Brexit Director Peter Wilding looks at the major issues facing the manufacturing industry as the EU withdrawal deadline looms and answers some key questions.
The legal landscape
The extent to which the UK continues to align itself with the EU on commercial trading law will depend on whether the Withdrawal Agreement and associated legislation is passed. If so, the UK will have a transition period to at least December 31st 2020 where we remain continuing members of the single market and customs union but outside the EU’s political institutions.
However, in future the top line considerations require businesses to have understanding about:
Significant reform to trading regulation will be challenging to deliver in terms of time and government resources, as detailed consultation will be required on numerous, highly complex areas of law, which cannot simply be abolished "wholesale" (such as EU-derived laws regulating chemicals, water, waste, air quality and other environmental issues). The EU (Withdrawal) Act retains all existing EU legislation as part of UK domestic law; and grants the UK Government limited powers to make secondary legislation to adapt or remove laws that no longer work or are considered irrelevant. If we move into transition the position remains that, from a legal perspective, there will be little change in the short term.
Brexit without EEA membership (or similar arrangements requiring adherence to EU single market legislation) will create the potential for the UK to pursue a more deregulatory agenda in areas such as consumer protection, safety and standards, product liability and environmental law. However, in the Withdrawal Agreement, UK attempts to seek deregulatory competitive advantages would result in access restrictions to the single market and thus any advantages will be more limited than some have suggested and will take some time to deliver.
Two sets of rules
Even where deregulatory measures are permitted only businesses focused on the UK domestic market or on exporting to non-EU countries will benefit. Businesses trading with the EU27 will have to comply with two potentially divergent sets of rules which could increase the regulatory burden on those businesses. Where deregulation would imply a lowering of standards/levels of protection, this may ultimately be considered undesirable in policy terms and is also likely to meet political opposition from consumer groups and others.
Where internationally-agreed standards are relevant (as is often the case in relation to product regulation, for example), the UK government may decide that it is preferable to retain those standards. In any case, contractual obligations may mean that businesses cannot avoid compliance with such standards.
Change is coming for trade in and out of the UK after Brexit
Not all UK manufacturers wish to sell into the EU, and those that do are likely to continue selling products in the UK as well, so it is important to consider in depth the administrative and regulatory challenges to manufacturers and their supply chains.
Post-Brexit position: If the Withdrawal Agreement is passed along with associated legislation the UK government has confirmed that it will ensure that current EU law continues to apply in the UK post-Brexit, until at least Dec 31st 2020. This should ensure the initial impact of Brexit from a product compliance point of view is relatively muted, although long term uncertainty will remain.
However, even in the short term, questions remain about the continued role of EU agencies and regulators, and the UK may lose access to some helpful market surveillance aspects of EU law, such as the RAPEX rapid alert system for dangerous products, which currently only applies between EU and EFTA/EEA members. There are also likely to be some increased hurdles to continuing to sell into the EU market, such as the need to appoint a certification body or authorised representative from within the EU.
Change is coming in the product manufacturing sector
Getting a product to market involves navigating a course through increasingly complex product standards, safety and environmental legislation. But it's not just manufacturers who need to be aware of product compliance issues - product safety and environmental obligations apply throughout the supply chain and commonly impact importers, distributers and retailers.
In terms of product liability, except for potential governing law or jurisdiction issues (see below), there is unlikely to be much change in relation to claims brought in contract, tort or strict liability (at least in the short to medium term). The strict liability regime arose out of EU law, was implemented in the Consumer Protection Act 1987, and is widely regarded as a success. As an accepted part of the UK consumer landscape, it is difficult to envisage this disappearing any time soon.
Unless we move into a no deal scenario, those looking to continue to trade in both the UK and EU post-Brexit can feel reassured that there is likely to be little in the way of immediate change to the current product compliance requirements, apart from some potential additional administrative steps required to sell into the EU once Brexit occurs.
However, uncertainties remain. Economic operators throughout the product supply chain should therefore ensure they understand how their obligations are currently implemented into UK law, and be vigilant in monitoring both EU and UK regulators so that they can ensure continued compliance and minimise the impact of potential changes.
