Analyses & Studies

Bedding in the Brexit deal

Companies are now at the sharp end of the push for Global Britain, says Anca Toma-Thomson, Partner Corporate and Commercial at the law firm Spencer West, as the implications of the deal begin to be felt across UK industry sectors.

Four and a half years after the referendum, the very subject of Brexit continues to polarise opinion like few other issues.

Whatever your view of Brexit – whether it’s the greatest-ever democratic act of national self-determination, or the folly of sentimental nation pining for the glory of the Empire but shooting itself in the foot – companies are now at the sharp end of the push for ‘Global Britain.’

Although the political fanfare following the last-gasp Trade & Cooperation Agreement (TCA) signed by the UK and the EU in late December trumpeted the broad avoidance of tariffs, the business community’s immediate sigh of relief soon gave way to a more pragmatic assessment.  While the services sector – which accounts for around 75 percent and 80 percent of the EU and UK economies respectively – was largely skirted by the deal, the apparent shortcomings in the agreement over the trade in goods soon became apparent.

Trade in Goods – off to a sticky start

Once cross-channel freight volumes began to gradually pick up from their usual New Year lull, logistics companies, already carrying the extra burden from the impact of Covid-19, soon felt the impact of the new non-tariff barriers.

Delivery heavyweight DPD suspended some of their cross-Channel services, citing frontier delays related to paperwork and declarations required for goods imported to and exported from the customs bloc. Meanwhile, against the backdrop of confusion over how ‘rules of origin’ regulations should be interpreted, some suppliers halted cross channel sales on the basis that the new, opaque non-tariff barriers rendered their trade unviable. The lack of any ‘grace’ period to allow exporters to adapt to the new rules was compounded by customs officials, many themselves relatively new to the job, seemingly showing next to no tolerance for even minor inaccuracies or oversights in the necessary declarations. Some declarations were reportedly even rejected on the basis of the wrong colour of pen being used to fill out forms.

In view of the potential for delays and fines, and the risk that goods could even be impounded or returned, some suppliers soon concluded that cross-Channel trade was, for the moment at least, more trouble than it was worth for them. While the UK government remained optimistic that teething problems as new systems and procedures were bedded in would soon solve themselves, pandemic-hit businesses were largely left to ‘like it or lump it’ as hopes that the UK-EU borders would remain truly frictionless faded. Nevertheless, given that many UK businesses already trade globally on WTO terms, the sticky start to UK-EU trade in goods underlined the need for businesses to master the required declarations long before goods reach the port.

Northern Ireland’s special status brings early issues of its own

Even within the UK’s ‘internal market’, companies trading between Great Britain and Northern Ireland were quick to voice concerns over non-tariff barriers. Online retail behemoth Amazon suspended sales of beer, wine and spirits in Northern Ireland, citing concerns that excise duty on booze shipments from Great Britain to the province could be payable twice. With several other major retailers such as John Lewis also suspending sales to Northern Ireland until greater clarity emerged, smaller suppliers could perhaps be forgiven for asking whether, considering the resources the market’s biggest names have at their disposal, if they can’t figure it out then what chance do the smaller players have. In that regard, despite the UK government’s pledge to release new guidance to clarify any remaining issues, even the most fervent Brexit proponent would admit that, a full month into the new arrangement, clarifications should have been available from day one.

Brexit requires better planning for mobility of people across borders

While Brexit has imposed restrictions on the free movement of people, December’s deal has provided some welcome provisions to help with labour mobility. The UK’s settled workers scheme covers those EU nationals already in UK work, although future work arrivals will be subject to the UK’s new points-based immigration system, whether they come from the EU or beyond. Nevertheless, it’s not all bad news on the mobility front as December’s deal provides multiple provisions for the business-related movement of people for entry and temporary stays, including stints of up to 90 days in a six-month period under certain circumstances, without the requirement for a work permit. So, while Brexit has created new barriers for businesses to move people around, better planning, bolstered by specialist advice, can help to alleviate mobility issues.

Despite some scaremongering, there is no reason to think that the UK Employment legislation that has been driven by the intensive EU jurisdiction will water down its standards, with the political environment particularly sensitive to proposals likely to adversely affect workers. If anything, the current climate will most probably condemn any lenience towards undermining employees’ rights, such as those brought in by Transfer of Undertakings (Protection of Employment) (TUPE) regulations, equal pay or maternity rights. However, over the medium-to-long term we could potentially see changes introduced, such as on the working time directive. The UK employment market has always been more dynamic and flexible than its EU peers and evolution in legislation governing the UK labour market is likely to reflect its ability to adapt to change.

