12 June 2019
Brexit and Your Business: Dodging the Pitfalls
Even though it is now three years since the UK voted to leave the European Union (the EU), the date and the manner of its departure remain frustratingly unclear. The British government invoked Article 50 – the process by which a member state leaves the EU – in March 2017 and was scheduled to make its exit two years later. That date, and that of a second deadline, have since passed because the UK parliament has failed to approve the withdrawal agreement signed between Britain and the other 27 EU member states in November 2018.
Although the EU has responded to the UK’s political deadlock by granting a new Brexit “flextension” (flexible extension) until 31 October 2019, uncertainty over the UK’s departure is escalating and the risk of a damaging no-deal Brexit is now higher than ever. The EU hopes that the UK will, during the flextension, either choose to approve the existing withdrawal agreement, or even cancel Brexit altogether by revoking Article 50. It is also not opposed to a second referendum being held in the UK, which could either give a fresh mandate to those campaigning to leave the EU as quickly as possible, or result in a majority for the “Remainers” and a unilateral cancellation of the ongoing Brexit process. However, the resignation of UK Prime Minister Theresa May and her likely replacement with a more hardline Brexit supporter, make all of these scenarios less rather than more likely.
Brexit, especially a no-deal Brexit, is likely to lead to new trade barriers and delays at borders. Hong Kong traders with operations in both the UK and EU markets will be aware that the UK crashing out of the EU without a deal could result in significant disruption to their supply chains. Companies should carefully scrutinise their operations, especially if there is no sign of a deal on Brexit as the EU-imposed deadline approaches. Hong Kong traders should have proper procedures and planning in place, so as to reduce the impact of Brexit uncertainty wherever possible.
The Q&As below are designed to help Hong Kong traders take precautionary arrangements, whether there is an orderly Brexit (i.e one with a withdrawal agreement in place, which includes a transition period to allow a new permanent relationship between the UK and the EU to be settled), or a disorderly one (i.e. a ‘hard’ or ‘no-deal’ Brexit, in which the UK leaves the EU with no agreement and no transition period in place.)
1. I’m a trader selling to the UK and from there distributing to the rest of the EU. What can I do now to safeguard my business in the EU market if the UK leaves the EU in an orderly manner? What will be my position if it turns out to be a no-deal Brexit?
Traders distributing goods from the UK into the EU post-Brexit will need to pay special attention to changes in customs clearance compliance, import tariffs, and regulatory compliance (i.e. product standardisation requirements and product safety issues).
In an orderly Brexit, the UK Parliament votes for the EU-UK withdrawal agreement before the deadline of 31 October 2019. The withdrawal agreement is designed to pave the way towards a still-to-be-negotiated permanent agreement between the UK and the EU (e.g. a Free Trade Agreement). It allows for a transition period until the end of 2020 (with a possible extension until as late as December 2022) during which the UK would continue to abide by the EU’s rules and regulations. The UK would remain part of the Single Market and to be subject to the rulings of EU courts, although it would no longer have a say in EU law-making. This means that, for Hong Kong traders, regulatory arrangements between the EU and UK would continue unchanged. Distribution of imported goods from the UK into the EU27 market during the transition period would continue on the same basis as now.
A no-deal Brexit, in which – the UK crashes out of the EU without any arrangements or transition period in place – will happen on 31 October 2019 unless a new flextension period is agreed. In this scenario, an economic operator established in the EU27 who, prior to the withdrawal date, was considered an EU distributor, will become an importer for the purposes of EU product legislation. EU rules in the field of EU product legislation will no longer apply to the UK (even if the UK decides to apply harmonised EU legislation within its own territory for a limited period of time). In the case of imports into the EU from the UK, the imported products will always have to comply with EU product standardisation and product safety and environmental legislation. Authorisations granting the status of Authorised Economic Operator (AEO) and other authorisations for customs simplifications, issued by the customs authorities of the UK, will no longer be valid in the customs territory of the EU.
In the areas where EU legislation requires the intervention of a qualified third party, known as a Notified Body, in the conformity assessment procedure, UK Notified Bodies will lose their status as EU Notified Bodies and will be removed from the European Commission’s New Approach Notified and Designated Organisations (NANDO) information system. UK bodies will therefore not be in a position to perform EU conformity assessment tasks after Brexit.
