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International Trade after 1 January 2021: EU-UK Trade and Cooperation Agreement

On 24 December 2020 the UK and the European Union agreed a Trade and Cooperation Agreement ("EU Trade Deal"), which provisionally took effect from 1 January 2021.

From that date, the UK is no longer part of the EU's Customs Union and Single Market.

In this article we explore the most immediate commercial implications of the UK leaving the EU including how the EU Trade Deal has changed the law and trading arrangements with the EU by way of eight headline points.

Our experts are on hand to provide you with the necessary support and advice you need to adjust and adapt to the new arrangements.

Overview of the EU Trade Deal

The EU Trade Deal has clarified many outstanding issues and increased certainty for the majority of businesses (especially those exporting goods to Northern Ireland and the EU) and consumers in general.

There are however three important caveats to the positive impression given by the paragraph above:

  • “increased certainty” is not, for the moment, to be interpreted as shorthand for “increased ease”: there is plenty of detail for businesses and consumers to digest in order to become familiar with the new regime and there will no doubt be a period of adjustment before the new arrangements become an accepted part of “business as usual”.
  • many operators in select sectors of the economy (such as financial services) may not welcome the new reality that is presented to them, and significant adjustment may be required for some businesses to adjust to the “new normal”.
  • the EU Trade Deal is not a comprehensive statement of the ongoing relationship between the UK and the EU: certain issues were not addressed by the EU Trade Deal and are still to be resolved. For example, cooperation on foreign policy, external security and defence are not covered by the EU Trade Deal, and those businesses that have a particular sensitivity to developments in these areas of policy will need to await further developments.

Jump to the matters that most affect you:

Trading in Goods

Trading in Services

Trading: Goods and Services - VAT

Movement of workers

Data transfers and GDPR

Haulage by Air and Road

Energy & Climate

 

Enforcement of Judgments

Trading in Goods - Certainty for trade in goods

Summary

Action Points

Zero tariffs and quotas will apply to goods traded between the EU and the UK, provided that they meet "rules of origin". The EU's "Union Customs Code" will also apply so that customs formalities and checks (including exit and entry summary declarations) will apply to exports and imports to and from the EU. Some traders may also need to provide export health certificates, security and safety data and special licences if trading in certain goods.

There is also effectively a customs border between Great Britain and Northern Ireland, but none between Northern Ireland and the Republic of Ireland (and indeed the EU):

  • declarations are not needed for any goods moving between Northern Ireland and the EU but declarations must be made and tariffs may be due when bringing goods into Northern Ireland from Great Britain or from outside the EU.
  • most goods moving from Northern Ireland to Great Britain do not need to be declared but certain restricted goods, controlled goods and goods where duty is required may need to be declared – whether goods fall into these categories is very much part of the detail and beyond the scope of this article.

Business that rely on imported goods in their supply chain, and those that export goods to customers in the EU, will need to account for possible delays when committing to delivery times with their customers.

 

Business that deal in goods which do not meet the “rules of origin”, restricted goods, controlled goods and goods where duty is required need to ensure that both the delay and cost are allocated in their contracts with customers and those that haul the goods. 

Trading in Services - Uncertainty for trade in services

Summary

Action Points

The UK has now lost its enhanced level of access based on EU membership, the EU Trade Deal treating UK service providers as from a third country. The EU Trade Deal does include measures to prevent the EU from adopting a more restrictive approach in the future. However, businesses may find that they are treated less generously than competing providers based in the EU.

 

In some highly regulated sectors such as financial services or broadcasting, businesses based in the UK will simply no longer be authorised to carry out the same range of activities that equivalent EU businesses can undertake.

 

The UK has lost its "passporting rights", which allow financial services firms, and firms in other regulated sectors, to access the EU's Single Market. Without these rights, UK firms have to comply with a Member State's local regulatory requirements to work for clients in that Member State.

 

Whilst perhaps sub-optimal for those sectors that have relied on passporting rights, there is light on the horizon: the EU Trade Deal confirms the EU and UK's intention to establish new regulatory arrangements regarding services, which will likely happen in Q1 2021. The EU has stated that it requires further information in order to make these decisions, particularly in relation to potential regulatory divergence by the UK from the EU in the future.

In order to continue to access the single market without passporting, UK-based undertakings that have relied on their passporting rights will either have to comply with the different requirements of individual member states or rely on “equivalence decisions” granted by the EU.

 

With the exception of certain firms operating as central securities depositaries and clearing houses (central clearing counterparties) which received a time-limited equivalence decision,  no  other equivalence decision has yet been made by the EU, so in the general setting and in the near-term, UK undertakings will need to ensure that they rely on the local regulatory requirements of each member state in which the services are sold.

