15 Jan 2020
Brexit: A Last Mile Checklist
On 12 December 2019, UK Prime Minister (PM) Boris Johnson’s Conservative Party convincingly won the country’s parliamentary election. Johnson returned to Downing Street with a large majority in the House of Commons and a strong mandate to fulfil his promise to leave the European Union (EU) by 31 January 2020, with the election having ended the parliamentary deadlock with regard to Brexit. On 9 January 2020, the PM cleared the final hurdle in the House of Commons, with MPs finally passing the government’s EU (Withdrawal Agreement) Bill, also known as the WA Bill, by 330 votes to 231 – a majority of 99. The bill sets out the legal framework for the UK PM’s deal with the EU. Upon its expected endorsement by the House of Lords, the deal still needs to be approved by the European Parliament, but it is expected to be voted through with few problems during the parliament’s 29-30 January plenary session.
Assuming it is, the UK will formally leave the EU on or before 31 January 2020 with a withdrawal deal in place and will then enter a transition period that is scheduled to expire on 31 December 2020. During this period, the UK will effectively remain in the EU’s customs union and single market but will be excluded from the EU’s political institutions.
As part of the WA Bill, the UK government has ruled out any form of extension to the transition period. It intends to begin negotiations with the EU as quickly as possible in order to conclude an agreement or a Canada-style trade deal – a Comprehensive Economic and Trade Agreement which is arguably the most ambitious trade agreement that the EU has ever concluded – with regard to the future relationship between the UK and the EU by the end of the transition period. However, it is widely believed that it will be all but impossible to negotiate all aspects of the UK’s future relationship with the EU within such a tight timescale.
For one thing, the EU could take weeks to approve a formal negotiating mandate – this must be formally agreed by all the remaining 27 Member States and the European Parliament. For another, the UK still has to make clear what its objectives in any talks over the future relationship will be. This means that formal talks may only begin by March 2020. The new European Commission President Ursula von der Leyen has suggested reviewing the progress of the talks in the middle of the year or before summer.
Without an extension to the transition period, and if no trade deal has been agreed and ratified by the end of 2020, the UK will face the prospect of a hard Brexit. The UK PM has argued that as the country is already completely aligned with EU rules, the negotiations should be straightforward. However, critics have pointed out that the UK wants to have the freedom to diverge from EU rules in order that it can do trade deals with other countries; this is likely to become a major sticking point in the UK-EU trade negotiations.
With a hard Brexit remaining a distinct possibility, the UK is likely to continue to prepare for a potential no-deal scenario, in parallel with the trade negotiations it will be conducting with the EU. As 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 such a scenario could result in significant disruption to their supply chains. Hong Kong traders should have proper procedures and planning in place, in order to reduce the potential impact of Brexit wherever possible.
The Q&As below are designed to help Hong Kong traders take precautionary measures, either in the event of the forthcoming UK-EU negotiations leading to a trade deal which guarantees the UK-EU relationship after 2020, or a disorderly Brexit in which the UK leaves the EU without such a deal.
1. I’m a trader selling to the UK and distributing to the rest of the EU from there. What can I do to safeguard my business in the EU market if the UK leaves the EU in an orderly manner? What will my position be if it turns out to be a no-deal Brexit?
As a trader wishing to keep any increased costs and delays to a minimum in a post-Brexit scenario, it will be especially important to pay attention to: a) customs clearance compliance and the possibility of import tariffs (i.e. customs arrangements and payments), and b) product standardisation requirements and product safety issues (i.e. regulatory compliance).
As discussed above, the UK is highly likely to leave the EU with a ratified WA deal in place by 31 January 2020, paving the way for a possible permanent agreement between the UK and the EU (a Free Trade Agreement, or FTA). The WA allows for a transition period until the end of 2020. Distribution of imported goods from the UK into the EU27 market will continue on the existing basis during the transition period. In other words, a standstill will be in place until the end of this year in which the existing trading and regulatory arrangements between the EU and UK continue unchanged for Hong Kong sellers.
A no-deal Brexit, in which the UK crashes out of the EU without any arrangements or transition period in place, will now almost certainly not happen this year, but could occur if there is no UK-EU FTA in place by the end of 2020, and there is no extension to the transition period. So, a hard Brexit could still occur at the end of the transition period.
With a hard Brexit, there will be no orderly UK departure after 2020. Goods to be distributed in any of the EU27 market would be deemed as “imported” into the EU from the UK. Goods which are brought into the customs territory of the EU from the UK will be subject to customs supervision and may be subject to customs controls in accordance with the European Union Customs Code. This implies that customs formalities will apply, declarations will have to be lodged and customs authorities may require guarantees for potential or existing customs debts. Goods which are brought into the customs territory of the EU from the UK will also be subject to the EU’s Common Customs Tariff. This means that, in principle, the relevant customs duties will be applied. 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.
It is likely that for several weeks or months, or even longer, there will be long delays for cargo traffic at the UK’s borders, as both cargo and administrative documents will become subject to inspections.
