What Brexit means for SMEs

The United Kingdom voted to leave the European Union on 23rd June 2016 and left on 1st February 2020. Between February and December 2020 the UK was in a transition period under the terms of the Withdrawal Agreement. This transition period ends on 1st January 2021 and the future relationship between the United Kingdom and the European Union will be conducted under the terms of a new deal -The Trade and Cooperation Agreement. This is your overview of what is in this Brexit deal.

Rangewell are business finance experts who work with UK SMEs and their advisors to help them find, compare and apply for business finance. We have comprehensively and independently mapped over 300 business finance lenders and 23,000 business finance products in the UK. And just like with business finance, we hope to bring all of the information in the Trade and Cooperation Agreement into one helpful overview with insight into how the two sides compromised to reach this agreement. 

TRADE IN GOODS

Summary

• Zero-for-zero tariff argument. This means if you buy or sell goods to the EU, there won’t be a new, additional charge added in January.
• A number of situations in the agreement to turn off zero tariffs and a few clues which will see them progressively introduced. 
• New ‘Rules of Origin’ for exporters on the components and/or materials in products - could be an extra charge if a component is made outside the UK or EU.
• The UK and EU will become two separate regulatory and legal areas. This means that all there will be different regulations and rules on products.
• Be prepared for paperwork when exporting to the EU which may ask for details of the origins on all of the components used in a product.
• All goods imported into the EU from the UK will be subject to regulatory checks. 
• Prepare for slight delays on goods being shipped when the system is first introduced.
• If you already export to the EU, you may be eligible for “trusted trader” status. 
• If a bottleneck emerges in trade (delays at Dover for instance), then the UK and the EU are able to quickly amend rules for customs processes.
• Product standards and technical regulations based on the same international references. This includes the continued use of self-certification of conformity by the manufacturer where it is currently applied in both the EU and the UK.

In 2019, the EU was responsible for 52% of total imports into the UK, and exports from the UK to the EU tallied at 43%. With that being said, services accounted for 42% of the UK’s total exports to the EU. We will detail the overview of services further down the article. 

Wales, followed by Northern Ireland and the North East of England had the highest percentage of goods being exported to the EU. Northern Ireland, followed by the East of England, had the highest proportion of goods imported from the EU.

The Trade and Cooperation Agreement sets out that the UK and the EU will be in a free trade agreement with a zero-for-zero tariff argument. This means if you buy or sell goods into the EU, there won’t be a new, additional charge added in January. The EU stated that this is the most ambitious commitment towards liberalising market access for goods ever to feature in an EU free trade agreement. 

So this means there will be zero-tariffs and zero-quotas on all goods from day one. If the UK did not have this agreement and left on World Trade Organization terms (No Deal), products like Welsh lamb would have been subject to a 50% tariff, Somerset beef an 87% tariff, Sunderland cars 10% tariffs and Leicester’s textiles would have been subject to tariffs of up to 12%.  

However, be warned, this agreement is not a straightforward wholesale end of tariffs. It is important to know there are a number of situations in the agreement to turn off zero tariffs and a few clues which will see them progressively introduced. 

To help to understand why and how new charges might emerge, it is useful to understand the positions taken during the negotiations and how they came to the remedies in the reached compromises. 

On one side of negotiations, you had the UK who wanted to use this agreement to maximise the benefits of being outside of the EU. While on the other side of the table you had the EU, who did not want to grant the UK any special access to their market as that would mean putting members of the EU at a disadvantage.

For example, being outside of the UK means the UK is free to strike a free trade agreement with an East Asian nation like South Korea; who produces electric car batteries cheaper than they do in the EU. The UK could then build an electric car with these Korean batteries in the UK. The UK would then hope to sell the cars inside of the EU in places like Poland or Cyprus. The EU is concerned with the UK doing this, as it would undercut and put EU car manufacturers at a disadvantage due to the fact the UK would be able to build cars cheaper. 

To remedy this in the agreement, the EU pushed for tariffs on cars. The compromise resulted in a zero tariff on cars made in the UK from January 2021 but tariffs will be phased in over six years on those cars which are built with parts from outside of the EU. 

