, but there still will be some controls with businesses needing to complete customs declarations and pay relevant tariffs, whatever they may be. As well as tariffs, import VAT will be payable when buying goods from the EU with related paperwork. VAT is then reclaimable but the impact on cash flow for many businesses will be significant.
- EU Border Controls – in contrast to the UK, the EU has its full border infrastructure in place and ready to go on 1 January 2021, with no suggestion of deferring checks or controls. The scare stories of the M20 becoming a lorry park may prove accurate. Businesses therefore need to look closely at their cross border supply chain and contractual obligations to meet delivery times given the disruption that could occur. It’s not hard to envisage how critical supply chains, up to now highly efficient and resilient, will be subject to stresses that they were not designed to withstand. In any scenario, the UK will be out of the EU’s single market and customs union as of January 1, and businesses will be required to submit themselves to new checks and file significantly more paperwork to move goods between the two markets, the functioning of which is still being thrashed out by the UK and the EU. Please refer to The Impact of Brexit on Cross Border disputes for more detail.
- Transport – the trade deal negotiations have indicted the desire for the EU and UK to agree provisions to ease access for transport operators, but up to now at least, this was linked to there being a trade deal in place. Although there seems to be a recognition that it is in the interests of both parties to put in place measures to aid connectivity, the position is uncertain.
- People – the days of UK businesses having the ability for their staff to travel and provide their services in EU markets are at an end after 31 December. Therefore, a business wanting to recruit or move their staff will now need to be mindful of and operate within the immigration rules of the UK and individual EU states. As has been well publicised this does not apply to EU citizens in the UK and vice versa who can still take advantage of the right of freedom of movement, but they will still need to apply for “status/visas” under a county’s rules and timescales . Businesses here in the UK will need to ensure that any of their EU staff do so, and the recruitment of U/EEA nationals will of course become more difficult.
- Data Management – after 31 December the UK will be considered a third country for the purposes of the EU GDPR. As such the UK requires an “Adequacy Decision” to approve it as a destination for transfer of personal data from EU. It does not look likely this decision will be issued by 1st In practice this means that if your business relies on personal data from the EU there needs to be a contact in place that includes an EU approved “Model Clause”. Businesses in this position need to check this and that they have the appropriate arrangements in place to be able to process data obtained from EU data subjects once the UK is not in the EU.
- Supply chains – businesses supplying to the EU and obtaining goods and components from the EU may need to review and amend their current arrangements. Next day delivery or specific delivery time obligations could well easily become unsustainable in a world of tariffs, currency movements border delays and untried customs systems. The detailed impact on these factors upon specific businesses and sectors can only be speculated upon at this stage but as well as building contingencies into your systems, amendments to contractual obligations (if and where possible) are undoubtedly best dealt with now, collaboratively. As an aside, given that Brexit has been on the table for such a long time it seems clear that a party will not be able to rely on any force majeure type provision to avoid an obligation that it cannot now perform.
- Placing of manufactured goods and food – authorised representatives and responsible persons based in Great Britain will no longer be recognised by the EU from 1 January 2021. UK businesses that have previously used a UK-based authorised representative or responsible person will, if necessary, have to appoint one based in the EU. Products from the UK placed on the EU market will be considered imports into the EU. Distributors of such products will be treated as importers for these purposes; this was not the case previously. As such, a business distributor network will have far more extensive obligations for matters such as labelling and conformity when bringing goods into the EU market. As will UK distributors bringing in goods from the EU and placing them on the UK market, though there are key exemptions for “existing stock”.
We would suggest that, in the light of the above, all businesses that trade with the EU or rely in some way upon goods, services and personnel from the EU review their key supply, distribution, agency and other commercial agreements with eye on particular factors such as :
- Territorial definitions;
- The substance of the contract – whether it governs the ability to buy or sell goods or services, or depends on the import or export of goods or services;
- Delivery obligations and responsibilities – do these sit with the customer or the supplier;
- Liability for delay in deliveries – could this lead to liquidated damages and/or termination;
- Which party is liable for increased costs in delivery for sectors where there will be an imposition of trade tariffs;
- Is the contract clear as to which party needs to clear goods for export/import and is this consistent with any references to Incoterms within the contract?
- What termination or variation clauses there are which may be required if a contract becomes unprofitable;
- What contract levers exist to change the price or cost base – for example exchange rate mechanisms, price review or increase clauses, and when and how can these be implemented;
- What additional technical changes are required, such as are required under data protection legislation;
- Conformity requirements for UK goods.
Some Practical Points:
Businesses may want to consider engaging freight forwarders to help with the process of importing and exporting goods.
If you are going to be purchasing from the EU, ask yourself is there a UK distributor I could purchase from instead? Or should your post Brexit planning include arranging a UK distributor and will the prices I am currently paying change?
If there is no UK Distributor, check your supplier will use your EORI number and include it on the declarations so you can recover Import VAT.
Understand as soon as you a can what will be the likely duties and, if you are liable for these under any terms of business, make sure you have an “HS6 code” for each product which lets you look up the relevant duty. Above all, directly engage with suppliers to define customs and borders roles and responsibilities so all parties involved have a clear understanding of the practicalities and the handovers in the chain to avoid unexpected costs and delays. From a cash perspective, run a rough calculation of your additional duty costs, based on the UK Global Tariff (for UK imports) and the EU Common External Tariff (for EU imports).
The current Withdrawal Agreement provides that, subject to some exceptions, if goods are already placed on the EU/EEA market before 31st December 2020, then they can continue circulating until they reach their end user, without any additional product requirements, such as re-labelling. So if you supply products into EU markets, consider whether making supplies before the end of the year or accepting contractual pre-orders now will help you take advantage of these rules.
[Note; for the purposes of this summary we have not commented the specific issues that will apply to businesses operating in regulated sectors such as Financial Services and Energy.]
If you would like to read part 1, part 2 and part 3 of Brexit Series, please refer to our insights page