Brexit: Deal or No Deal?
Set out below is an outline of some key issues for businesses to consider in planning for the possibility of a no deal Brexit scenario.
- The UK’s exit from the EU would be from 31 October 2019 (absent any multi-lateral agreement to extend this).
- There would be no transition period. The presence of a transition period has been considered to be a critical component for an orderly Brexit.
- The level of the UK’s preparedness for a no deal Brexit is uncertain, particularly in terms of the implications for cross-border trade, customs, transportation and other logistics. HM Government has provided practical guidance to business on how to prepare for a “no deal” scenario and according to the CBI businesses have invested hundreds of millions of pounds in such preparations.
The UK and EU would immediately trade with each other as third countries under the WTO rules. Businesses which trade internationally only within the EU will have to address regulatory and cost issues from which they have previously been exempted, notably:-
- Tariffs (taxes on imports) on goods.
- Rules of origin – which determine how customs authorities classify where an export has come from, specifically by reference to the “economic nationality” of the goods, ie the source of the value contributions to the final product.
- Quotas to limit the number of goods which may be imported by country.
- Most EU Law would continue as retained UK law under the EU Withdrawal Act 2017, subject to certain formal amendments laid down in statutory instruments.
Future trading relationship with the EU and rest of the world
Trading under the rules of the World Trade Organisation (WTO) has been promoted as a cushion against the worst effects of a no deal Brexit. Key points to be aware of on this are:-
- The WTO is an international organisation, based in Geneva and run by its member governments of which there are some 160 members who account for around 95% of world trade.
- It aims to help trade flow as freely as possible by providing a negotiating forum for trading partners by:
- reducing tariffs and non-tariff barriers;
- providing stability through the operation of predictable WTO rules; and
- resolving trade disputes under its dispute settlement process.
- Members of the WTO lay down maximum tariffs applicable on different categories. This is only a baseline commitment and does not prevent members from negotiating Free Trade Agreements which contain more favourable arrangements.
- The UK is currently through its membership of EU also a member of the WTO. The UK has said that in the event of a no deal Brexit trade with the EU will be on non-preferential WTO terms (which will therefore include the payment of tariffs). However, there also needs to be agreement with the other WTO members for trade outside of the EU.
- The General Agreement on Tariffs in Services contains a mechanism for members to set out their baseline commitments in relation to access to services markets. Schedules set out any restrictions or conditions of access which are imposed by each member.
- The UK’s Department for International Trade has started the formal process of agreeing tariff and quota schedules principally by seeking to replicate the UK’s current obligations. However, it is apparent that other countries will take advantage and seek to negotiate better terms, which makes agreement on tariffs and quotas by 29th March 2019 unrealistic. As of October 2018:-
- The draft UK goods schedule faced formal objections from some 20 countries, including the US, China, Australia and New Zealand;
- The UK will have to undertake lengthy bilateral negotiations with each of those countries.
Supply chain mapping is an essential priority step in a business’s Brexit planning:
- Knowing where your inputs come from, and what product category they fall into can help you assess the possible tariffs that might apply.
- Businesses which only export goods to the EU will feel the greatest impact, given their unfamiliarity with WTO rules.
- 57% of UK exports go to non-EU countries and might already be subject to tariffs or quotas depending on the arrangements the European customs union has with the destination country. But as noted above there is uncertainty as to the levels of tariffs and quotas when the UK is no longer in the EU.
- Current goods schedules and tariff data in relation to goods and details of restrictions applicable to accessing service markets are available from the WTO website.
Businesses which import or export goods should familiarise themselves with guidance on exporting and customs law. In particular they should:
- Consider applying for “authorised economic operator” (AEO) status, which is an internationally recognised quality mark. By showing that a business has efficient customs controls and procedures (meeting EU standards) AEO status currently gives access to some simplified customs procedures. However, it is best to apply early as the application process is complex and might take up to a year.