This agreement is full of caveats like this. The story of the negotiations is one of the UK trying to take advantage of their global position and the EU ensuring this does not undercut goods made in the EU zone. The outcome is zero tariffs for British goods but protection for the EU if the UK gets too much of an advantage over what can be done from within the EU itself.

If you sell goods to the EU, you will have to understand this ‘Rules of Origin’ of all the components or materials in your products, as there could be an extra charge if a component is made outside the UK or EU. Importantly, this doesn’t just mean the origin of materials used but also which country the processing of the components took place. 

Be prepared for paperwork when exporting to the EU which may ask for details of the origins on all of the components used in a product.

The other area in which the UK sought to take advantage and the EU wanted to mitigate this is on the goods which the UK might import from those nations the EU does not have a free trade arrangement with, like Australia or South Africa. 

The EU are worried that the UK would become a back door for these goods to come into the EU. This could mean cheaper goods or goods which undermine a protected industry, or goods which don’t meet EU standards. 

This means that, from January, all goods imported into the EU from the UK will be subject to regulatory checks. This is to ensure that goods - like Australia or South Africa wine for example - do not sneak into the EU without the necessary tariffs which currently protect French wine producers.

So even with zero-tariffs and customs and regulatory cooperation, all products traded between the UK and the EU will be subject to regulatory compliance checks from the 1st of January. Remember, the UK and EU will become two separate regulatory and legal areas. This means that all there will be different regulations and rules on products.

What could this mean to UK businesses?

Simply put, this could mean slight delays on goods as the system is first introduced. This does not concern trade in goods between the EU and Northern Ireland, as goods entering Northern Ireland from the rest of the UK will need to comply with EU product rules and will be subject to customs checks.

If you already export to the EU, you may be eligible for “trusted trader” status. In the treaty, they have agreed to recognise each other's ‘Authorised Economic Operators' programmes, enabling trusted traders that benefit from this status to enjoy certain simplifications with customs authorities. 

If you are worried about an increase of paperwork and delays in the delivery of goods, you might be pleased to learn that a number of mechanisms were negotiated to reduce administrative burdens for businesses. The deal does not have any specific agreement but if a bottleneck emerges and we see delays at Dover for instance, then the UK and the EU are able to quickly amend rules on ships carrying lorries or how the UK/EU exchange customs information.

Both sides have agreed a definition of international standards that identifies the relevant international standard-setting bodies. This included the continued use of self-certification of conformity by the manufacturer where it is currently applied in both the EU and the UK. This will ensure that product standards and technical regulations are based on the same international references and will make compliance rules easier and less costly.

DIGITAL TRADE 

Summary

• Agreement to stop any unjustified barriers to trade.
• Commitment to continue an open, secure and trustworthy online environment for businesses.
• Maintain high standards of personal data protection.
• No requirement for UK data to be stored or processed within the EU.
• UK/EU will continue to cooperate alongside other nations at multiple levels to ensure the highest possible protection.

The Agreement aims to facilitate digital trade. It wants to stop unjustified barriers and to maintain an open, secure and trustworthy online environment for businesses and consumers alike. 

The forefront of the agreement is to maintain high standards of personal data protection and, notably, prohibits requirement for UK data to be stored or processed within the EU.

Faced with increasing cybersecurity challenges, the UK and the EU will continue to cooperate alongside other nations at multiple levels to ensure the highest possible protection.

TRADE IN SERVICES

Summary 

• There is a deal for services in the agreement including for financial services. The agreement provides a significant level of cooperation on the trade in services, going far beyond the baseline of the WTO's rules.
• As of 1st January, UK service suppliers will lose their automatic right to offer services across the EU. 
• Service businesses that operate in the EU may need to establish an entity in the EU to continue to operate. 
• Firms will no longer be able to operate the ‘passporting' concept. 
• In the deal, a non-discrimination clause was agreed in order to ensure that service suppliers or investors from the UK will be treated no less favourably than EU firms within the EU. 
• There is a review clause encouraging the EU and UK to consider whether there are possibilities to improve trade of non-financial  services in the future.
• The actual level of market access for UK firms will depend on the way the service is supplied and whether it is supplied on a cross-border basis. 
• United Kingdom professionals will need to have their qualifications recognised by the relevant Member State to supply those services in the relevant Nations. 
• The agreement foresees a mechanism whereby the UK and the EU may later agree on specific professions to have mutual recognition of certain professional qualifications.
• Negotiations continue for financial services, with the aim to be finalised by March 2021. They will mainly cover the question over equivalence on financial services.
• Until the new agreement, the UK's equivalence decisions will be adopted in the UK's interest and the EU will consider equivalence when they are in the EU's interest.

