What Does it Mean to be Outside the EU?

Key facts: 

• The UK left the EU on 31 January 2020.
• The transition period started on 1 February 2020 with no changes for businesses for the duration of the transition.
• The transition period ended on 31 December 2020 and the UK officially left the EU at 23.00 on 31 December 2020.
• A Free Trade Deal between the UK and the EU has been agreed and entered into on 31 December 2020 which replaced the previous. The agreement became effective from 1 January 2021.

The UK becomes a “third country”

After exiting the EU on 31 December 2020 the UK has fully left the EU’s structures and has become a “third country”, a term for a country outside the EU. The EU trades with third countries on the basis of World Trade Organization rules (WTO), except in areas where there is a Free Trade Agreement with the EU. The aim is to have a deal with the best possible access for UK and EU businesses to each other’s markets, one that goes beyond the WTO rules.

The UK’s transition from EU member to third country with a Free Trade Agreement has happened in three phases:

Phase 1: The Withdrawal Agreement, which listed the terms of leaving (e.g. monies due, citizens’ rights, Northern Irish border).

Phase 2: During the transition period, the UK and the EU were negotiating future access to each other’s markets while businesses continue to trade under the rules of the EU internal market (the “Single Market”).

Phase 3: The  UK-EU Free Trade Agreement has been entered into which defines the new terms of access to the EU market.

What does the post-Brexit free trade deal mean for businesses?

A Free Trade Agreement aims creates market access conditions that go beyond the baseline WTO rules.  The agreement covers not just trade in goods and services, but also a broad range of other areas, such as investment, competition, State aid, tax transparency, air and road transport, energy and sustainability, fisheries, data protection, and social security coordination.

Key positive outcomes for businesses:

• No tariffs or quotas for goods. There will be no tariffs or quotas for goods traded between the UK and EU.  However, this is accompanied by a number of new customs procedures and formalities, including completing and submitting customs declarations, new ‘rules of origin’ requirements, which are needed in order to qualify for the tariff-free, quota-free treatment.
• Reducing barriers to trade. Specific provisions were agreed to reduce the non-tariff barriers for medical products, automotive, chemical products, organic products and wine.
• Government procurement. The UK and EU agreed to continue to allow access for their respective businesses to bid for each other’s government procurement contracts, going beyond the obligations set out in the WTO Government Procurement Agreement.
• Reduced barriers for services providers. In principle, service providers will not need to establish a local presence to trade within each other’s markets – and they will be able to avoid economic needs tests, residency requirements and a range of other non-tariff barriers. However, there are very lengthy reservations listed to these main provisions.  The parties have agreed ‘national treatment’ to prevent discrimination between nationals and ‘most favoured nation’ provisions to ensure the treatment of service suppliers keep pace with either party’s future free trade agreements.
• Road haulage. Hauliers can continue to operate between the UK and EU, and to transit through UK or EU territory. UK hauliers will also not need European Conference of Ministers of Transport (ECMT) permits.
• Air transport. Air transport of passengers and cargo can continue without quantitative restrictions on capacity or frequency (although UK airlines will no longer be able to fly between two points in the EU, so called ‘onward legs’). With regards to aviation safety, both sides will recognise the validity of each other’s safety certificates and licenses.
• Access to EU programmes. The UK will continue to have access to various EU programmes, including: Horizon Europe, the Euratom Research and Training Programme, the fusion test facility ITER, Copernicus, and access to the EU’s Satellite Surveillance & Tracking (SST) services. However, this will not include the Erasmus student programme.
• UK-Turkey trade agreement. The free trade deal has enabled the UK to reach a continuity trade agreement with Turkey which will be extremely beneficial for many supply chains which rely on the EU-Turkey Customs Union to source products. The UK and Turkey have committed to expanding this agreement in the future to include services trade and investment.
• Business mobility rights. Business mobility rights have been agreed, i.e. attending conferences, seminars, meetings for short-term stays, permitted for 90 days in any 180 day period.  Intra-company transfers (with spouses and dependents), contract and self-employed working are also supported.  Travellers will otherwise rely on the rules of individual member states for the right to work as the free movement of people ends.
• Intellectually property. There is a wide-ranging protection and enforcement of intellectual property rights, including patents, trademarks and designs, at least in line with existing international agreements.
• The agreement is limited to adherence to international frameworks and cooperation in areas such as tax and debt recovery, including VAT, customs duties and excise.  UK autonomy on tax rates and rules is preserved.