Change is coming in the automotive sector
Under the Whole Vehicle Type Approval process, a single approved body (in the UK's case, the Vehicle Certification Authority) can test a vehicle's compliance with international standards and approve it for sale in the whole of the EU. As of now, the UK and EU would continue to recognise each other's type approval authorities (including whole type approval certificates and assessments of conformity of production processes); and UK agencies could be designated by EU approval authorities to authorise the UK
If no agreement is reached, a 'hard' Brexit would be the automatic position and, critically, there would be no transition period. In this instance, the UK's relationship with the EU would instead be governed by general international public law, including the basic rules of the WTO. In this case, movement of goods would be severely restricted by import and export formalities. The UK currently exports approximately 80% of all cars assembled here, with 50% going to Europe. The introduction of export taxes - 10% tariff on cars and a 4.5% tariff on components, in accordance with the WTO's rules - would add at least £1.8 billion to exports and £2.7 billion to imports annually. The list price of cars imported to the UK from the EU could increase by an average of £1,500 which may eliminate the profit that is made on an average car (as estimated at just £450 on a £15,000 car).
Similarly, although UK manufacturers are already required to comply with the Whole Vehicle Type Approval System, goods would nonetheless become subject to conformity assessment procedures upon withdrawal in a 'no deal' scenario. The lengthy process of re-certification (possibly on a country by country basis) would likely result in the suspension of manufacturing activities until the requisite approvals were obtained, at a significant cost and to the great detriment of planning timetables.
Question 1 – exporting and importing
- How will Brexit affect the way I export to Europe? Will my products face extra tariffs or compliance?
- How will Brexit affect the way I import from Europe? Will my products face extra tariffs?
- I am part of a supply chain which spreads across the EU. Will I be able to continue working with EU partners after our withdrawal?
- I currently do business in markets where preferential goods or services access is governed by a FTA between the EU and that third country? How can I prepare for and mitigate the impact of this access being removed or changed?
- Intra-EU trade is free of customs duties and customs processes by virtue of the Customs Union. This will change. As yet we do not know what tariff or compliance regimes will be in place.
- Trade between the EU third countries is subject to the Common External Tariff pursuant to the EU Customs Union, and to trade agreements negotiated by the EU on behalf of the member states, so as to ensure uniformity across the EU in relation to external trade. No grandfathering of the approximately 70 EU-third country trade agreements has, as yet, taken place.
A standalone UK customs regime will be necessary from Brexit. The UK government's intention is that its new customs legislation will provide continuity for businesses by being mostly based on the EU Customs Code and by keeping the administration of VAT and excise regimes largely the same as at present.
The Government has enacted the Taxation (Cross-border Trade) Act 2018, to establish an independent UK trade and customs regime. This will be necessary as from 29th March 2019 if the UK leaves the EU Customs Union.
The Act will establish a framework for the implementation of an independent UK trade policy following Brexit, within the WTO framework. This has not been necessary whilst the UK has been in the EU Customs Union; the negotiation and implementation of external (third country) trade agreements have been the exclusive competence of the European Commission, pursuant to the Customs Union. The Act provides the statutory framework for implementation of an independent UK trade and customs policy following Brexit.
The legislation enables the UK to charge its own customs duties on goods (including goods imported from the EU), set quotas, makes changes to the VAT regime, vary the rates of duties, specify when goods are relieved from duties, determine when additional territories may form part of a customs union with the UK, and provide for preferential tariffs, for example in relation to developing countries.
The Act will also empower the Trade Remedies Authority to take anti-dumping and anti-subsidy measures against imports causing injury to UK industry. The government is in the process of establishing the Trade Remedies Authority through a separate piece of legislation, the Trade Bill.
So, the Act will result in import duties in respect of the importation of all chargeable (i.e. non-domestic) goods into the UK and an obligation to make a customs declaration on importation. The Treasury is required to compile a customs tariff by means of a statutory instrument classifying types of goods according to their nature and origin, using codes and specifying the rates of duty and rules for determining the amounts of duty applicable.
