More than a million UK SMEs benefit from sales to customers in the EU. Scheduled for introduction in 2021, what impact could post-Brexit transition changes have?
When will Brexit start to change things?
On 31 January 2020, the UK stopped being a member of the European Union, ushering in a transition (aka “implementation”) period that is scheduled to end on 31 December 2020.
The UK and EU have until 1 January 2021 to negotiate a new trade agreement. During the transition period, the UK will remain subject to EU rules and still be a member of the Single Market and Customs Union. Existing rules concerning the free movement of people and goods between EU countries and the UK will remain until 1 January 2021.
Because a new agreement hasn’t yet been negotiated, we don’t know what will change or to what extent, although the free movement of people and goods is likely to end on or before 31 December 2020.
How many UK SMEs will be affected?
The UK exported £291bn of goods and services to other EU countries in 2018, amounting to 45% of all UK exports. The UK imported £357bn of goods and services from the EU, accounting for 53% of all UK imports.
According to government estimates, about 8% of UK SMEs export to the EU, which equals some 530,000 businesses out of a total SME population of 5.9m. A further 15% (885,000) SMEs are in the supply chains of other businesses that export to the EU. So, about 1.4m UK SMEs could be affected by trade rule changes that result from Brexit.
We don’t yet know what will change or how, but let’s consider a few likely scenarios and their implications for UK SMEs that sell to customers in EU countries.
Will my business have to pay new tariffs?
What if I sell services to EU countries?
The UK will no longer operate under the European Economic Area (EEA) regulations for cross-border trade in services from 1 January 2021.
Services provided by UK businesses will be regarded as originating from a “third country” (ie non-EU Member State).
According to GOV.UK: “You will need to follow the terms set out in the legislation of the host country. This includes commitments that the host country applies to all WTO members.”
The government concedes that UK firms and service providers may face additional legal, regulatory and administrative barriers as a result.
The UK government has confirmed its plans to introduce import controls on EU goods at the border after the transition period ends on 31 December 2020. This is likely to be reciprocated by EU countries.
Because the UK will no longer be in the EU Customs Union, new compliance border checks for goods will be introduced, which could, to a greater or lesser extent, lead to delays (some have predicted bottlenecks at ports). This could have more serious implications for some UK sellers rather than others, for example, those who sell fresh produce or other perishable goods.
You may also need to consider whether a customer could take legal action against your business for failure to supply to a deadline set out in your supply contract. Now might be the time to revisit the terms of such contracts.
What about currency fluctuations?
The pound to euro exchange rate has averaged about €1.33 over the past 20 years. At its highest, it was about €1.75 in May 2000 and at its lowest, in August 2019, £1 was worth just €1.09. It has since recovered, and in February 2020, £1 was worth about €1.20.
We don’t yet know whether the pound will strengthen or weaken against the euro after the end of the transition period. And, potentially, there are pros and cons to each. A weaker pound might make the things you sell more attractive to buyers in the EU, but your sales will be relatively less profitable.
Alternatively, were the pound to strengthen against the euro, your sales would be more profitable, but it could affect demand. You may also have to take into account whether you buy goods or services from the EU, of course.
What about customs declarations?
According to GOV.UK:
“From 1 January 2021 you will need to make customs declarations to move goods into and out of the EU. You should:
A freight forwarder, customs agent/brokers or fast parcel operator may be able to help you to get your goods through customs in EU countries. You or your staff might need additional training on customs and export rules post-transition.
What if I’m distance selling to the EU?
Distance selling means selling goods or services through digital TV, by mail order or by phone or text message.
You should register for VAT in the country to which you’re selling if the total value of goods exceeds that country’s distance selling threshold (€35,000 for most countries) and you’re selling to consumers (not businesses).
What else should I do?
The Institute of Export recommends communicating “with your EU customers” to “reassure them of your commitment in the face of potential changes”.
It also advises UK businesses to “review sales to non-EU countries where the EU currently has Free Trade Agreements in place. Assess whether sales are dependent/influenced by duty preferences and may be at risk when the UK loses access to them”. The European Commission website lists these.
As regards technical barriers to trade, according to the government: “There should be provisions to address regulatory barriers to trade in goods, providing for cooperation on technical regulation, standards, conformity assessment procedures, and market surveillance, building on the WTO Technical Barriers to Trade Agreement.”
The government would like this to be part of a free trade agreement between the UK and EU. It might be worth seeking advice on specific regulations and standards your business uses, to find out about any post-transition changes.