2. I’m a trader selling to the EU market (including the UK market) via mainly Northern European ports such as Rotterdam and Hamburg. What can I do now to safeguard my business in the UK market if the UK leaves the EU in an orderly manner? What will be my position if it turns out to be a no-deal Brexit?
Once Brexit occurs, goods distributed from the ports of Rotterdam or Hamburg to the UK will be deemed imports into the UK. During the transition period under an orderly Brexit, goods lawfully placed on the market in the EU before the end of the transition period may continue to freely circulate between the EU and the UK, without new customs arrangements applying, until they reach their end-users. There will also, during the transition period, be no need for product modifications or re-labelling, as the EU product standardisation and product safety rules will continue to apply.
In the event of a disorderly Brexit with no transition period, imports into the UK from ports like Rotterdam and Hamburg will become subject to new UK-imposed tariffs. Under a Temporary Tariff Regime, classification of goods will, in most cases, remain the same in order to provide continuity to companies currently interacting with the EU system so as to minimise disruption for traders.
The vast majority of the UK’s import duties will be set to 0%. The UK tariff measures will, however, only apply for a temporary period of up to 12 months. Furthermore, Hong Kong companies trading with the UK post-Brexit should keep in mind that favourable import duties could apply for a period shorter than 12 months.
In some cases, where the import duty is not set to 0%, the UK will allow for a reduced or zero rate of duty for a limited quota of goods over a given period. The measure sets tariffs on approximately 95% of tariff lines to 0%. On the basis of average trade flows between 2017 and 2018, as calculated by the UK’s customs authority, this amounts to approximately 87% of imports by value. Tariffs will be retained on finished vehicles, including cars, goods vehicles, road tractors, buses and motorcycles. Non-zero duty rates may also be established for, among others, certain agricultural products and meat products.
Regarding regulatory compliance, goods imported into the UK from EU ports after a hard Brexit will have to comply with UK regulations. However, according to UK Guidance, the essential requirements (the legal requirements that must be met before a good can be placed on the market) applying to goods for sale in the UK will not change. If the goods meet the relevant EU regulatory requirements and bear the CE marking, then those goods can still be sold in the UK after Brexit. This applies whether the CE marking is used after the manufacturer has self-declared it, or after an EU-recognised conformity assessment body has assessed its conformity. However, this arrangement will be for a limited time. The UK government will give businesses notice before this period ends. Please note that for goods imported into the UK where no harmonised EU law exists, the trader will need to make sure that they meet UK national requirements for those goods.
3. As there’s not yet any clear picture of how and when Brexit will happen, what shall I do when receiving orders from UK customers at the moment? Are there any checklists of items that I should vet before entering into any sales contract?
For the moment, it is probably safe to assume that it is “business-as-usual” until such time as either an approved withdrawal agreement between the EU and UK comes into force, or the UK leaves the EU without a deal. Therefore, when receiving orders from customers for goods and services that are expected to enter the UK market before 31 October 2019, these should be processed according to current operating procedures. In the event of an orderly Brexit, the position will continue as it is now until the end of the transition period set out in the withdrawal agreement, as explained above.
However, in order to prepare for the possibility of a hard Brexit on 31 October 2019, Hong Kong sellers should check whether their current operating procedures cover the following issues:
- Customs Formalities: For imports into the UK, you would need an Economic Operator Registration and Identification (EORI) number from the UK. Traders from Hong Kong will therefore need a UK EORI number (the EORI number starts with GB) if they: (i) trade goods into the UK, (ii) lodge a customs declaration in the UK, or (iii) apply to be authorised for customs simplifications and procedures in the UK. You do not need to apply for a UK EORI if you already have one. The HMRC (the UK authority for customs revenue) will use this number to identify you and collect duty on your goods. Please click on the UK Guidance on EORI numbers for more information.
- Contractual Terms: Hong Kong traders are advised to check their existing contracts to determine the extent to which they address the implications of Brexit and provide sufficient protection of their interests. Traders should also consider the possibility of amending or renegotiating contracts whose terms are insufficient or ambiguous in addressing potential concerns or liabilities post-Brexit.
- Be specific: Hong Kong traders should check whether the sales contracts refer expressly to the consequences of Brexit. Instead of using general terms such as ‘force majeure’ or ‘financial hardship’, use should be made of express provisions which cover specific eventualities of Brexit.
