Don’t forget about brexit: what no deal could mean for your business
Over the past months, one tiny virus has successfully captured the world’s attention - the Covid-19 pandemic has completely turned our lives upside down, and many previously prominent issues, including Brexit, have fallen to the wayside. It has, in the past, seemed impossible to turn on any form of British news broadcast without being bombarded by Brexit news, today, you often have to dig to find it. Nevertheless, Brexit is still coming, and there is a chance that it’s going to be no-deal. So, what does this mean for business?
On 23rd of June 2016, the citizens of the UK voted to leave the European Union (EU) and over three years later on the 31st of January 2020, the UK officially left the EU. However, Brexit is still not a ‘done deal’; there are still several details that need to be finalised which will impact UK businesses, both small and large. At present, the EU market consists of 28 countries with 500 million potential customers. Not being part of such a large trade union will eliminate the UK’s rights to the four freedoms: free movement of goods, free movement of services and free movement of people and capital, which, up until January 2020, the UK was privy to.
There is a great deal of uncertainty surrounding the future of UK businesses as a result of Brexit. No country has ever left a significant trading bloc in this manner before. There is no precedent on which to rely, and there is currently a great deal of confusion surrounding what these developments will mean for businesses. The lack of clarity regarding what the outcomes of Brexit will be are likely to impact future planning in industry for anywhere between two and ten years while the UK reaches concrete agreements with the EU for the future. Article 50 of the EU treaty indicates that the UK must negotiate a new relationship within two years – this has not yet been achieved. If the UK gains status as a third country (one that is not a member of the EU at all) through a no-deal Brexit, then this will have significant impacts to the economy and how businesses are run.
The UK is currently in a transition period which ends on the 31st of December 2020. This means that the UK is not a member of the EU during this time, but trade and other deals within the EU can still be carried out, and the UK remains in the single market and the customs union. This means that a range of outcomes are possible until the transition period is over. For instance, it could mean abrupt termination of any intra-union transactions. Ministers believe that Britain and the EU will fail to sign a post-Brexit trade deal, with governments working on the assumption that Britain will trade on Europe on World Trade Organisation (WTO) terms when the transition period ends. This would mean tariffs on exports to the EU and customs checks at borders.
However, the UK government may be able to introduce some measures that will favour the UK economy even in the case of no-deal. For example, the government has announced that £344 million will be spent on border and customs operations to make the process easier and more efficient. The government also announced that 88,000 companies would be enrolled in a new customs system to ensure lorries are ready for customs. Economists have also suggested that cutting the current 20% VAT paid on goods in shops would be a means to support consumer spending as a no-deal is estimated to cause a decrease in the value of the pound. This decrease in the pound would mean higher imports, increased inflation, and consumers would not be able to afford to buy products. Paul Dales, the chief UK economist of the consultancy Capital Economics, said that the WTO rules could actually be an advantage, bringing in about £10 billion extra per year. This money could be used to support decreased taxes to maintain consumer spending. Businesses are being forced to take a flexible approach, given the volatile nature of no-deal and what exactly this might mean for the country.
The EU is one of the most significant contributors to the UK economy, and a no-deal Brexit makes the future of trading look bleak. The largest UK export market is the European Union; in 2018 the UK exported 46% of its goods to the EU, and 53% of all imports that arrived in the UK came from the EU. Two of the UK's biggest trading partners at the moment are also in the EU: Germany (exports of £36.3 billion) and France (exports of £23.6 billion) – second and third only to the United States.
In June 2020, in a joint letter to Prime Minister Boris Johnson, UK company entrepreneurs, CEOs and founders of companies like Ebookers and Zoopla, outlined the kind of damaging impact a no-deal Brexit could have on businesses and the economy. The letter stated that businesses are not in a position to prepare for large changes in trading rules by the end of the transition period, especially with the unprecedented upheaval caused by the Covid-19 pandemic. There is widespread concern regarding the absence of progress in EU trade talks, given the approaching transition period end date, and the sentiments of UK business leaders demonstrate the real risk of a no-deal Brexit occurring, and the negative impacts it is likely to have.
The European Union (Withdrawal) Act was passed in 2018, which repeals the European Communities Act 1972 and has aimed to incorporate EU laws into UK law in order to make the transition easier and ensure continuity. This means that, on the whole, no laws should change significantly post-Brexit. The only changes relate to the requirement for interaction with EU institutions and bodies, as these bodies will no longer have jurisdiction in the UK. However, laws will have to be put into place to allow communication between the UK and these institutions to oversee any future relationship agreements. Legislation on import and export duties and taxes may also have to change, given that the UK previously traded for free within the EU.
If no deal is agreed upon, then the UK will not have access to any of the four freedoms, which would mean that goods travelling from the UK to the EU will not be sold into the internal market. Customs duties will apply in this case, making EU trade more expensive for UK retailers. Small to medium-sized retailers will be hit the hardest; the rising costs of exporting to the EU are likely to prove most difficult for smaller businesses which will struggle to keep up with their larger, more prominent, counterparts. In the case of no-deal, WTO terms will come into force. These terms are notoriously complicated, and the UK would have to apply tariffs on goods being imported into the UK from the EU, whilst the EU will use third country tariffs and quotas for UK goods. So, what does this mean? In a nutshell - the UK would have to pay a large amount of taxes when selling goods to the EU market. The Confederation of British Industry (CBI) estimates that a no-deal Brexit could mean up to 90% of the UK’s goods exported to the EU will be subjected to tariffs.