Key negative outcomes for business

• New customs procedures and formalities. A return to full EU border formalities from 1 January 2021 means that goods entering the EU from the UK will require customs declarations to be completed, including proof of origin, without which duties could become payable. Goods entering the UK from the EU will be subject to a phased implantation of border controls over six months.  Specific arrangements for Northern Ireland will apply, including the application of EU customs duties applying to goods entering from Great Britain deemed at risk of entering the EU.
• Treatment of the UK as a ’third country’. UK is now treated as a ‘third country’ for regulatory purposes by the EU, requiring businesses to undertake additional processes for EU and UK approval for product and manufacturing standards. This is especially the case for the food items which will be subject to the EU’s SPS rules, such as some animal products and raw meet.
• Services trade. Although services provisions have been included, they do not go much beyond existing EU practice, and notable barriers will limit the scope of many services providers to trade between the EU and the UK.
• No new recognition of professional qualifications. Barriers to services trade include the end of the mutual recognition of professional qualifications and significant restrictions from the EU regarding the extent to which it commits to allowing UK service providers to access their EU customers.
• Tax. There are changes to the way VAT and withholding tax are applied, including in some cases payment of VAT at the border, loss of simplifications and additional registrations or administrative procedures apply.
• Conformity assessments. There is no agreement on the mutual recognition of conformity assessments, which means UK manufacturers will need to have their products assessed for compliance with an EU-notified body, and vice versa.
• Agrifood. The UK and EU have not agreed on how to reduce the burdens of sanitary and phytosanitary (SPS) checks and cooperation, which require enhanced regulation and physical checks for products of human, animal and plant origin. Agrifood businesses will be highly impacted, although the degree to which this is the case will depend on the implementation of the provisions of the Free Trade Agreement. There was also no agreement on geographical indications (GIs) beyond what was already set out in the Withdrawal Agreement.
• Trade remedies. The Free Trade Agreement includes virtually no restraints to prevent the UK and EU using trade remedies against each other. Trade remedies are policy tools that allow governments to take remedial action against imports which cause injury to domestic industry. This means that the level playing provisions may have less power than expected, because either side can revert to trade remedy action as an alternative resort.

Issues which have not been agreed yet

• Data adequacy: Among the largest issues will be the data adequacy decision for which a temporary arrangement has been put in place to allow data to continue being transferred from the EU to the UK from 1 January. This will initially last for four months (extendable to six months) while the European Commission undertakes to make its adequacy decision. For companies which transfer such data, this additional breathing period should allow for preparations to ensure compliance across their data collection, transfer, storage and processing locations.
• Financial services: UK and EU have committed to setting out a framework for regulatory cooperation in financial services by March 2021 and will discuss the equivalence decisions which the EU has yet to make. The EU had made temporary equivalence decisions in respect of clearing (for 18 months), and central securities depositaries, recognising the importance of UK infrastructure to EU markets and the potential financial stability risks of a cliff edge termination. The EU had not otherwise mirrored the UK’s other equivalence decisions or taken steps to smooth the transition.

What happens next?

As there is no grace period for businesses to prepare, from 1 January 2021 businesses will need to meet many of the new requirements imposed as a result of the UK leaving the EU’s single market and customs union.  These include new customs documentation and procedures, immigration changes and reduced services market access.

Businesses will also have to adapt to a changing environment through 2021 as the UK has announced a series of measures to stage the implementation on the customs requirements for products arriving from the EU, as well as phase-in periods for the UK’s new regulatory regime around product safety and chemicals.

The EU has also announced that additional flexibility for the documentary evidence necessary to qualify for rules of origin will be granted in the first year of the application of the Free Trade Agreement. However exact details on this have yet to be confirmed.

What businesses should do 

• Understand what the new rules will mean for your business activity by using the Government Brexit checker tool and the EU Readiness Notices.
• Talk to investors/funders and insurers to ensure financial support and cover is sufficient and remains valid.
• Check and brief your team which should include representatives from all the impacted business functions including supply chain, procurement, HR, legal and IT. Ensure representatives are senior enough to make quick decisions.
• Communicate with your priority customers and suppliers on any expected Brexit impacts on your business in light of the Free Trade Agreement and understand their positions. Appoint appropriate contact points within your business for those customers and suppliers which can be reached over the coming days.”
• Apply for relevant EORI (Economic Operator Registration and Identification) numbers/VAT registrations in Great Britain, EU and Northern Ireland or confirm the status of these applications. These will be crucial to being able to complete the necessary customs procedures and declarations.  You cannot trade with the EU if you do not have an EORI number.
• Closely monitor the impact of Brexit on your cost base. Prepare to reassess operations which may become unprofitable and quickly revise your pricing models.
• Collate a priority checklist of regulatory requirements (including registrations, labelling and markings) required for shipments of products due to arrive after 31 December 2020. Be aware of the risks of non-compliance and implement changes needed.
• Apply for postponed VAT accounting – this allows you to defer paying VAT upon importation of goods. Instead your import VAT will be paid on your usual VAT return (https://www.gov.uk/guidance/check-when-you-can-account-for-import-vat-on).
• Apply for a Duty Deferment Account – this will allow you to defer paying your import duty and duty can be paid once a month rather than every time you import your goods. Currently HMRC has waived the need to put up a Customs Comprehensive Guarantee and, if you qualify, will give you a £10,000 credit limit per month. More information can be found here.
• Check your commodity codes. You need to ensure you are using the correct Commodity Code for your goods. There are many implications such as financial or criminal penalties if you are using the wrong codes. Businesses can check here.
• Check whether import duty may be payable on your goods after 1st January 2021 if importing goods from the EU (https://www.gov.uk/check-duties-customs-exporting).
• If trading with Northern Ireland – register on the TSS Trader Support Service (https://www.gov.uk/guidance/trader-support-service).
• If trading with Northern Ireland – ensure you have an XI EORI number. You cannot trade with NI without one (https://www.gov.uk/eori).
• Engage with relevant government bodies and trade professionals for any additional support and guidance.