Brexit – just three months to prepare your business left
The odds are now stacked against the EU27 and the UK agreeing a comprehensive framework for trade in goods and services among others. As the UK becomes a third country on 01 January 2021, you and your business will have to calculate with increased costs, barriers to trade and travel. Only three months are left for you to prepare for the changes and the challenges of doing business in and with the UK post-withdrawal. These changes pose significant risks and costs.
The changes to doing business resulting from the UK's withdrawal from the EU are wide-ranging, indeed covering every aspect of business and life. Their impact on business depends on the activities concerned, be it sale of goods, cross-border manufacturing operations, providing services or maintaining a commercial or manufacturing presence in the UK or the EU27. Even if some small agreement can be reached between the parties, it is certain that Brexit will generate additional costs and risks for all economic operators, both in the UK and in the EU27.
General remarks on key risks and challenges
Businesses need to prepare themselves by identifying and addressing the challenges and risks in advance. BEITEN BURKHARDT will support you in finding the right commercial and legal answer to all issues arising out of Brexit.
As mentioned, the changes and therefore the challenges and range of risks resulting from the UK's withdrawal from the EU encompass all aspects of doing business. Of course, the impact depends on the activities concerned, be it sale of goods, cross-border manufacturing operations, providing services or maintaining a commercial or manufacturing presence in the UK or the EU27. Nevertheless, we can group them into several broad categories that every person or company doing business with the UK should evaluate:
- The entire manufacturing and / or supply chain should be reviewed and eventually modified in light of Brexit.
- All contracts related to the UK, which will still be valid or have effects after the end of the transition period should be reviewed and eventually adapted or terminated.
- All cross-border shareholdings between the UK and EU27 countries that will continue after December 2020 should be reviewed and eventually modified.
All future movement and postings of persons and goods must be Brexit-proofed.
Manufacturing and supply chains
Brexit poses the greatest risks and challenges for manufacturing and supply chains, irrespective of whether a free trade agreement is concluded and what such an agreement may provide. From the outset, it should be emphasised that all known EU rules concerning free movement of goods, services, capital and people between EU27 countries and the UK will no longer apply. Disruption has been guaranteed! Additional paperwork at both ends, registration with the EU27 and with new UK bodies and new rules will become reality. At best, the UK and the EU will agree on a limited free trade deal as with for instance Canada, reducing or eliminating customs tariff rates but not paperwork and other new burdens or obstacles to trade.
When evaluating the consequences of Brexit and the possible need for action, you have to think of doing business with most other non-EU countries, for instance, India. This means the movement of goods between the UK and any EU27 country will be subject to customs control and the payment of duties. The UK will keep most of its tariffs at similar levels as the current EU28 tariff rates for industrial products, which will result in additional costs in manufacturing and supply chains. The origin of a product may now change. The burden for companies that carry out production steps in different countries will increase significantly, as will the costs of doing business in general.
For a retailer and trader additional costs for customs duties, customs procedures, delays for transport have to be taken into account in the business planning. For a manufacturer with a supply chain over the Channel, business will become much more complicated and costly. By way of example, Airbus mentioned additional costs in the order of one billion EUR. Consider the following: If a gas heating system made in Germany is installed in a motor vehicle manufactured in the UK, which is then sold in France, duties will have to be paid on the gas heating system in the UK and duties on the vehicle in France. Duties on the imported parts may possibly be refunded, but this will require further efforts and possibly delays.
As the shipping conditions change to those applicable to businesses in a third country, additional regulatory burdens for customs documents, taxes and import turnover tax will arise and pose challenges. Delays in crossing the UK/EU border are a likely result of additional export and import controls. This needs to be taken into account upfront. Thousands of additional customs officers have already been recruited border, new customs forms created and new electronic procedures foreseen. It is reported that the UK authorities will generate 215 million customs declarations a year and need 50,000 extra customs agents. The additional "red tape" would cost British businesses £7 billion.
