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Four and a half years after the Brexit referendum was held in 2016, the UK Government and the EU Commission agreed an historic trade and security deal which replaced the UK’s application of the EU trading framework on 1 January 2021.
The UK/EU free trade agreement (FTA) is the biggest trade deal ever signed by the UK and the EU, covering bilateral trade worth more than £660bn annually. The deal has been designed to account for the UK leaving the EU customs union and single market as of 1 January 2021. This will bring significant change to how British and European businesses trade in future, restoring the UK’s position as an independent customs territory, as it was before signing the treaty of Maastricht in 1992.
The treaty text contains over 2,000 pages of legal treaty text and was approved by the UK Parliament on 30 December 2020. The trade deal still needs to be approved by the EU Parliament and the 27 EU member states individually and is therefore applied provisionally until full ratification.
Many detailed questions about the new trading relationship remain. However, the following is a summary of the seven most important facts about the Brexit trade deal.
1. The Withdrawal Agreement – terms continue to apply in 2021 and beyond
The Withdrawal Agreement and the Political Declaration, which were agreed on 17 October 2019, set out the terms of the UK’s exit from the EU. It also provided the framework of the Brexit transition phase during which EU rules continued to apply for the UK and came to an end on 31 December 2020. The terms of the Withdrawal Agreement and the Political Declaration form the basis of the new FTA and will continue to apply in parallel, particularly in areas such as UK and EU citizens’ rights, the commitment to avoid a hard border on the island of Ireland and the UK’s financial settlement obligations towards the EU.
2. Goods and Customs – an implementation period is urgently required
Although the UK formally left the EU on 31 January 2020, movement of goods between the UK and the EU have been subject to EU trading rules during the transition phase. This included membership of the EU customs union and single market arrangements, and EU VAT rules.
With the end of the transition period on 31 December 2020 and the start of the new FTA rules, the UK has created a new customs border with the EU. The new FTA guarantees zero tariffs and no quota restrictions for almost all goods moving between the UK and the EU, which is certainly good news for businesses. However, standard customs procedures still need to be followed resulting in over 230 million additional customs forms that need to be filed per year, which are burdensome and expensive. In addition, customs rules prohibit businesses from filing import and export declarations in customs territories where they are not established, meaning that many businesses will have to appoint an agent to file customs paperwork with authorities.
According to the Road Haulage Association the UK still requires more than 20,000 customs agents to meet the demand from European traders importing to the UK, which will lead to further border chaos throughout the beginning of 2021.
The UK Government must introduce easements for European importers to keep goods flowing into the UK.
3. Workers and Immigration – UK employers are facing a cliff-edge
One of the UK Government’s red lines during the Brexit negotiations has been the termination of the free movement of people arrangement with the EU. On 1 January, the UK introduced a new points-based immigration system, which will prohibit EU citizens from entering and working in the UK without a work visa. The rules for UK employers to offer EU citizens – who do not have settled or pre-settled status – jobs are complex and require the application of an expensive sponsorship licence.
Many UK sectors, like the construction industry or hospitality sector, depend on skilled EU workers and face a cliff-edge with regards to their staff resourcing in 2021. Businesses across the country are looking to recover from the current economic crisis and will be hit hard without access to the vital European labour market.
The UK Government should show flexibility and delay certain provisions of the points-based immigration system by at least 12 months.
4. Cross-border services – the no-deal situation
The focus of the initial free trade agreement with the EU has been a zero-tariff and zero-quota trade deal for goods only, which has been achieved. However, due to the limited time to negotiate, the services sector has been left out.
Comprehensive provisions on services are not commonly included in free trade agreements. However, the UK’s services sector is heavily interlinked with the EU and the absence of provisions in the trade deal will mean restrictions and less EU market access for the UK’s services industry. UK professional qualifications may not be recognised in the EU (and vice versa), although the UK and EU member states could decide to unilaterally recognise each other’s professional qualifications or provide streamlined routes to re-qualification.
UK services firms will also face additional barriers to establishment in the EU. They would have to comply with usually more onerous third country rules of establishment (such as rules on the nationality or residency of directors or caps on foreign-held equity). The precise rules on market access would vary between EU member states and could effectively bar some UK services firms from the EU market. The UK Government will have to continue negotiating with the EU to add more industries and sectors to the trade agreement over time to overcome these significant restrictions.
5. Finance and capital – expect restrictions for moving money
The EU framework allows for free movement of finance and capital across EU member states. EU directives such as the Interest and Royalties Directive, the parent subsidiary directive or the mergers directive will generally continue to apply where the UK is one party to a transaction with an EU company. However, the other country will now regard the UK as a non-EU country, and so will not give a UK entity the benefit of favorable treatment.
For payments by an EU company to the UK, withholding tax is now likely to apply. This will depend on the local rules in each country, and whether a Double Tax Agreement (DTA) applies to reduce the rate of withholding tax. Key countries which are likely to impose withholding taxes on interest are Belgium, Malta and Portugal, all of which impose tax at 10%. Where an EU subsidiary pays a dividend to the UK, withholding tax may be imposed. The rate will depend on local laws and the relevant DTA, but key countries which are likely to impose withholding taxes are Ireland (5% but reduced to nil if certain conditions are satisfied), Belgium (10%) and Luxembourg (5%).
6. Northern Ireland – a complex half-in, half-out solution
The Brexit Withdrawal Agreement provided that a land border on the island of Ireland should be avoided as part of the UK’s departure from the EU. However, due to the UK’s exit from the EU customs union and single market, this has created a significant challenge to avoid a customs border between Northern Ireland and the Republic of Ireland. As a result, Northern Ireland will remain in the EU’s single market for goods only to allow the flow of goods without customs formalities. However, Northern Ireland will also stay in a customs union with the rest of the UK as well, creating significant complexities for businesses trading with Northern Ireland.
As a result, one of the most complex dual VAT and Customs regimes in the world will be created for Northern Ireland, which will significantly increase the costs for traders, even for domestic trade inside the UK.
There is still a lack of guidance of how to apply the new trade rules between Great Britain and Northern Ireland and how the newly developed customs software will work, raising the demand for an implementation period to allow for more time adjusting to the new regime.
7. The next steps – continued negotiations can be expected
The UK/EU trade and security deal is only the first step towards a comprehensive free trade agreement between the two sides. Many business sectors are not covered by this first deal and are now facing significant disruption since 1 January, such as the vital services industry which makes up over 80% of the UK’s economy.
The EU is a dynamic alliance of 27 countries that permanently change their political landscape. The UK Government and the EU commission will continue to negotiate for years to come to improve and widen the terms of the trade relationship. A good example for this is Switzerland that is in permanent negotiations with the EU to keep their trade relationship on fair terms. It is safe to say that the UK can expect at least the same in the years to come.
Would you like to know more?
If you would like to learn more about how Brexit may impact you, please visit our Practical Guidance: Brexit hub here.
And if you have any questions or would like to discuss your specific circumstances, please get in touch with your usual Blick Rothenberg contact or one of the partners on this page.