Goods imported into the EU from the UK after a hard Brexit will have to comply with EU regulations. As a consequence of Brexit, an economic operator established in the EU27 who previously (including during the transition period) was considered an EU distributor will become an importer for the purposes of EU product legislation. 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.
For some products, EU legislation requires the intervention of a qualified third party, known as a Notified Body, in the conformity assessment procedure. When the UK leaves the EU, its Notified Bodies will lose their status as EU Notified Bodies and will be removed from the Commission's information system on notified organisations (the NANDO database). As a result, UK Notified Bodies will not be able to perform conformity assessment tasks relating to EU product legislation after Brexit.
2. I’m a trader selling to the EU (including the UK) mainly via 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 Dutch port of Rotterdam or the German port of Hamburg to the UK will be deemed imports into the UK. During the transition period which will apply under the withdrawal agreement, 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 FTA agreed after the end of the transition period, imports into the UK from the ports of Rotterdam or Hamburg will become subject to new UK-imposed tariffs. It may be that under a Temporary Tariff Regime, classification of goods could remain the same in order to provide continuity to companies currently interacting with the EU system so as to minimise disruption for traders, and that most import duties might be set to 0%.
On 8 October 2019, as part of the UK’s no-deal preparations, the UK Treasury and the Department for International Trade published an update to the UK’s temporary tariff regime that was intended to be put in place had the UK left the EU without a deal at the end of that month. This updated regime allowed 88% of imports by value to enter the UK without being subject to tariffs. This regime will come into force in the event of a no-deal Brexit and be replaced by a permanent tariff regime developed in light of consultation with stakeholders within 12 months. Please be aware that this updated regime could be subject to change.
As regards regulatory compliance, goods imported into the UK from the ports of Rotterdam or Hamburg after a hard Brexit will have to comply with UK regulations. As regulations may diverge from EU regulations, it is advisable to check the UK Guidance (including future updates) on this.
3. As there’s not yet any clear picture of how the future UK-EU relationship will look like, what should I do at the moment when receiving orders from UK customers? Are there any checklists of items that I should vet before entering into any sales contract?
It is currently expected that the withdrawal agreement will be ratified, and that the UK will formally leave the EU on 31 January 2020. An 11-month transition period is also expected to apply as part of that agreement. Therefore, when receiving orders from customers for goods and services that are expected to enter the UK market before 31 January 2020, these should be processed according to current operating procedures. Assuming the withdrawal agreement and transition period are adopted, which is likely, that position will continue until the end of 2020.
However, it is by no means certain that an FTA will be agreed by the end of the transition period. It is therefore a good idea to prepare for the possibility of a hard Brexit from 1 January 2021. Hong Kong sellers should check whether their operating procedures will, at that time, 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: (a) trade goods into the UK, (b) lodge a customs declaration in the UK, or (c) 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. 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 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: Contracts should be checked for provisions on payment. To mitigate a hard Brexit scenario, Hong Kong traders may wish 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 the 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 a contract 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. It should also be checked whether the drafting is clear in relation to: (a) whether the right to termination is bilateral or unilateral, (b) the timeframe for when a contract no longer becomes binding following termination, (c) whether there is an obligation to compensate or a penalty to be paid for termination, and (d) 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 possible that UK rules on packaging and labelling will mirror EU rules – but 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 will not become a Brexit casualty?
Currently, there are two parallel systems for obtaining registered trademarks which cover the UK - UK registered marks, which are obtained through and administered by the UKIPO, and 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 the transition period, if any, 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 the end of the transition period 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 cease to have effect 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 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 cost-effectively protect their trademarks 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.
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 trademark holder could lose its EUTM if it is not used in the EU27 post-Brexit.
It is also recommended to review existing licensing agreements 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 co-existence 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 GDPR came into force on 25 May 2018 and standardises 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. If the GDPR does not eventually become part of a future UK-EU trade deal, you will have to abide by the 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 – if there is a no-deal Brexit after the transition period - these issues will be addressed in an agreement covering data protection or not.
The current situation is that after the UK leaves the single market (i.e. after any transition period), 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. Canada, Japan, Switzerland and the US) recognised as providing an “adequate” level of protection for personal data. The UK is not currently on this list, and it will take some time before an “adequacy” finding can be made to add the UK to it. 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 such standard data protection clauses when transferring personal data about EU citizens to the UK.
It is also important to note that companies that have their sole EU establishment located in the UK may still need to comply with the GDPR after the UK leaves the EU single market. 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: (a) 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 (b) 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 means 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 located 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 local data protection authorities of each Member State in which the group is established.
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 (with the adoption of a withdrawal agreement and transition period) then the situation is expected, in general, to continue “as is”, at least until the end of the transition period. That is likely to change in the case of a hard 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. In fact, companies or individuals exporting goods from the UK to the EU would have to fall back on World Trade Organization (WTO) trading 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 burdensome than is currently the case to sell from the UK into the EU. At the same time, it is not essential for an SME based 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 FTA.
However, it is not uncommon for 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.
This will depend on a variety of factors. It is, for example, more likely to be advisable 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. Locating in the EU (rather than selling into the EU from the UK) would in this case help to avoid duplicating the cost and administrative burden associated with first importing into the UK and then into the EU.