- Clarify references to EU law: Instead of simply referring to EU Member Countries as “the EU”, Hong Kong traders should go further in clarifying that the UK is excluded in this description and/or list the relevant countries individually.
- Payment: Traders should check contracts for the provisions regarding payment. To mitigate a hard Brexit scenario, Hong Kong traders may want to insert flexible contractual provisions to amend prices or payment mechanisms if faced with unforeseen cost increases (such as currency fluctuations or additional duties).
- Dispute settlement: Traders should check the contract for provisions on dispute settlement and applicable law. For example, in case of a hard Brexit, the EU-wide rules for enforcement of UK judgments will cease to apply to the UK. If necessary, consult local attorneys for enforcement advice and implications.
- Termination: Traders should examine whether it is necessary to include a right to terminate upon Brexit, if appropriate. For example, termination could be triggered by an event such as a hard Brexit, or the loss of any EU-wide rights, or the sudden application of UK law. They should also check whether the drafting is clear in relation to: (i) whether the right to termination is bilateral or unilateral, (ii) the timeframe for when a contract no longer becomes binding following termination, (iii) whether there is an obligation to compensate or a penalty to be paid for termination, and (iv) whether there is an obligation on parties to renegotiate in good faith prior to termination being finalised.
- Insurance: Traders should check whether existing insurance policies apply to goods and services shipped to a non-EU member state, and if not, a broker should be asked to arrange additional cover.
- Product compliance: At the point of UK exit, it is anticipated that UK rules on packaging and labelling will mirror EU rules – but in future it will be necessary to monitor compliance with UK standards, as adopted by the British Standards Institute (BSI), and UK regulatory laws. The BSI has published various updates on its website and BSI guidance for no-deal planning.
4. I’m a brand owner working mainly with UK partners to market and license my products for the EU market. What should I do to ensure my brands do not become a Brexit casualty?
Currently, there are two parallel systems for obtaining registered trademarks which cover the UK: a) UK registered marks, which are obtained through and administered by the UKIPO; and b) European Trademarks (or “EUTMs”) which are obtained through and administered by the EUIPO. The UK registered marks are national and will not be affected by Brexit.
After Brexit, EUTMs will, in principle, no longer be protected in the UK as a matter of EU law. EUTM holders may need to apply for a separate UK trademark. Continuity of protection in the UK of EUTMs registered (or applied for) before Brexit depends therefore exclusively upon the conditions established by UK law. For instance, this will have to determine whether EUTM holders can maintain the so-called “priority date” of the EUTM when they register the same sign as a UK trademark. Since trademarks are protected on a ‘first come, first served’ basis, it is not only the filing date of the potential competitor’s trademark that has to be taken into account when establishing who has filed first, but also any priority date. The EUTMs’ territorial scope of protection will be limited to the territory of the remaining 27 EU member states.
Since EUTMs will no longer apply in the UK post-Brexit, the only way to obtain new registered trademark protection in the UK will be to file a new UK trademark. Protection for the rest of the EU will be possible by filing an EUTM as before. UK companies and individuals will not be prevented from applying for and owning EUTMs. A large number of existing EUTMs are held by companies from outside the EU, including companies established in Hong Kong. As such, companies and individuals will still be able to protect their trademarks cost-effectively across the remaining member states of the EU through a single EUTM application post-Brexit. They will also still be able to enforce these rights against third parties.
It is also important to note that under EU trademark law a trademark can be invalidated if it is not used. At present, genuine use of an EUTM in a single member state is sufficient to maintain an EUTM registration. Use of the EUTM in the UK before the withdrawal date will constitute, in principle, such use ‘in the EU’ for the purpose of maintaining the rights conferred by the mark. Post-Brexit, use of the EUTM in the UK will no longer qualify as use ‘in the EU’. Therefore, the TM holder could lose its EUTM if it is not used in another member state post-Brexit.
It is however recommended to review existing licensing agreements which apply to the EU to clarify their scope and to ensure the terms continue to apply in the UK post-Brexit. Most agreements relating to trademarks will simply refer to “the EU”. Other agreements in the trademark world include undertakings and coexistence agreements to settle disputes, as well as distribution agreements. In future agreements, it is recommended to include a specific reference to the UK and not just the EU.
5. I’m a trader/brand owner working mainly with UK partners to market and license my products for the EU market; will the GDPR apply?