Brexit deal – thin on goods, even thinner on services

London’s financial sector has been one of the UK’s greatest global success stories over recent decades. Nevertheless, the City has been largely overlooked by the TCA, with the passporting arrangement that provided access to EU markets brought to an end, and discussions over “enhanced equivalence” long since falling by the wayside. Discussions over a future framework for equivalence decisions have targeted a Memorandum of Understanding due by March. However, with Bank of England Governor Andrew Bailey, himself the former head of the UK’s Financial Conduct Authority, stressing the need for the UK to avoid becoming a mere ‘rule taker’ and UK Chancellor Rishi Sunak heading up a body aimed at freeing UK businesses from EU red tape, the prospect of meaningful UK divergence from EU rules has become increasingly real. In late January the European Commission upped the stakes by granting equivalence status to US clearing houses, a move seemingly aimed at putting the squeeze on UK clearing agencies that presently have permission to operate in the EU until mid 2022.

Grey areas abound in post-Brexit UK-EU jurisdiction matters

Even at around 1,200 pages, few could expect the TCA to address all aspects of the post-Brexit UK/EU relationship. However, some of the more obvious shortcomings of the agreement included the lack of clarity of how contract disputes can be resolved, particularly as the key issue of how judgements in EU and English courts should be recognised is not addressed for any litigation action instigated since the start of 2021. The UK’s bid to join the Lugano Convention may eventually provide some clarity for disputes spanning the now-grey area of the appropriate weigh given to UK-EU judgements. However, the administrative hurdles required to join the 2007 Convention could take several months yet to clear, creating uncertainties in the meantime.

At present, the common law rules established by the Hague Convention will apply. Nevertheless, major issues remain over jurisdiction matters. How, for example, can a UK court decision be implemented in an EU country on a party that is registered in EU, resides in EU or has assets in EU only and not in UK?  At the very least, it’s safe to say that the choice of law clauses will require very careful consideration in cross-border contracts of this nature.

Company matters

The application of the Companies Act 2006 remains a matter of UK domestic law and is in general not affected by the UK’s departure from the EU. Any UK companies that have established a subsidiary or branch in an EU member state will of course be required to comply with any local rules regarding reporting and accounting.  This requirement was in certain aspects already present before Brexit for any established legal entity with legal personality.

However, on the other side of the coin, an EU-established company that has a UK-registered branch or place of business will have to provide the UK’s Companies House with additional information that they were previously exempt from. Such information includes basic matters such as where the company is incorporated, where its registered or principal place of business is, what the objects of the company’s business are, the company’s issued share capital of the company and accounting period dates.

One important – and potentially critical - consequence of post-Brexit changes is that the limited liability status of a UK registered company might not be recognised in an EU country. Specifically, this could occur in cases where their place of business or management will be in that particular EU country. That country’s company law will apply, and it could be that the limited liability status recognised in the UK will not be applicable locally. The shareholders could even be personally liable, potentially making the post-Brexit situation a complete game changer. Therefore, the value of specific legal advice on these matters cannot be overstated.

As the majority of corporate M&A transactions that are either domestic or cross-border are normally governed by private contractual amendments, post-Brexit these will not change significantly. Attention, however, should be given to competition issues and clearances that need to be obtained and dispute resolution issues.

In the context of companies, insolvency is another area where post-Brexit changes apply. Any insolvency proceedings opened from the start of January will not be automatically recognised in EU countries. Therefore, cross border insolvency proceedings may need to be started in any EU member states where the cross-border element is applicable. Consequently, the cost often associated with such insolvency proceedings is likely to increase.

IP and Data Protection considerations

From 1 January 2021, any EU-registered trademarks ceased to cover the UK, and vice-versa. The UK will, however, grant UK registrations to the owners of EU-registered rights that will keep the initial registration date and fillings. It appears that no fees will be charged for these new UK rights when they are created, but only for renewal.

For pending EU trademarks that were not yet registered by 1 January, there will be a nine-month period during which the owners will be able to apply to the UK to register such trademarks. This will be a new application process and payment of a fee will be required.

Regarding the Data Protection, following Brexit, the UK now has its own data protection regime.  The main piece of legislation is a version of the General Data Protection Regulation 2016 which has been amended to reflect the UK’s position following Brexit (the UK GDPR).  This should be read with reference to the UK’s Data Protection 2018.  The Information Commissioner’s Office (ICO) has already stipulated that it will have the independence to review this.

Outlook

Without stating the obvious, whether we like or dislike Brexit, as with every opportunity, it is what we will make of it. The meander of legalities and opportunities will develop as companies adapt to the reality of the post-Brexit environment. The UK will take its own decisions and almost certainly retain a good number of legal developments inspired by EU legislation that are already imbedded in its domestic legislation. Doubtless some laws will change; the UK has always had thriving flexibility in its legislative decisions and there are sound reasons why English law is very often chosen as the governing law and jurisdiction clause in contracts relating to cross border transactions. Moreover, notwithstanding the short-term uncertainties as companies adapt to the implications of Brexit, free enterprise has a knack of finding a way forward, especially if it is not stifled by political ambitions and point scoring. -Anca Toma-Thomson, Partner Corporate and Commercial, Spencer West

Spencer West is a leading full service international law firm advising businesses and individuals across the UK and globally.

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