A free trade agreement, should one be concluded, will only reduce these additional burdens to some extent. Indeed, such an agreement can avoid the levying of customs duties on goods originating within the area, but must lead to additional controls. Currently, once goods have cleared customs in one EU country, they can circulate freely within the EU. As of 2021, customs controls, origin checks and the like become necessary. Moreover, physical movement between countries for goods and persons will be subject to agreements on (air, road, rail and sea) transport.
To guarantee the conformity of goods with applicable standards will become more cumbersome. The CE-Marking and self-certification will be different in the UK. Product requirements will diverge over time. The certification (within the British, EU and other markets), recognition of certifying bodies and costs for meeting standards will pose additional challenges for manufacturers and traders alike. Today, there is a one-stop-shop for homologating chemicals, medicine, medical apparatus, pharmaceuticals, etc. On 01 January 2021, decades of progress towards frictionless will became history, with the irony that it had been the UK that pushed for the completion of the single or internal market in the 1980s! Additionally, tax-related issues have to be taken into account (for further details please see below).
For all of these reasons, trading, manufacturing and supply chains must be analysed in terms of economic viability and cost-effectiveness, and adapted if necessary. Companies should evaluate their costs and exposure, assuming the UK is India. They should review manufacturing and supply chains with their most important customers and suppliers:
- Identify the most important suppliers for each manufacturing site or trading operation. While economic importance of a part or operation will be key to identifying the importance in the manufacturing and supply chain, attention must be given to smaller, but strategic supply chain relationships which could have a big impact on both production and supply as well.
- Analyse supplies to and from the UK:
- How should supply chain relationships be configured, in particular will they be maintained or replaced, and how will contracts be adapted? For details see below “Contracts related to the UK”.
- How will the company react to foreseeable delays? Do you need to build-up stocks, look for additional or alternative suppliers, etc.?
- How will the company react to increasing costs and who will bear them? Increased costs as a result of customs duties, import turnover taxes, logistics, certifications for products, etc. need to be assessed and taken into account in business planning. Future contracts should include terms to apportion responsibilities for costs and risks; for details see below under “Contracts related to the UK”.
- As the movement of people will be restricted, which location should be used to provide services (installation, repair, maintenance)?
- If applications for industrial property rights (especially EU trademarks and community designs) were filed, which ones will need to be resubmitted or renewed in the UK or the EU27 after Brexit?
- If there are products with CE certification, which ones might have to meet new UK safety standards?
- Are IT systems prepared to handle new requirements for customs and statistical declarations, or can they be adapted? Possible diverging data protection requirements in the processing of data should be taken into account. As of the time of writing, the processing of EU27 personal data in the UK would be illegal.
- Identify the most important customers that are supplied from different factories, warehouses and other places.
- Analyse customers located in or supplied from the UK:
- How should supply chain relationships be configured post-Brexit, in particular should they be maintained or replaced, and how should contracts be adapted? (For details see below under “Contracts related to the UK”);
- How should the company manage increased costs and who should bear responsibility for these costs and risks?
Contracts related to the UK
Irrespective of a free trade agreement being agreed, if any, 2021 will bring additional costs and challenges. Contracts that will remain in effect beyond the Brexit transition period need to be examined closely. Some long-term contracts may no longer be adequate and need to be adapted or terminated. For new contracts that will still be valid after December 2020, the distribution of costs and responsibilities for risks should be taken into consideration when negotiating the contract and be spelled out in clear terms.
A key aspect that needs to be reviewed and (re-)considered in contracts is the apportionment of additional risks and costs as a result of Brexit. These can be caused by border delays, shortage of supplies, additional export/import controls and new documentation requirements. The changes and additional requirements regarding the modalities for the submission of documents and licenses, customs, VAT and import-turnover tax will give rise to long-term costs.
The UK will introduce its own procedures in steps, for instance accepting the CE marking for some time, but requiring as soon as possible a new UKCA (UK Conformity Assessed) sign to be used on imported products.
