21 Feb 2019
European Commission Implements Action Plan for No-deal Scenario in Framework of Brexit
On 18 February 2019, the European Commission announced its continued rolling out of a plan that has the intent of preparing businesses in the area of customs and indirect taxation such as Value Added Tax (“VAT”). This is being done due to the risk that the UK might leave the EU without ratifying the Withdrawal Agreement. With the implementation of this plan, the Commission is seeking to ensure a smooth transition for all traders operating from the EU, that maintain business links with the UK.
The Commission’s plan comes about as a response to UK Prime Minister Theresa May’s defeat, during a symbolic vote in the British Parliament on 14 February 2019, against her renewed attempt at ratification of the Withdrawal Agreement. May informed EU leaders that she could get her deal approved, but with concessions, primarily around the backstop issue (a guarantee to maintain an open border on the island of Ireland in the event of a “no-deal” scenario). It should be recalled that the backstop issue has been the main point of contention ahead of Britain’s planned departure from the EU. Culture Secretary Jeremy Wright explained that “changes needed to be made to the backstop” but it does “not necessarily mean that the agreement needs to be reopened”. However, unless the Prime Minister can deliver a Brexit deal, she will have to decide whether to delay Brexit or face a “no-deal” scenario.
While the ratification of the Withdrawal Agreement continues to be the priority of the European Commission, its execution remains uncertain. Given this uncertainty and associated risks for traders, the Commission has called on European citizens, businesses and Member States to prepare for all possible scenarios, assess the relevant threats, and plan a response to mitigate them.
The Commission emphasised that stakeholders as well as national and EU authorities need to prepare for two main possible scenarios:
- The Withdrawal Agreement gets ratified by 29 March 2019: The Withdrawal Agreement provides that goods lawfully placed on the market in the EU or in the UK before the end of the transition period may continue to freely circulate in and between these two jurisdictions, without any need for tariffs, product modifications or re-labelling. EU law will then cease to apply to and in the UK as of 1 January 2021 – in other words, after a transition period of 21 months. There is a possibility for a one-off extension, for a limited period, even beyond that date.
- The Withdrawal Agreement does not get ratified by 29 March 2019: EU law will cease to apply to and in the UK as of 30 March 2019, without any transition period. This is often referred to as the "no deal" or "cliff-edge" scenario.
In the event of a "no deal" scenario, goods coming from or going to the UK will be treated as a exports from or imports into a “third country”, vis-à-vis the EU. Customs duties, VAT, and excise duties will be levied upon importation. However, Hong Kong businesses may like to know that exports to the UK from the EU will be exempt from VAT.
The Commission’s plan aims to raise awareness amongst the EU's business community. According to the Commission, in order to uninterruptedly keep trading with the UK, EU businesses should:
- Determine whether they have the technical and human capacity to deal with customs procedures and rules, e.g., on ‘preferential rules of origin';
- Ponder obtaining the necessary customs authorisations and registrations to facilitate their trading activity if the UK is part of their supply chain; and
- Contact their national customs authority to determine what other steps must be taken.
As of 18 February 2019 a range of material, that includes a simple 5-step checklist, has been made accessible for businesses in all EU languages. The material provides an overview of the steps that need to be taken in order to prepare for a “no-deal” scenario. Moreover, the Commission has published a series of notices which aim to better inform stakeholders and travellers about the consequences that a “no-deal” scenario could have for their business when it comes to customs procedures, indirect taxation such as VAT and excise duties, preferential rules of origin and import/export licences.
Furthermore, preparatory works produced by the Member States, and supported by the Commission, are reported to be underway. These seek to ensure that national customs infrastructure and logistics are also ready for a “no-deal” scenario. The Commission has further noted that Member States' action is essential. National authorities have a key role in monitoring and guiding industry preparations. On that basis, the Commission has held technical discussions with the EU-27 Member States both on general issues and on sectorial, legal and administrative preparedness steps. The Commission seeks to ensure that national contingency planning is on track in order to provide any necessary clarifications on the preparedness process.
The Commission has emphasised that to disregard the envisaged scenario, the UK's choice to leave the EU will cause significant disruption – an opinion widely shared by enterprises in different sectors of the economy.
Until this moment it is uncertain whether the Withdrawal Agreement will be ratified. However, due to the current chaotic situation in the UK Government and its Parliament over Brexit, traders should be mindful of the increased likelihood of a “no-deal” scenario, and take all steps that are deemed necessary to avoid any significant disruption to their trade.