I went to a great event at the Institute of Directors in London last week, on the impact of Brexit on the trade in services. That's critical for the British service providers and their trade partners to understand, because most services are not covered by free trade agreements (FTAs). So even if Britain were to leave the EU and eventually negotiate FTAs, there will always be "No Deal" for most UK services. That's a significant problem: services account for 80% of the UK economy, 80% of UK jobs and a third of UK exports, 40% of which go to EEA countries under the free movement of services. By contrast, for example, services accounted for 6% of total Irish exports to the UK and 9.3% of total imports from the UK in 2017.
Another issue to bear in mind is that (as in most economies) nearly all UK businesses are small: 5.4m UK businesses are either sole traders or employ up to 9 people - the figures for Ireland are very similar. And (unlike big businesses) most small businesses have been waiting to see what the UK government will do to protect their livelihoods... yet in terms of trade rules governing the export of UK services, the UK government is powerless (here's what their online Brexit-readiness checker told me).
Here at Leman, we've published a lot on how a base in Ireland can help you continue to trade with the EU - and that's also been part of my own personal/professional Brexit-proofing journey.
Let me know if we can help.
Where do you start?
Firstly, you need understand the impact of Brexit on your services business. Here are some key points from the recent IoD event:
- EU membership entitles firms to free movement of services based on mutual recognition of professional/trade qualifications and legislation that ensures individual member states don't drop their standards or supervision. That freedom falls away on Brexit day (subject to any agreed transition).
- Some services remain unregulated today (e.g. management consultants) and some are given mutual recognition status only at trade body level rather than by governments (e.g. architects). That shouldn't change on Brexit.
- Some regulation is based on outcomes, rather than dictating how qualifications are actually obtained or what subjects have to be studied to gain 'equivalence' or 'mutual recognition' (e.g. lawyers). This could diverge on Brexit, and 'equivalence' findings and mutual recognition will not automatically apply, can take a long time to be granted and can be subject to withdrawal on little notice without appeal.
- Financial services passporting represents the most advanced form of free movement in services, since authorisation in one EU member state allows certain services to be provided in all member states. That will not be possible after Brexit (subject to any transition, though the UK has been comparatively generous with its temporary permissions regime, for which you must register by Brexit day).
- In stark contrast to financial services passporting, the 'equivalence' regime that is available to third countries (and post-Brexit UK) is only available for certain types of financial infrastructure (e.g. exchanges) and some investment services, and can be withdrawn without appeal on 30 days notice (e.g. Swiss stock exchange) - so equivalence is not reliable.
- Other services that can be supplied to EU countries after Brexit will be based on a patchwork of national access rights, which vary in terms of scope and conditions.
- Outside the scope of EU trade rules (and where only minimum standards are set), the member states (like any other country in the world) can set tougher standards where they see greater potential adverse impact. The UK will be treated like any other non-EU country for that purpose.
- There is a WTO rule (article 7 of GATS) aimed at preventing one member country from discriminating against another member ('most favoured nations' or 'MFN'). Free trade agreements also contain MFN clauses that require one party to offer the other any similar benefit that has been offered to another country. The EU seems to ignore the WTO requirement (which the Swiss have complained about to no effect so far), but does allow MFN clauses in its free trade deals with very limited scope (won't cover mutual recognition or equivalence decisions, for example, just legislation and 'national treatment'). Critically, the EU insists on its own regulatory autonomy. Only the European Commission (and ultimately the European Court of Justice) can decide whether a service etc meets EU rules.
- Immigration and visa restrictions go hand-in-hand with constraints on services, since people often have to be physically present to provide services. So free movement of labour is also critical to the free movement of services. That freedom entitles Brits to live, work and retire freely in 30 countries, but is lost on Brexit. Related entitlements to healthcare and so on will also fall away... But British and Irish citizens separately benefit from the Common Travel Area, so can live in either country and enjoy associated rights and privileges, including access to social benefits, healthcare, social housing supports and the right to vote in certain elections.
What are the practical impacts of Brexit on services?
Well, if you're a small business exporting to the EU, the VAT rules on services could be a big problem. You currently benefit from hard-fought exceptions under the VAT Mini One Stop Shop (MOSS), but those will disappear on Brexit day. The UK's HMRC warns:
Businesses that want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU member state. This can only be done after the date the UK leaves the EU. The non-Union MOSS scheme requires businesses to register by the 10th day of the month following a sale. Alternatively, a business can register in each EU member state where sales are made.
EU consumers are already ceasing to buy from UK suppliers. Some EU suppliers are geo-blocking UK customers and suppliers from applying to their websites, which prevents online bidding online for service contracts from the UK. Many EU business people have also stopped traveling to do business in the UK, partly owing to the trend among UK businesses and EU institutions shifting headquarters and setting up new hubs in the EU27.
Work permits will be needed by British citizens in the EU27 after Brexit, but can’t be applied for before Brexit day. Some countries even require visas for speaking at conferences (unless asked a question first), giving training sessions, working on temporary projects and so on. But, remember, if you're a British citizen you can rely on the Common Travel Area for the purpose of doing business in or from Ireland.
Tariffs and duties on imports into the UK may also mean Brits will travel to the EU for cheaper, duty free consumer goods. That presents a threat to smaller UK retailers, but presents an opportunity if they can set up in a nearby EU country...
What Steps Can You Take?
If you're a director of a company, you need to be able to demonstrate that you satisfied your duties in the context of Brexit - which is a 'known unknown'. Those duties will vary depending on where your company is incorporated, but steps you'd likely need to take include: holding board discussions, appointing a sub-committee (with minutes, briefing papers and presentations), creating and updating risk registers, scenario planning sessions/documentation, supply chain analysis to identify suppliers at risk who may need to be replaced/helped (some may be using the wrong type of pallet for export to the EU, say, or hauliers may be allowed into the UK by UK authorities, but will struggle to back into EU); and making resolutions taking action to address threats and opportunities.
The steps you can take if your services are impacted will depend on threats and opportunities identified, and we have previously outlined an approach to 'Brexit-proofing', but examples include:
- consider the incentives offered for setting up a new subsidiary in an EU27 member state;
- consider the impact of visa and immigration requirements (bearing in mind the Common Travel Area);
- Rewrite contracts with new governing law and other pertinent changes;
- Establish a new basis for transferring personal data from EU customers/suppliers to the UK;
- Consider the tax impact of moving business activity to an EU27 country (for instance, whether there might be a capital gain, tax on profits moving offshore, or an impact on withholding tax exemptions).
Time to get craicing!
Let's know how we can help.
Of course risks remain and challenges for some businesses cannot be entirely mitigated, even with every possible preparation in place. Michael Gove, the UK minister tasked with no-deal Brexit planning.