The HMRC Commissioners are required to establish a system enabling traders to apply for rulings by HMRC officers to determine the applicable code in the customs tariff and/or the place of origin, for particular goods.
The Act makes important changes to the VAT regime by amending the existing legislation so to replace the reference to charging VAT on the acquisition in the UK of goods from EU member states by the principle of VAT being charged on all imports from outside the UK. The Act enables the HMRC Commissioners to introduce, by regulations, an excise duty regime applicable to non-UK persons in respect of the sending of goods to the UK by post. It is notable that the Act's provisions concerning VAT and excise duty state that any directly applicable EU law to be retained in domestic law under the EU Withdrawal Act relating to VAT or excise duty, respectively, is disapplied.
The Act enables the Treasury to adopt regulations imposing export duties by reference to all exports or exports of specific goods from the UK. Such regulations may provide for an export tariff to be established. The Act provides for relief against export duty where goods are declared for an outward processing procedure. This enables the goods to be exported from the UK in order to be processed outside the UK and re-imported within a temporary period specified by the HMRC by notice in response to the relevant declaration.
From a regulatory perspective, the EU laws that have been incorporated into UK law will not quickly fall away. The UK Government has indicated that it will freeze into UK law the EU legislation in force at the point of the UK's exit to ensure continuity, but may choose to amend such law in due course. There could be a gradual repeal of EU-derived laws that are currently implemented in the UK. A gradual move into two different consumer protection regimes could have a significant effect over time on the shape of supply contracts in the UK versus those in Europe. Similarly, if the mutual recognition of standards and approvals across Member States is to fall away, UK operators may require separate approvals when selling onto mainland Europe for example.
Question 2: How will Brexit affect commercial contracts?
Brexit will affect the negotiation and drafting of commercial contracts in a number of ways. Standard provisions that may have to be reconsidered include clauses dealing with territory, payment provisions or intellectual property rights, as well as boiler plate clauses.
We suggest you conduct an audit of your commercial agreements to map any operational, legal and commercial issues surrounding Brexit. Considering your governing law and jurisdiction clauses is just the beginning:
Governing law clause and jurisdiction clauses. A contract that has commercial or operational ties to both the UK and the EU which "default" governing law applies, goes to the heart of the validity and interpretation of all of the other terms contained within the contract. EU Regulations which currently govern this area - called Rome I (in respect of contractual obligations) and Rome II (in respect of non-contractual obligations) - will no longer apply post-Brexit unless they are formally adopted into UK law. So exclusive jurisdiction clauses in favour of the English courts are likely to be upheld by the English courts but may not always be upheld by courts of EU Member States. This is because the Recast Brussels Regulation, which governs the law in this area, does not contain obligatory principles of reciprocity in favour of non-EU Member States.
Parties should consider where the other party's assets are located. If they are in an EU Member State an exclusive jurisdiction clause in favour of the English courts may not be ideal following Brexit, as it may be harder to enforce a judgment of an English court in the court of an EU Member State. Depending on whether you are more likely to sue than be sued you may wish to consider arbitration as a preferred dispute resolution mechanism because arbitration will not be affected by Brexit.
Increased trade barriers: Trade barriers between the EU and the UK seem likely to increase, meaning that costs when trading in Europe would increase. When negotiating future contracts, you may wish to consider the extent to which prices should include or exclude any new taxes, duties or other similar levies that the UK's or remaining EU member states' governments may introduce after Brexit takes effect.
Territorial scope of your agreements: Identify if any of your commercial agreements have the European Union as their territorial scope. Depending on the nature of the UK's new relationship with the EU, the question of whether the UK is carved in or out of types of agreement may now need to be carefully considered and then specifically catered in the drafting.
Parallel regulatory regimes: If you’re existing or planned commercial agreements govern the introduction of new goods or services onto both the UK and EU markets, you should note that parallel regulatory regimes - under both UK and EU law - may emerge. The risk of this happening is largely dependent on the nature of the UK's future relationship with the EU but, if parallel regimes do emerge, contracting businesses will likely need to agree who should be responsible for achieving compliance and who should bear the consequences of non-compliance.
