Faced with the challenges of the COVID-19 pandemic and its widespread, economic fallout, Brexit may not be top of mind for many executives at the current time. Despite Brexit happening on 31 January, it did not (unlike the ensuing pandemic) produce dire consequences for business.
The continuity was due to the one-year transition period under the EU-UK Withdrawal Agreement ("Transition Period"), which basically provided for the UK to continue to be part of the EU Single Market, Customs Union and VAT regime until the end of 2020.
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. Progress was reportedly very slow in July's negotiating round with the two parties' positions a long way apart. Even if a trade deal is negotiated before the end of the year, the compressed timescale means any agreement now reached is highly unlikely to be comprehensive, addressing the needs of every sector.
"No deal" would can bring significant disruption to day-to-day operations. Carrying on business in the same way as before may not only bring disruption but also risk penalties for the business concerned. Below, we have highlighted five of the many issues businesses should consider in order to be ready for "no deal".
Action point 1: How will you be affected by new freight and customs arrangements?
At the end of 2020, the UK will leave the EU Single Market, Customs Union and VAT regime. It will therefore require all imports to be accompanied by customs declarations, potential tariff payments and import VAT settlements. Leaving a common customs area with the EU raises two issues for business: it will add potential costs and creates possible bottleneck issues (with delays to importing and exporting goods). Some of this will be beyond the control of businesses, although there are certain steps they can take to mitigate the potentially harmful effects.
Considering the cost impact is a critical starting point. If the UK does trade on WTO terms with the EU, that will mean tariffs (also referred to as customs duties) may need to be paid on goods imported from overseas. These tariffs are set by the UK government. Goods you export into the EU may also attract tariffs (set centrally by Brussels). You should not assume that
How much will need to be paid in duties? This will depend on the goods applicable. Importers must be aware that the rate can be as high as 30% or more for some goods. Businesses need to work out the impact that this will have. Under contracts of supply, can customer prices be increased to absorb the cost? If not, will selling goods in their current form still be profitable? This is a question addressed in our next session.
As between the exporter and importer, who is legally responsible for paying these import duties? The answer will depend on the contractual terms between the parties. If the parties have agreed to trade on one of the INCOTERMS forms of contract, in which case it will turn on which form has been adopted (some INCOTERMS models attribute customs responsibilities to the importer and others to the exporter). Unfortunately, many contracts will be silent on the issue.
While the focus of the impact of a "no deal" Brexit is understandably on trade with Europe, the effect of leaving a common customs area may be felt with trade with other third countries beyond Europe. The EU has negotiated preferential customs arrangements with several major third countries, including Canada and Japan. If the UK is unable either to agree terms with those countries, there is a risk of increased duties on goods moving to and from those zones.
Businesses can take some practical steps in order to minimise the time it takes for their imports and exports to clear customs. Firstly, they can apply for "authorised economic operator" status with HMRC (also sometimes referred to as "trusted trader" status). The AEO standard is a quality benchmark which, when met, entitles the holder to certain benefits with regard to customs handling.
Benefits include the ability for AEOs to have consignments fast tracked through customs controls. Although holding an AEO security and safety authorisation does not mean that consignments will not be subject to examination for prohibited or restricted goods or on behalf of other government agencies. However if it is selected for examination it will receive priority over non AEOs. 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. UK businesses sending goods to the EU need to obtain and EU EORI.
Action point 2: Supply chain mapping and engaging with trading partners
Supply chain mapping is the exercise of working out the origins of goods supplied and their constituent parts. This is necessary as part of preparations for a no deal. It assists businesses to ascertain the impact of having no deal with the EU. Armed with this information, businesses can then identify appropriate steps to mitigate or remove the risk of delay in production or delivery.
There is both a customer facing and a supplier facing aspect to this exercise. First, will existing suppliers still be able to make timely deliveries? 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. Will supplies from overseas still be viable if hit with attract tariffs? If you are inclined to switch to a UK based supplier, will that supplier itself be impacted indirectly by the same sorts of problems (if for example, its own supply chain will also be hit with tariffs and customs delays? How "Brexit ready" is the new supplier?
Customer relationships should be considered. To what KPIs or delivery milestones has the business committed itself? Can those still be met given the challenges of Brexit? If not, what are the business options? For example, for EU based customers, could the business set up a hub within the EU for stockpiling or manufacturing goods prior to onward delivery? If not, could the requirements of the supply agreement be negotiated? If the EU imposes tariffs which affect the goods themselves, who will bear the cost of those? Will your existing contracts allow you to pass the cost of these duties on to the customer?
Action point 3: Do you need licences to export?
After almost 50 years of the EU single market, it is difficult to contemplate needing export licences to send goods to the EU27. 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, the exporters of some 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 number of goods falling within this category is probably higher than you would think. Businesses which have previously exported products outside of the EU27 may have rubbed up against the licensing regime.
