It went down to the wire, but the culmination of the intense negotiations between the UK and EU is that we now have a Trade and Cooperation Agreement (TCA). This 1,246 page agreement went into effect from 1 January 2021 and its content will be of vital importance to any businesses that trade between the UK and EU. Here we take a look at some of the key implications of the deal to help you make a success of this new trading relationship.
Goods: free trade, or not?
The good news is that the deal does allow for tariffs and quotas to be eliminated between the UK and EU, and this goes beyond other EU trade agreements such as with Canada and Japan. However, the UK is no longer in the single market or customs union, so this agreement doesn’t replicate what went before.
There are non-tariff barriers resulting in more friction and restrictions, with import and export declarations and procedures needing to be complied with when goods move between the UK and EU. Given the negotiating mandate of the UK, this additional paperwork burden was always going to be one of the impacts on business as we return to border controls with the EU. The updated GB-EU Border Operating Model published in October 2020 provides the detail on how the border will work and the ability for VAT registered importers to use postponed import VAT accounting should improve the cash flow position.
Rules of origin provisions in the TCA mean that it is only goods that originate in the UK or EU that will be free of customs duty. Businesses will need to claim preference on their customs declaration and declare they hold proof that the goods meet the rules of origin. There are helpful measures that allow business to self-certify that they have met the requirements. Where goods do not meet the rules of origin requirements (or if this cannot be proved) customs duties can arise. This is a complex area, and there are different methods that are applicable to different kinds of products, so greater awareness of the supply chain and an understanding of these requirements will be a new challenge for business.
There will also be duplication of product standards regulations. This means that businesses trading in the UK and EU will need to comply with two different regulatory systems, including conformity assessments, although the TCA does allow for self-declaration of conformity with EU product rules for low-risk products and provides simplified arrangements for some sectors. Conformity certificates will be required to be issued by an EU body for many products to be placed on the market, although the CE mark should be able to continue to be used for most products until 31 December 2021.
The Northern Ireland protocol provides special arrangements for good moving into or out of Northern Ireland, and EU customs duties may apply where goods entering from Great Britain are ‘at risk’ of being moved into the EU.
The TCA is mainly focused on goods, not services, and this is as expected with other recent EU Free Trade Agreements. The service chapter of the TCA has a large number of exemptions, and the impact is different for each sector. Coupled with this, the EU services market is not joined up, and different rules can apply in each member state. Unfortunately this means that service providers looking to do business in the EU will need to consider the TCA on a sector by sector, country by country basis. Some headline outcomes are as follows:
- EU member states will not be able to discriminate against UK service providers and will need to treat them as if they were from their home jurisdiction. This means that many service providers will not need to meet economic needs tests, residency requirements or other non-tariff barriers, although this is by no means comprehensive and there are many reservations that can apply.
- Financial service firms can no longer exercise EU passporting rights to provide services in the EU. As a result, financial service firms are likely to require an EU subsidiary to continue to service EU customers. There is a separate joint declaration that both sides will try to reach equivalence decisions in the future.
- There is no mutual recognition of professional qualifications. Professionals in regulated sectors, such as architects and doctors, will need to assess the requirements in each member state in which they wish to practice.
- Service providers in certain sectors will require work permits before carrying out work in the EU.
The TCA contains details of the social security rules to be applied on the movement of workers between the UK and EU. In many respects, the agreement maintains the previous position, and workers should only pay social security contributions in one country. Contributions will generally be payable in the country where the work is performed, although there are specific rules to deal with multi-state and detached workers.
Movement of people
Free movement has ended between the UK and the EU, and this was a certainty given the aim of the UK government to take back control. What we now have is a UK points based system for immigration that applies from 1 January 2021. EU citizens living in the UK before the end of 2020 have the right to remain, although this needs to be applied for through the EU Settlement Scheme by 30 June 2021.
The TCA allows visa free travel, including for work, for up to 90 days in a 180 day period. However not all activities can be carried out visa free, and the TCA has a list of permitted activities. The list includes activities such as meetings, research, training, sales, after-sales services and commercial transactions. However, it should also be noted that individual member states have listed reservations, so it will be important to carefully check that the activity is permitted in a particular country.
A data adequacy decision has not been granted, but the UK and EU have agreed a temporary solution, with a further bridge period lasting four to six months. During this time, data can flow as it did before between the UK and EU, with the hope that an adequacy decision is granted within the next six months.
The UK will be establishing its own subsidy regime, although the exact nature of the UK regime is still to be determined. This will need to conform to a series of principles set out in the TCA, and if either side feels that there is unfair state aid that distorts trade and harms their industry, then after a notice period and subject to arbitration by an independent panel, they can take action such as imposing tariffs. The UK has also agreed to non-regression from current standards, such as environmental protection, social and labour rights, and tax transparency, and similar action can be taken where there is significant divergence that distorts trade.
It is clear that the TCA is far from perfect and in one way or another many businesses are going to be impacted. However, it’s a starting point, and much better than a no deal outcome, and it is hoped that the negotiations and agreement will continue to evolve over time to improve the position.