Services accounted for 42% of the UK’s exports to the EU. This includes financial services and professional services such as legal, accounting, advertising and engineering. The UK had an overall trade deficit of -£79 billion with the EU but a surplus of £18 billion on trade in services.

It is important to note that there is a deal for services in the agreement, which is in contrast to the fake news being shared by some. The agreement provides a significant level of cooperation on the trade in services, going far beyond the baseline of the WTO's rules.

All UK service providers to the EU must be aware that as of 1st January, UK service suppliers will lose their automatic right to offer services across the EU. Service businesses that operate in the EU may need to establish an entity in the EU to continue to operate. 

Firms will no longer be able to operate the ‘passporting' concept, which is that if you are authorised to practice in one member state it enables you to operate throughout the EU. That said, in the deal, a non-discrimination clause was agreed in order to ensure that service suppliers or investors from the UK will be treated no less favourably than EU firms within the EU. 

This entitles UK practices to receive more favourable treatment than is granted to service suppliers or investors from outside the EU who do not have similar provisions in place. There is a review clause encouraging the EU and UK to consider whether there are possibilities to improve trade in services in the future (financial services are excluded in this clause).

The actual level of market access for UK firms will depend on the way the service is supplied and whether it is supplied on a cross-border basis. For example, if the service is purchased over the internet or by a tourist travelling abroad and purchasing services.

United Kingdom professionals including doctors, nurses, dental practitioners, pharmacists, veterinary surgeons, lawyers, architects and engineers will need to have their qualifications recognised by the relevant Member State to supply that services in the relevant Nations. This will happen, and in many cases has already happened, between the UK regulators and their European counterparts. 

The agreement foresees a mechanism whereby the UK and the EU may later agree on specific professions to have mutual recognition of certain professional qualifications.

UK lawyers will be allowed to provide legal services relating specifically to the practice of international law and the law of the country where they are authorised under their “home” title in the EU. 

The Trade and Cooperation Agreement does cover financial services but it is important to note that negotiations continue and that most areas for financial services are covered by WTO rules.

The Agreement commits both the UK and the EU to maintain their markets open for each other seeking to supply services. It was also agreed to commit to current standards in the financial services sector and they are applied throughout the UK and EU. 

The Agreement does not include any elements pertaining to equivalence frameworks for financial services, that is the recognition of each other’s legal requirements for regulating financial services.

It is important to note that negotiations for financial services are ongoing. The UK and EU have stated that they aim to have an agreement on the framework for regulatory cooperation on financial services by March 2021.

The negotiations will mainly cover the question over equivalence on financial services. This is in regards to how the UK will diverge from EU frameworks and how it will use its supervisory discretion regarding EU firms. Until then, the UK's equivalence decisions will be adopted in the UK's interest and similarly, the EU will consider equivalence when they are in the EU's interest.

This is mainly as the UK hopes to secure provisions that would add more stability to the equivalence system. The UK wanted to at least replicate provisions in the EU’s deal with Japan, which foresee consultations and advance warning before equivalence is withdrawn but the EU rejected this out of concern that the UK would make it as hard as possible for the EU to revoke equivalence.

PUBLIC SECTOR CONTRACTS 

Summary

• UK & EU companies will be able to participate on an equal footing in bids for procurement tenders covered by the agreement. 
• The Agreement further provides for non-discrimination of UK/EU companies for small-value procurement. 

The agreement contains what the EU describes as some of the most ambitious provisions on public procurement ever entered into by the EU and goes well beyond commitments under the WTO agreement. 