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 regulations1, so businesses will need to think about export controls.
To give one example, many businesses move computer hardware between the EU and UK, perhaps between offices and sister companies within the group. The dual use rules provide that a licence may be needed to export technology with cryptographic technology, a common feature built in to modern equipment in order to secure data. Certain software too may be caught, even where the means of export is a telecom transmission (e.g. email) rather than sending a physical package.
The Government has taken steps to mitigate disruption after the transition period comes to a close. In February 2019, it published an Open General Export Licence ("OGEL")2 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 for the licence, traders must first register to use it with the Department for International Trade. They must also comply with the terms of the OGEL; compliance can sometimes be backed up through DIT inspections. Before any of those steps of course they must check whether any of their goods fall within the categories of dual use goods.
Action point 4: Have you checked marketing or labelling requirements?
A benefit of EU membership (extended during the Transition Period) has been the continuation on 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 foods3. These apply to all food placed on EU market, independently of where the food was produced. The EU rules require labels to state the address of a "Food Business Operator" (FBO) within the EU. After the Transition Period, it will no longer be sufficient to provide a UK address. Similar issues arise with labelling chemical products as discussed in section 5.
Action may also be needed in order to keep using certain standards or descriptions related to goods. To be labelled as "organic", the food must have been certified as such by a control body recognised by the EU. UK control bodies may not enjoy this status after 31 December 2020, so producers may need to seek a new certification from another body which has been recognised. Similar changes will occur with the EU's "Ecolabel", a quality standard demonstrating the environmentally friendliness of certain products.
Action point 5: Do your imports and exports require registration?
In a number of sectors, exporters of goods into the EU are required to register with an EU recognised body when putting on the market goods from outside of the EU. Absent a trade deal, the goods that businesses export may need to be subject to registration first.
The Registration, Evaluation, Authorisation and Restriction of Chemical Regulations ("REACH")4 are the EU rules which control the placing on the market of chemicals. This regulatory framework affects almost all industries as most businesses use some form of chemicals in their day to day operations. That could be the sale of the chemical itself in stand-alone form, or products containing chemical ingredients, such as nail polish, printer toner or certain building materials.
Before a chemical can be placed on the EU market, an entity based within the EU must apply to the European Chemicals Agency ("ECA") in Helsinki. An EU/EEA-based company can register a substance under the REACH Regulation, providing a technical dossier related to the relevant substances and their use and making sure that the dossier remains updated.
From the beginning of 2021, registrations which have been filed with ECA by UK based companies will no longer be valid. To continue doing business in the EU/EEA, those businesses should either appoint an EU based representative to manage its registrations. or move the business' operations related to the registered substance to a legal entity within the EU. These steps should also be actioned by those businesses based outside the UK and EU which have used a UK based company to make a registration.
If the second of these options is chosen, it must be remembered that the new registrant will be legally responsible for the substances covered by their registrations, a role which is neither nominal nor passive. The responsible staff and relevant documentation must be present at the address of the registrant rather than sitting back in the UK. In other words, just setting up a company on paper in the EU or EEA will not be sufficient. Other aspects of the goods, such as labelling, will also need to be updated, to reflect the location of the new registrant.
In the UK, a legal regime similar to REACH will be applied5. Chemicals imported into the UK from overseas (whether from the EU or elsewhere) will need to be registered in the UK. Whilst there will be some "grandfathering" of REACH registrations in the UK (so that new registrations do not need to be duplicated for the UK), there is still some uncertainty as to how in practice this will work. The UK Health and Safety Executive is the entity with which the registration must be made.
This gives a snapshot of some of the issues arising from REACH, a complex regulation which runs to thousands of pages wrong. There are also rules on authorisations for downstream users of chemical products which also stand to be affected in a no deal scenario.
Penalties for an infringement of REACH can be serious. In the UK, for example, infringing REACH can carry an unlimited fine or a prison sentence of up to 3 years.
This article gives only an idea of some of the actions which businesses will need to take (or consider taking) 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 (complications over VAT, retaining EEA workers and new complications in trade with Northern Ireland are two examples).
The impetus to tackle these issues may be hampered at the current time by the impact of COVID-19, which has presented sizeable challenges of its own. However, a no deal scenario could pile further challenges on to businesses which are already struggling. If you would like more information about how a no deal scenario will affect your specific business or assistance in planning for one (including any of the areas covered above), please don't hesitate to contact us.
1 Trade etc. in Dual-Use Items and Firearms etc. (Amendment) (EU Exit) Regulations 2019 and the Export Control (Amendment) (EU Exit) Regulations 2019.
2 Open general export licence (export of dual-use items to EU member states)
4 Regulation (EC) No 1907/2006 (as amended by Regulation (EU) 2019/1148)
5 The REACH etc. (Amendment etc.) (EU Exit) Regulations 2019.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.