The EU General Data Protection Regulation (GDPR) came into force on 25 May 2018, standardising EU data protection rules across all member states. The UK has already reformed its own data protection law in line with the GDPR and thus implemented these strict data protection rules. So even if the GDPR does not become part of an agreement between the UK and the EU, it will still be necessary to abide by the GDPR-compatible UK data protection law.
Nevertheless, the UK’s departure from the EU could cause compliance issues under the GDPR. Currently, it is still not clear whether, in a no-deal Brexit, these issues will be addressed in an agreement covering data protection or not.
The current situation is that, post-Brexit, the UK will be considered a “third country” for international data transfers. In principle, the GDPR only allows personal data to be transferred outside the European Economic Area (EEA) to white-listed countries (e.g. Japan) recognised as providing an “adequate” level of protection for personal data. The UK is not on this list, and it will take some time before an “adequacy” finding can be made to add the UK to the white list.
In the meantime, data controllers or data processors that process data falling under the GDPR should take measures to compensate for the lack of data protection in that third country by way of appropriate safeguards for the data subject. Such appropriate safeguards may consist of, for instance, making use of binding corporate rules (BCR) or model contracts, including the standard data protection clauses adopted by the European Commission. It is recommended to adopt, for instance, such standard data protection clauses when transferring personal data about EU citizens to the UK.
Also crucial is that companies that have their sole EU establishment located in the UK, may still need to comply with GDPR after the UK leaves the EU. Indeed, the absence of an establishment in the EU does not necessarily mean that a data controller or processor established in a third country would be excluded from the scope of the GDPR. This is because the GDPR also applies to the processing of personal data of data subjects who are in the EU by a controller or processor not established in the EU, where the processing activities are related to: (i) the offering of goods or services, irrespective of whether a payment of the data subjects is required, to such data subjects in the EU, or (ii) the monitoring of their behaviour as far as their behaviour takes place within the EU.
Finally, Brexit may have an effect on the application of the one-stop-shop mechanism of the GDPR. The one-stop-shop mechanism provides that companies with establishments in multiple EU countries are regulated only by the data protection authority of the location of their “main establishment”, which is usually their EU headquarters.
If the main establishment of a group of companies is in the UK, the whole group may no longer be able to benefit from the one-stop-shop mechanism after Brexit. This means that it could receive inquiries from, and have to conduct proceedings with, the data protection authorities of each member state in which the group has establishments.
6. I’m an SME using London as a regional headquarters to manage my firm’s trading business (administrative and financial/payment activities) across the EU. How is Brexit likely to affect my daily operations? Is it a must for my firm to relocate right away, or establish a branch at the very least in another EU member state? How would the answers change if my core activities take place outside the UK?
Currently, the UK benefits from its position inside the EU by allowing SMEs registered in the UK to sell throughout the EU with very little administrative difficulty. If there is an orderly Brexit, then the situation is expected, in general, to continue as is. That is likely to change in the case of a no-deal Brexit, as the UK will no longer benefit from being part of the EU Customs Union or Single Market.
In a no-deal scenario, the UK would immediately become a “third country” for EU trade and customs purposes. This means that if you export goods to the EU, or move goods from Hong Kong through the UK for later export into the EU, new rules would apply. Goods exported from the UK to the EU would be traded on World Trade Organisation (WTO) terms which only provide a very basic degree of protection and recognition.
In the case of a no-deal Brexit, SMEs established in the UK will find it more difficult than is currently the case to sell from the UK into the EU. However, it is not essential for an SME in London to move outside the UK to elsewhere in the EU in order to sell into the rest of the EU. As it is, the EU and Hong Kong enjoy a fairly stable trading relationship, but do not yet have in place a deep and comprehensive free trade agreement.
However, it is common for many Hong Kong SMEs to establish a regional administrative centre within the EU, and many prefer to do so currently in the UK. Therefore, for certain goods and services, it may make business sense to move operations, and open a branch office or legal registration in another EU member state. The decision to do so will depend on a variety of factors. This is more likely to be the case if the core activities of the SME that take place in the UK (such as importation, finance and administration) are mainly to facilitate sales from Hong Kong to the EU. The reason it is likely to be more attractive to locate in the EU (rather than selling into the EU from the UK) is to avoid duplicating the cost and administrative burden associated with first importing into the UK and then into the EU.