- As a third country outside the EU, any business trading goods within the EU after a no deal Brexit will need to register for an Economic Operator Registration and Identification Number (EORI number) which is used to track and register customs information in the EU.
- Consider applying for an export licence or provide supporting documentation to export specific types of goods from the UK. The requirement for a licence depends on the nature of the goods, destination, end use and nature of the trade activities.
- Ensure carriers (for example hauliers, and train, vessel or aircraft operators) are compliant with the need to make a “safety and security declaration” for goods moving between the UK and EU.
- A no deal scenario will also bring about changes to the excise regime (applicable to the production and importation of alcohol, tobacco and oils). These goods currently move freely between EU member states with excise suspended. Post-Brexit, businesses importing excise goods from the EU to the UK would have to make a customs declaration immediately on importation. Unless the excise goods are placed into a customs/excise suspensive arrangement, the duty will have to be paid immediately.
- Training should be given to staff in order to get them ready for the new regime.
Commercial contracts, employment/immigration and intellectual property
- The UK and the EU must ensure that the level of protection provided by their laws, regulations and practices does not fall below the level provided by the common standards that apply at the end of the transition period in the area of labour and social protection, and as regards fundamental rights at work, occupational health and safety, fair working conditions and employment standards, information and consultation rights at company level, and restructuring.
- The UK and the EU reaffirm their commitment to implement effectively in their laws, regulations and practices the International Labour Organization conventions and the European Social Charter.
- The UK must maintain an effective system of labour inspections, ensure that effective administrative and judicial proceedings are available for enforcement, and provide for effective remedies.
- Commercial contracts which involve parties in other EU member states and which are likely to run on beyond Brexit need to be reviewed to ensure these remain fit for purpose in a no deal scenario. A business should identify and assess potential unintentional consequences and ambiguities in any such contracts which may cause particular risks (such as increased costs, termination triggers and ineffective exclusivity rights) and put in place strategies to deal with any necessary re-negotiations.
- Employers will need to be more proactive in planning how they intend to retain staff who are EEA migrants and supporting visa applications by EEA migrant workers.
- EU registered trade marks and designs will not continue to cover the UK following Brexit. That said, the UK government has indicated that regardless of any deal it intends unilaterally to “clone” EU trade mark and design rights into the UK. There should also be a procedure for re-registering community rights as UK ones in a manner which is inexpensive.
- Small amendments will be made to employment-related legislation to reflect the fact that the UK is no longer an EU country but this will not change existing employment rights.
- The only rights to be affected will be that no new requests to set up a European Works Council or Information and Consultation procedure can be made and employees working in another EU country should check whether they will be protected in that country in the event of their employer’s insolvency.
- Data transfers from EU Member States to the UK would potentially be impacted. Under the GDPR, there is a general prohibition on the transfer of personal data to ‘third countries’ outside the EEA. From 29 March 2019 the UK would become a third country requiring businesses within the EU to put in place a ‘lawful transfer mechanism’ in order to transfer data to the UK (i.e. model clauses). This could impact a variety of data flows, both intra-group and to third parties. In order to prepare for this, businesses may consider incorporating model clauses into their commercial agreements as a pre-emptive measure.
- The UK government has stated that it would not seek to restrict data transfers from the UK to the EU, but this position should be monitored.
- To the extent that an organisation conducts any cross border processing (i.e. processing of personal data affecting more than one EU Member State), such processing may be impacted. Businesses that wish to take advantage of the GDPR’s ‘one stop shop’ mechanism to engage with only one data protection ‘supervisory authority’ would no longer be able to use this mechanism in the UK. The UK’s Information Commissioner’s Office would not be eligible to act as a ‘lead supervisory authority’, requiring a business to either appoint another lead supervisory authority within the EU (if possible) or resort to engaging with the supervisory authority in each applicable Member State. This may be relevant in a number of circumstances, including where for example a business is required to make a data breach notification.
Each of these areas, together with data protection and other industry sector specific issues, are addressed in more detail in separate briefing notes on the Charles Russell Speechlys Brexit Hub.