The internal UK market is expected to remain strong, but this will obviously only benefit businesses based solely in the UK, and it’s unlikely that there will be many opportunities for new cross-border relationships between countries. HMRC has estimated that British businesses would have to spend an additional £15 billion annually on paperwork in the event of a no-deal, according to the Financial Times. Brexit secretary Dominic Raab said the government had set aside £3 billion for Brexit staffing and administration expenses. Businesses will be faced with higher administration costs as they prepare for Brexit, and there are only five months left to prepare. Everyone is on a tight schedule, which has been exacerbated by the expenses and losses incurred as a result of the global Covid-19 pandemic.
A report from the National Audit Office (NAO) claims that Defra (the Department for Environment, Food and Rural Affairs, which was the governmental department most affected by Brexit), will most likely not be able to deliver everything it initially intended to in a no-deal scenario and that the chemicals industry will probably be one of the hardest-hit sectors. A “good EU trade deal with close alignment on chemical regulation and standards is the only way to avoid chemical supply chain disruption and harm to our economy” said Peter Newport, chief executive of the Chemical Business Association, in the June 2020 letter to Johnson.
Business travel will be affected by new immigration checks and UK nationals employed in other countries may lose rights and healthcare advantages in their country of residence. Individuals’ situations will vary, however, depending on the country they are in as many countries lack legislation on employment law and immigration.
EU citizens living in the UK have already had the opportunity to apply for “settled status”, which gives individuals indefinite leave to remain. To achieve this status, they must have been living in the UK for a continuous period of 5 years and started living in the UK before the 31st of December 2020. If an individual doesn’t have continuous residence in the UK for five years, then it is possible to apply for what has been termed ‘pre-settled status’ if they have been in the UK for between six months and five years. The settled and pre-settled status will give individuals the right to continue to work in the UK. It’s important to note that this application for status must be carried out by the individuals themselves, and not the business employing them. EU citizens that arrive in the UK after 31 December 2020 will be subject to the UK’s immigration rules.
As long as your European employees have been granted settled or pre-settled status, their employment should not change significantly. Businesses are already obliged to check an individual’s right to work in the UK, this simply means adjusting verification steps for EU member state employees.
Brexit will mean that the UK will no longer be awarded EU trademark protection to brands in the UK. The Intellectual Property (IP) system will continue as it is now until the end of the transition period on the 31st of December 2020. After this date, the Intellectual Property Office (IPO) will convert 1.4 million EU trademarks and 700,000 EU designs to UK rights which will come into effect on the 1st of January 2021.
There are several international treaties that regulate copyright, so, even though the UK is leaving the EU, copyright works will still be protected in the EU and UK respectively under these treaties. The UK’s membership status in the EU will not impact the participation of the UK in these treaties. However, there will be changes concerning the portability of online content services, sui generis database rights, and copyright clearance in satellite broadcasting.
To minimise the impact of a possible no-deal, businesses are advised to: 1. Perform a global check-up of commercial agreements 2. Update their privacy notice 3. Implement a standard data protection clause – as GDPR will no longer apply 4. Register EU trademarks in the UK
If a no-deal Brexit does happen, the UK will be regarded as a third country when it exits the EU. Therefore, the government is advising businesses to prepare appropriate contracts to ensure that any transfer of EU citizens’ data to the UK is compliant with privacy laws. Transfer of data from organisations within the EU to ones in the UK will be subject to strict data transfer rules which are governed by the EU General Data Protection Regulation. EU businesses will have to ensure the transfer of private data to the UK is lawful, and this will mean that data transfer will be a lot more complicated than it is now.
According to the government, the transfer of personal data from the UK to the EU will remain unaffected. The UK will not be classed as an “adequate country”, and will, therefore, have to be in compliance with Articles 46-49 of GDPR regulations regarding sending personal data to the UK. Businesses should work with any partners they may have that are located in the EU to ensure the compliant transfer of data between the UK and the EU. The government is advising that data protection clauses should be added to contracts to cover the rights of individuals when data is being transferred.
In the case of a no-deal Brexit, the EU will also no longer recognise many products that have been registered or tested in the UK – which will have a significant impact on highly regulated sectors such as the pharmaceutical and chemical sectors.
It has been emphasised by the Government that the Climate Change Act, which is a piece of domestic legislation unique to the UK, should not be changed by Brexit. From the 1st of January 2021, a new statutory body will come into play – the Office for Environmental Protection (OEP) which will oversee compliance with environmental law and they will be able to bring legal proceedings if necessary.
If a no-deal Brexit was to transpire, current UK businesses that are part of the EU Emissions Trading System (EU ETS) will no longer be part of this trading system. The EU ETS monitors and produces annual reports on operators’ emissions. Operators are allocated annual emission allowances to their ETS union Registry account, where they must pay fees based on their carbon dioxide emissions. Businesses should consider opening another account in another member states’ registry to retain their access to ETS allowances.
The Covid-19 pandemic has caused widespread economic damage and caused significant financial losses. Smaller businesses have been hit particularly hard, many have found themselves burning through cash reserves saved in preparation for a no-deal Brexit and were forced to furlough staff. It is estimated that one logistics firm would have to hire 300 new border officials to start preparing for a no-trade deal Brexit, which they currently cannot afford to do given their already limited resources. The Federation of Small Businesses (FSB) has produced guidance online to help small businesses plan for the possibility of a no-deal scenario.
In order to understand what a no-deal Brexit could mean for you and your business specifically, it’s a good idea to run a Brexit impact assessment. Companies should, of course, make sure to keep up to date with the latest developments and look at what the potential risks are to their business and try to take necessary precautions where possible. Political leaders have said that a good deal with the EU is needed for the future of the economy, jobs, and livelihoods of the population. Whether or not this will be the outcome remains to be seen.