Trading in Goods and/or Services - VAT

Summary

Action Points

With regards to VAT from a UK perspective:

  • exports become zero-rated (subject to proof of export) while imports become subject to import VAT.
  • imports into the EU are subject to payment of import VAT, regardless of whether the import benefits from tariff preferences.
  • imports into the UK will be subject to UK import VAT.
  • excise goods imported into the UK from the EU will be subject to excise payments on the same basis as imports from the rest of the world.

All businesses should check the terms of their current contracts and invoices going forward to ensure that the payment of VAT is properly accounted for in accordance with the terms of the contract. Depending on how the contract is drafted, there may be some perverse or unintended outcomes that should be budgeted for.

 

All businesses should review their standard terms of business to ensure that the drafting relating to VAT is fit for purpose and takes into account any additional costs that is borne by the business as a result of changes in arrangements in its supply chain. 

 

 

Movement of workers - movement of persons and professional qualifications

Summary

Action Points

From the UK perspective there are two sides to the coin:

  • outbound UK citizens: UK citizens now need visas for stays over 90 days in a 180 day period in the EU. UK citizens must ensure they comply with the immigration laws of the EU Member State they are travelling to/working in.
  • inbound EU citizens: EU nationals can stay in the UK as visitors for up to 6 months. This includes visiting for the purposes of their employment overseas (e.g. attending meetings with a UK based customer or signing a contract) provided that no active work is being carried out in the UK. For long-term stays or work purposes, the UK has implemented a points-based immigration system that treats EU and non-EU citizens equally so workers from outside the UK (other than Irish citizens) must apply for permission in advance.

 

UK professional qualifications are no longer automatically recognised in the EU - the right to practise a regulated professional service in the UK does not grant the right to practise in an EU Member State.

Businesses will need to bear in mind the requirements for visas when sending their operatives to the EU to conduct business – especially when workers start travelling to the EU for holidays once the Covid-19 travel restrictions have come to an end.

 

UK businesses will need to ensure that, when  recruiting workers from the EU states, the workers have the right to work in the UK prior to them starting work and that this process is accounted for within the recruitment process.

 

As part of the UK’s points based immigration system, it is now mandatory that the UK business has a Sponsor Licence from the Home Office before the business may employ (‘sponsor’) EU nationals who were not resident in the UK prior to 31 December 2020. This is the same sponsorship process that was already in place for non-EU nationals. Businesses will therefore need to apply for a Sponsor Licence and have the Licence in place before recruiting workers from the EU. 

 

Businesses that provide or buy-in professional services (such as services rendered by doctors, nurses, dentists, pharmacists, vets, engineers or architects) should ensure that the qualifications of those delivering the relevant expertise are recognised in the Member State where the skills are being practiced. Contracts for the supply of these services should be reviewed to check how the contract allocates the responsibility for ensuring that the advice is given by properly-qualified individuals. Customers should not assume that responsibility always rests with the provider of the services. 

Data transfers and GDPR - Data Protection Regulation Overhaul

 Summary

Action Points

The UK has implemented a "UK GDPR" to regulate the protection of personal data.

 

As a "third country", the UK must have certain safeguards in place for data being transferred to the UK from the EU. One such safeguard is an "adequacy decision".

 

A 4-6 month transition period is currently in place for data flows from the EU to the UK pending an EU adequacy decision. Transfers of personal data from the EU to the UK  will not be treated as restricted transfers until 1 May 2021, which shall automatically extend to 1 July 2021 unless either the UK or EU object.

The 4-6 month transition period provides a short-term reprieve for businesses that are dependent on data flows between the EU and UK and so on a practical level, data transfers can proceed in accordance with the GDPR prior to the EU Trade Deal.

 

An adequacy decision from the EU is not guaranteed: businesses should adopt a risk-based review of their arrangements in order to ascertain what plans can be implemented in the event that there is no adequacy decision and the current transition period is not extended. This should include consideration of safeguards for the protection of personal data.

 

Businesses that deal in and receive data between the UK and EU should:

  • Review their current contractual arrangements and establish the risk and disruption to their business which may arise if no adequacy decision is achieved and the transition period is not extended, as this would involve entering into legally recognised safeguards (such as the standard contractual clauses issued by the European Commission).
  • Review future contracts and standard terms of business in order to ensure that the risks are allocated as intended and costed appropriately and that the relevant data protection provisions remain up to date following Brexit (for example, references to data protection laws or terms prohibiting ex-EU transfers of data may need updating).
  • Appointment of a Representative within the EU may be required for UK companies that are processing EU citizen data.