In addition, in the case of territorial limitations or industrial property rights, you must verify whether the contract still includes the UK after Brexit. If this is not the case, an evaluation should be performed as to whether it is appropriate to adapt the contract in question.
In most cases, the risks associated with Brexit have not been calculated and taken into account, nor have the attributions or sharing of responsibilities for new risks been agreed on and set out in the contract. Rarely will it be possible to terminate a contract because the implicit basis of the contract no longer exists (which can lead to an adaptation of the contract under German law) or for "frustration" (which can lead to termination of a contract under British law).
Irrespective of the conclusion of a free trade agreement, a company should:
- Identify the most important contracts (as deemed necessary for manufacturing and supply chains).
- Review the distribution of costs and the attribution of responsibilities for risks, taking into account the applicable law.
- In particular, review the distribution of additional costs and the allocation of responsibilities for risks arising from delays, supplementary services, new or modified approvals required (safety and certification standards) and for the impossibility to fulfil a contract.
- If these elements are not yet defined, will it be possible to terminate or adapt the contract?
- Which applicable law and jurisdiction were agreed upon?
- Adapt or terminate contracts with greater risks, if possible.
- Consider hedging for currency fluctuations.
- Conclude new contracts with an appropriate distribution of costs and attribution of risks, taking into account the choice of law and jurisdiction, and possibly arbitration rather than court proceedings in the case of dispute.
Post-Brexit and the transition period, companies established and operating in the UK will no longer have to abide by EU rules on the one hand but no longer benefit from EU rules with respect to their subsidiaries in EU countries on the other hand, unless UK law or international or bilateral agreements apply rules that are similar or identical to EU law. EU regulations regarding disclosure, incorporation, transparency, capital maintenance and alteration, cross-border restructurings and mergers will no longer apply to the UK. The same is true for rules on the common system of taxation applicable to interest and royalty payments between associated companies of different Member States, and on the elimination of double taxation within corporate groups from profit distribution between related EU companies. Whether or not this will have consequences for the company or group has to be examined in detail and solutions for any negative developments must be sought.
Over time, UK corporate law may start to deviate from the current EU law requirements, since it will no longer have to comply with EU regulations. UK companies hoping to establish a branch in the EU will, in principle, be subject to the more extensive disclosure formalities applicable to branches of non-EU companies. They will be treated as “third country companies”.
Companies that use the English legal form of limited company but are located in EU Member States will no longer be able to rely on the right of establishment granted by the European treaties. After Brexit, limited companies resident in Germany, for example, will no longer be regarded as corporations, but they will be subject to the rules for partnerships and might lose their limited liability status. As a consequence, shareholders of such limited companies may be personally liable without limitation. In order to remedy this situation, Germany allows a transformation of companies concerned into acceptable German company law forms.
An EU Member State may in the future require companies resident in the UK to appoint a fiscal representative when they register for VAT within the EU. The representative usually takes on joint and several liability for the VAT debts and accounts of the company.
Finally, Brexit will have consequences for European works councils, since the EWC agreements under UK law will not automatically endure. If the agreements are not renegotiated, EWCs will lose their UK members.
- Identify agreements concerning dividend and royalty payments, supplies as well as the supply of goods and services within the corporate group.
- Review which tax regulations apply if EU regulations are no longer applicable (see as a fall back double taxation agreements).
- Calculate the financial consequences of the upcoming changes and consider optimisation measures.
- If changes to the group structure are already being considered, review whether it is appropriate to implement them before or (if still useful) after Brexit.
- Determine cash flows within the company group and whether they need to be adapted.
- Determine whether there are accumulated profits and losses and whether they may be claimed or offset post-Brexit.
- If you have a limited company established in a EU27 country, prepare the appropriate adaptations under corporate law.
In our view, the above-mentioned points are the most important issues that you need to consider. However, every business is different and is confronted with different risks and challenges as a result of Brexit. Tailored legal advice is therefore strongly recommended. General information can be found on the websites of the EU and the UK at the following addresses: