With ‘Brexit day’ (29 March 2019) now only months away, UK businesses are still faced with a range of very different scenarios for a future UK-EU trading relationship.
It’s a nightmare for business planning. But prudent businesses need to be preparing for all options. For some, it might mean setting up an EU base.
Status quo for goods trade?
The UK government has proposed a ‘Facilitated Customs Arrangement’ between the UK and the EU, which would maintain tariff free access for traded goods and avoid customs checks and controls.
But it is only a proposal at this stage. The final relationship will only be known with certainty once Brexit negotiations are complete. And the outcome is far from certain, the UK and EU have advised businesses to prepare for a ‘no-deal’ scenario. In this case, trade would be governed under World Trade Organisation (WTO) rules, and would involve tariffs being imposed on some goods, as well as border checks.
Shiner, a Bristol based distributor of skateboards, sports equipment and apparel, imports products from around the world, sells them in the UK and also exports to many EU countries. In a no-deal scenario, it would be faced with the possibility of double-tariffs, once when importing goods into the UK, and then again when exporting to the EU.
As part of Shiner’s Brexit preparations, managing director Charlie Allen conducted detailed planning for a subsidiary and a separate warehouse in the EU, which would receive stock directly from suppliers, by-passing the UK. Charlie reckons the logical location was the Netherlands, which has good infrastructure for shipping around the EU and also has VAT cash flow advantages.
However, Shiner has found another solution that doesn’t require a full warehouse in the EU and also avoids double-tariffs. It is in the process of getting it’s UK warehouse ‘bonded’, where goods would be customs-controlled and retained until exported, avoiding UK duties.
But businesses supplying EU countries that cannot use this ‘bonded warehouse’ option – such as UK-based manufacturers or distributors of goods originating in the UK – would be faced with additional tariffs when exporting to the EU, and may find it necessary to set up a base there. In addition to the Netherlands, Belgium and Germany are popular destinations for suppliers of goods into the EU.
Changes to ‘passporting’
The UK government is taking a different approach to services. It sees the ability to design UK-specific services regulation as an opportunity. And although it wants a trade agreement with the EU that maximises reciprocal market access, it has acknowledged that UK businesses can no longer expect to operate under the EU passporting regime (passporting applies to regulated industries and allows businesses authorised in one member state, to operate across the entire region).
So a UK insurance broker, using passporting rules to give advice to an EU client, is likely to require alternative arrangements, such as setting up an office in the EU.
But Tim Dolan, partner at Reed Smith solicitors, and financial services specialist, says that before rushing into setting up a new EU office, firms first need to make sure that they need to. It is not always necessary, even for financial services firms.
He says: “In the past, firms have ‘passported into Europe’, often without a lot of thought about whether they are carrying out regulated activities, simply because it has been so easy. They filled in a simple form outlining their services and target jurisdictions and sent it to the Financial Conduct Authority. But there may be circumstances where they have no need of passporting to continue offering their services. The exact nature of the services provided would need to be checked against regulatory requirements, as well as where they are delivered, where clients are based, and to what degree marketing is conducted in the EU."
According to Tim, those financial services businesses that have already decided to set up an EU presence have selected a range of destinations, chosen for different reasons, including tax efficiency, availability of skills and where the end customer is located. The most popular destinations are Germany, France, Ireland and Luxembourg.
But some services businesses would not be directly affected by a change in trading relationship, even in a no-deal scenario. Trade in services would then fall under the WTO’s ‘General Agreement on Trade in Services’ (GATS), which specifies that the international sale of services between WTO members is tariff-free.
For example, selling software that is hosted in the cloud and downloaded is classified as a service, would not attract tariffs, and is obviously not impacted by border controls.
There may also be merit in businesses looking outside of the more obvious candidates for an EU base.
Lithuania is targeting ‘fintech’ businesses and has been selected by ‘challenger bank’ Revolut as its EU base. The country is punting its regulatory speed and flexibility.
Estonia is targeting both digital and non-digital businesses. Individuals from anywhere in the world can become ‘e-citizens’, start an Estonian registered business and open bank accounts, without physically moving anything to the country. It is popular with small digital companies and freelancers but not exclusively so.
It’s an uncertain environment for UK businesses, many of which simply don’t know for sure if they need an EU base or not. But setting up in the EU has now become a well-trodden path, so there is plenty of information and experience available to research all the options and choose the right one.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.