Change in law: Suppliers and customers who are contemplating entering into or are already subject to long-term commercial agreements (particularly service agreements) will need to be mindful of the contractual impact of changes in law arising out of Brexit may have, bearing in mind the way in which change in law is governed under the relevant agreement.
Question 3: Employment
- How will Brexit affect UK employment law?
- My company relies on a large EU workforce. Will I still be able to employ them after we leave the EU?
Audit the immigration status of workforce. Review secondment arrangements to and from the EU. Determine approach to GDPR implementation. Monitor opportunities to lobby and make your views known on future direction of the law in relation to immigration and employment especially as follows:
EU-derived employment laws: Many of the established employment laws in the UK in areas such as agency workers, working time, holiday pay, business transfers and collective redundancies originated in the EU. While there is unlikely to be a full-scale repeal of these laws in the short term, there will inevitably be calls for some of the stringent requirements on businesses in these areas to be relaxed as part of a general move towards deregulation of the labour market post-Brexit.
Free movement of workers: If this is curtailed as currently proposed, the pool of talent and skills available to UK business is likely to diminish as visa requirements would make it difficult to recruit employees from and move them within Europe; also, individuals may prefer to be located in the EU where their movement would be unrestricted.
Data protection: The UK will become a 'third country' under EU data protection rules meaning that UK businesses operating in the EU would need to provide adequate protection for the rights of employees whose personal data is transferred from the EU to the UK. UK businesses will need to comply with a similar regime to GDPR under a new Data Protection Act.
Are there any opportunities I should look forward to?
Yes. There are three:
- The potential application of tariffs to components and supply-chain disruption may result in greater local sourcing of components for UK-assembled cars. Currently, only 40% of the components comprising a car built in the UK are sourced from UK manufacturers. The component market may therefore see some growth if demand increases as a means of avoiding costly import tariffs.
- The Department for International Trade estimated that 90% of global economic growth up to 2040 will come from outside Europe. Of the 80% of UK-assembled cars that are exported, 6% currently go to China – yet this market is forecast to grow by 32% by 2023. In this respect, the changing trade patterns that will inevitably result from Brexit should be cultivated and exploited by the UK automotive sector, to generate sufficient trade to make up the shortfall from Brexit-related losses.
- Autonomous vehicles and related automated (and connected) technology remain a primary development focus for the UK Government. Research work has so far benefitted from European funding through the Horizon 2020 project, which is likely to be lost upon EU withdrawal. This potentially presents an opportunity for the UK to partner with technologically-strong emergent economies such as China and India to become a market-leader in this breakthrough field, which is (at least, currently) less restricted by regulation than the traditional automotive sector.
These are the main legal, administrative and regulatory questions you must ask yourself. All of these issues WILL change over the coming weeks, months and years. And they are not the only ones. Based on the above, what are your business's priorities for the post-Brexit commercial environment and are there particular EU laws that should be retained or replaced?
Here are more questions we are able to advise you on:
- Should I be stockpiling raw materials now?
- As I receive any grants/subsidies from the EU, will these be withdrawn post Brexit?
- Do I need to reassure investors that anticipated risks have been considered and are being managed?
At FBC Manby Bowdler we understand the importance of getting product compliance issues right at the outset. Reducing time and cost to market for new products and minimising the 'regulatory overhead' of expanding into new markets is often a key commercial advantage.
However we also understand the consequences of non-compliance and are ready to protect clients: for example, unforeseen environmental and safety issues can give rise to risks that need to be carefully managed to ensure they don't expose the business to additional costs, significant liability or reputational damage.
We support manufacturers, importers, distributors and customers in a wide range of sectors not only to ensure their compliance with regulatory requirements but also to achieve maximum benefit and market advantage from their responsibilities and obligations and support them when problems arise.
To get in touch with our Brexit advisory team contact Peter Wilding on 01694 724440, 07901 008220 or email firstname.lastname@example.org.