Haulage by Air and Road – Transport and Travel Overhaul

Summary

Action Points

For the Aviation Sector, UK carriers:

  • have lost traffic rights within the EU - they can carry passengers and cargo between points in the EU and the UK, but not between two points in the EU.
  • cannot operate passenger flights onwards to or from the EU (e.g London-Amsterdam-Bangkok).
  • will need an agreement with the relevant Member State to allow onward carriage of goods to/from a third country (e.g. Paris-London-New York).

In terms of road haulage, only basic cabotage is allowed. EU and UK hauliers can move goods to and from any point in the other party's territory, but UK hauliers can only perform one cabotage operation.

The new position for aviation will no doubt be a blow to an industry hugely affected by Covid-19. Unless there is a further agreement on the topic (perhaps unlikely whilst EU carriers will also be suffering from Covid-19 strain) the UK-based aviation sector will need to adjust on a permanent basis to the restrictions on their business model.  

Road hauliers and those depending on it will need to come to terms with the added complication (and inconvenience and possible delay and increase in costs) that arises from the new restrictions on UK road hauliers. The restriction to one cabotage operation in particular may cause some decrease in efficiency and lost opportunity. Hauliers should:

  • Review their current haulage contracts to ascertain to what extent the losses flowing  from decreased efficiency and lost opportunity can be passed onto customers.
  • Update pricing models for new contracts to account for the less flexible trading environment.

 

Energy & Climate - Regulation Overhaul

Summary

Action Points

Great Britain is no longer part of the EU ETS (European Union Emissions Trading System) or the European Atomic Energy Community (Euratom) and cannot trade nuclear material and technology with Euratom. Northern Ireland Electricity Generators continue to participate in the EU ETS to preserve the SEM (Single Electricity Market) with Ireland.

 

A December 2020 BEIS Energy White Paper suggests that the UK Government will implement a UK ETS to replace the EU ETS but it has not been confirmed when this scheme will come into force and limited details have been given regarding its operation.

 

Those UK operators formerly subject to and working within the EU ETS will need to keep a keen eye on developments and ensure that they are in a position to act quickly when the details of the new regime are known.

 

For example, waste PFI contractors may need to serve change in law notices within strict timescales under their contracts with waste disposal authorities. Similarly waste disposal authorities should prepare to respond to such notices. 

Enforcement of Judgments – the Lugano Convention and the Hague Convention

Summary

Action Points

The UK has submitted its application to accede to the Lugano Convention, which is the instrument through which judgments obtained in the courts of different countries are mutually recognised and enforceable.

 

Whilst many expect the UK’s application to proceed, such that the judgments obtained in the UK courts are recognised and enforceable in the courts of the EU member states, this is by no means guaranteed, or delays may be experienced meaning that the UK does not accede to the Lugano Convention promptly.

 

However, the Lugano Convention excludes insolvency proceedings and judgments from automatic or reciprocal recognition. Separate recognition will be required (either foreign insolvency to be recognised in England and Wales, or insolvency within England and Wales to be recognised in other jurisdictions) by other means. This might include the UNCITRAL Model Law on cross border insolvency, where both relevant jurisdictions are signatories.

 

The UK has however already acceded - in its own right rather than as an EU Member State - to the Hague Convention, effective from 1 January 2021. The Hague Convention ensures that exclusive jurisdiction clauses and judgments pursuant to these clauses are recognised and enforced by the Convention's contracting parties, which includes the EU. However, the Hague Convention does not provide reciprocal recognition and enforcement of interim measures, for example, injunctions and freezing orders.

 

The Hague Convention is currently (until the UK accedes to the Lugano Convention) the only primary mechanism in place for the UK on cross-border enforcement matters.

 

There are transitional arrangements in place for claims that are currently issued in the courts of both the UK and EU. The rules are, however, complex and it is important for anyone pursuing a claim or defending a claim to establish whether:

  • the judgment will be enforceable against the defendant; and
  • any other action can or should be taken to preserve rights or provide strategic leverage in pursuing or defending a claim.

 

Until the UK accedes to the Lugano Convention, and if the Hague Convention does not enable enforcement of the remedy sought, then it will likely fall to the UK court or EU Member State court (depending on which forum is sought) to apply their own domestic laws and conflict of law rules to determine matters of jurisdiction and the enforceability of judgements.

 

Those pursuing or defending new claims should establish whether the course of action taken in enforcing a claim will result in an enforceable action and act accordingly.

 

For insolvency matters where there are assets in multiple jurisdictions, creditors or office holders will need to carefully consider whether and how recognition of another jurisdiction’s insolvency process or judgments may be achieved prior to commencement of the insolvency.

 

 

 For more information on this article please contact Jonathan Croley.

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