How will a no-deal Brexit affect the supply of goods and services between the UK and the EU?

So how does a no-deal Brexit affect the supply of goods and services between the UK and the EU?

A no-deal arrangement will mean that initially, the UK would have to trade with the EU on World Trade Organization (WTO) rules. A fundamental principle of these rules is the principle of most-favoured-nation (MFN) which aims to eliminate discrimination between trading partners. Generally, this means that if the UK was to lower, for example, customs duty rates for a certain product for one trading partner, the same lower rate would also have to apply to that product for its other trading partners. There are certain exceptions to these rules e.g. free trade agreements, but if a free trade agreement cannot be agreed between the UK and the EU by the end of the transition period, the WTO rules would only allow such an agreement to be in place under strict conditions.

Supply of goods

Without a free trade agreement between the UK and the EU, from 1 January 2021, businesses will need to make customs declarations when importing goods to the UK or exporting goods from the UK. As the UK will be considered a third country, businesses may also need to hold certain licences or certifications and follow new rules depending on the types of goods being imported/exported.

The EU business exporting/importing goods to/from the UK will also need to check that they can make the necessary customs declarations and that they hold the relevant licences or certificates to export/import the relevant goods.

From 1 January 2021, the UK Global Tariff will apply to imports into the UK from the EU, payable at the rate on the day that goods are imported into the UK.

For exports from the UK, the tariffs payable will vary from country to country and from product to product. Suppliers should familiarise themselves with the local rules for each country it supplies – the applicable tariff rates can be checked here.

Parties should also expect VAT changes. Generally, goods leaving the UK will be treated as exports and most goods will be exempt from VAT. Goods entering the UK and EU Members States will be treated as imports and VAT will be chargeable at the local rate of VAT for the country of import and for that type of goods – the applicable VAT rates can be checked here. It is advisable to seek expert advice in your individual circumstances as the VAT treatment for B2B and B2C supplies of goods is a complex topic.

For goods in transit on 1 January 2021, if it can be proven that movement of such goods started before the end of the transition period and that the customs status of the goods are of Union goods, these may be treated as an intra-Union movement, and will therefore continue movement under EU rules[1].

Supply of services

The free trade deal between the UK and the EU would have focused mainly on goods, however the supply of services between the UK and the EU will also be subject to changes from 1 January 2021.

The right of free movement of services within the EEA will no longer apply to UK businesses so service providers should check that they are aware of and are compliant with regulations of the country that they conduct business in. B2B contracts for services are largely governed by contract law and legislation which will not be directly affected by Brexit however underlying legal and regulatory changes may affect performance.

Potential barriers to the supply of services include:

• the requirement for additional authorisations or licences;
• nationality requirements and restrictions on foreign nationals to own, manage or direct a company registered in the EEA;
• travel and entry restrictions;
• refusal of recognition of UK professional qualifications; and
• compliance with GDPR and data transfer rules.

Suppliers can check the requirements for providing services in European countries here.

Generally, the VAT rules will remain largely unchanged with the B2B supply of services continuing to be subject to the local rate of VAT in the country of the customer (subject to some exceptions) and the B2C supply of services continuing to be subject to the local rate of VAT in the country of the seller (subject to some exceptions). Suppliers will need to check whether they are required to register for VAT in the country where the service is supplied and whether a fiscal representative will need to be appointed. It is advisable to seek expert advice in your individual circumstances as the VAT rules for the supply of services is a complex subject matter.

The imposition of tariffs and the costs consequences of complying with regulatory changes will mean that from 1 January 2021, businesses can expect to incur additional costs in performing contracts to supply goods and/or services. Businesses should also expect to be affected by the economic consequences of the transition period ending (e.g. currency exchange rate fluctuations or changes to the rate of inflation) and potential business interruption as parties become accustomed to the new regimes and processes.

In the face of uncertainty, parties should turn in the first instance to their supply contracts which should set out which party is to be responsible for increased costs in performance, reliefs if performance is likely to be affected and termination provisions if continuing the contract is no longer profitable. If parties are using Incoterms, it would be sensible to review these terms ahead of the new year as they will set out which party is to be responsible for customs duties, VAT and other additional costs.

It is important that you are aware of the changes and are ready for the end of the transition period – you can check how you and your business may be affected and what you can do to prepare here.

Our commercial team would be happy to provide practical and strategic advice to ensure that your business continues to operate as smoothly as possible following the end of the transition period. You can get in touch with a member of our commercial team via our website.

[1] Article 47 of the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (2019/C 384 I/01)