UK & EU companies will be able to participate on an equal footing in bids for procurement tenders covered by the agreement. The Agreement further provides for non-discrimination of UK/EU companies for small-value procurement. 

INTELLECTUAL PROPERTY RIGHTS 

Summary

• The agreement enhanced standards in copyright. 
• Collective management of rights and rights such as the resale right for visual works, which are not covered by international conventions, are covered.
• Trade marks, design rights, patents, the protection of trade secrets, plant variety rights and the enforcement of intellectual property rights have enhanced standards.
• All EU geographical indications already registered in the EU by the end of December 2020 will be protected in the United Kingdom. 
• Future geographical indications the EU may want to protect will have to be agreed with the UK at the time and won’t be automatically applied.

The Trade and Cooperation Agreement complements the existing international legal framework on intellectual property rights. In particular, it enhanced standards in copyright. 

Notably the collective management of rights, and rights such as the resale right for visual works, which are not covered by international conventions and which are particularly important for international artists. Trade marks, design rights, patents (supplementary protection certificates), the protection of trade secrets, plant variety rights and the enforcement of intellectual property rights (including border enforcement) have enhanced standards.

All EU geographical indications already registered in the EU by the end of December 2020, such as Champagne, will be protected in the United Kingdom. Future geographical indications the EU may want to protect will have to be agreed with the UK at the time and won’t be automatically applied.

NEW RULES FOR EU WORKERS AND TRAVELLING TO THE EU FOR WORK

Summary

• EU/UK nationals will still have short-term visa-free access of up to 90 days within a 180-day period.
• For longer stays in the EU, you have to follow individual nations’ immigration rules. 
• The UK created the EU Settlement Scheme to continue living in the UK after 30 June 2021. The deadline for applying is 30th June 2021. You must have started living in the UK by 31 December 2020.
• Intra-corporate transferees who need to work in the EU can continue to do so but the maximum duration of such transfers is now capped at three years.

In short, there is nothing new in terms of ‘freedom of movement’. It’s actually not covered in the treaty. It was already agreed though that from 1st January 2021, EU/UK nationals will still have short-term visa-free access of up to 90 days within a 180-day period. If you want to stay in the EU for longer than 90 days, then you have to follow individual nations’ immigration rules. 

One of the first things to happen after the vote to leave the EU in 2016 by then-Prime Minister, Theresa May, was to say that EU nationals in the UK are welcome. This was repeated by Boris Johnson when he became Prime Minister in 2019. As a result, the UK created the EU Settlement Scheme.

EU, EEA or Swiss citizens and their families can apply to the EU Settlement Scheme to continue living in the UK after 30 June 2021. The deadline for applying is 30 June 2021. You must have started living in the UK by 31 December 2020.

Theresa May pushed hard for the EU to make a declaration in line with the UK’s Settled Status Scheme. Unfortunately, the EU has not reciprocated. This means that, for UK nationals living in the EU, they will have to apply through their respective countries for residence.

If you are going to temporarily live in the EU for business purposes, the UK and the EU have agreed on a broad range of reciprocal commitments. For example, intra-corporate transferees who need to work in the EU can continue to do so but the maximum duration of such transfers is now capped at three years before the transferee has to apply for a more permanent visa. 

THE LEVEL PLAYING FIELD, STATE AID AND SUBSIDIES 

Summary

• Rules on State Aid so British firms do not have an advantage over those in the EU.
• The EU offered zero tariffs in exchange that the UK did not offer overly-generous subsidies. 

The level playing field is an EU concept which means, for example, a Belgian steel plant is not at a disadvantage to one in the Netherlands. That is to say, the Dutch government can not grant subsidies to a Dutch steel plant as that would give them an advantage over the Belgian plant.

During the negotiations, the EU was very keen that British firms were not given an advantage of UK State Aid which could see industry leave the EU for the UK. The EU offered zero tariffs in exchange that the UK did not offer overly-generous subsidies. 

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Nic Conner is Rangewell’s Research Consultant. Nic worked for Vote Leave during the referendum. Of the six-person UK negotiation team, Nic has known and worked closely with four of them over the past decade. Prior and after the referendum, Nic has worked in business finance alongside SMEs and their advisors.