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The first of the government’s No Deal Brexit contingency planning notices have laid bare the extent of the upheaval, and potential damage, that will be inflicted on the UK economy and on the daily life of its citizens in the increasingly likely event that the UK crashes out of the European Union (EU) without any kind of deal at the end of March 2019.
In a speech delivered today, Brexit secretary Dominic Raab said the government had a duty to plan for every eventuality and consider that the EU might not “match our ambition and pragmatism”.
“To do this, we need to have a sensible, responsible and realistic conversation about what a ‘no deal’ situation really means in practice,” he said.
“For citizens, for businesses, for public sector bodies and for NGOs, and we need to take some steps now, so that we can avoid and mitigate those risks that arise.”
However, Raab said he still believed getting a good deal was “by far the most likely outcome” and claimed that “roughly 80% of the withdrawal agreement” was now settled.
“I want to reaffirm what we expect the negotiations to deliver – a good deal with our EU friends,” he said. “One that works in our mutual interests, and a deal that recognises our shared history and values, but also provides a strong and sustainable foundation for our future relationship.”
TechUK deputy CEO Antony Walker said the papers showed more clearly than ever why it is so important for the tech industry that the government secures a comprehensive deal with the EU, because failure to do so would mean significant new bureaucracy for businesses, and higher costs and less choice for consumers.
“Most significantly, the papers make clear that No Deal means a full third-country customs regime with the EU,” said Walker. “That would create significant and unpredictable disruption to supply chains, new costs for UK tech businesses exporting to the EU and long delays for those trying to get goods into the UK, including the millions of packages sent via just-in-time e-commerce services.
“TechUK welcomes the fact that government is being honest about the problems a No Deal situation would cause and doing its best to address issues where possible. We welcome the clear commitment to introduce postponed accounting for VAT. This is a positive step that will ensure businesses do not face an immediate cashflow crisis as a result of at-the-border VAT charges the day after Brexit.
“However, the potential complexity of such a system shows yet again that the UK government can only do so much to mitigate the impact on millions of businesses.
“The notices also lay bare some of the other challenges facing the UK tech sector if there is no deal. Rules covering payment services will cease to apply, affecting many new fintech companies and meaning charges for using credit cards are likely to increase and payments in different currencies could slow.
“The UK would no longer be able to approve new medical devices for use in the EU and all UK businesses and businesses selling dual-use equipment would have to apply for new licences. All of this would create cost and complexity that would damage some of the UK’s fastest-growing and most innovative businesses.”
Trade, customs and VAT
No Deal will see goods entering and leaving the UK from and to the EU treated in the same way as goods from the rest of the world are currently treated.
This means importers and exporters will need to register for a UK Economic Operator Registration and Identification (EORI) number and should already be taking steps to consider how they will submit import and export declarations, such as through a customs broker or other logistics provider, or by doing it themselves, in which case they will need to buy relevant software and secure authorisations from HM Revenue & Customs.
The government also advises businesses to begin to consider a number of possible mitigations for trading after No Deal. These could include: customs warehousing – storing goods with duty or import VAT payments suspended; inward processing – importing goods from outside the EU for work or modification in the EU; temporary admission – for goods such as samples, professional equipment or items for auction, exhibition, and so on; and authorised use – allowing a reduced or zero rate of customs duty on some goods used for specific purposes during a defined timeframe.
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A No Deal Brexit would also leave the UK outside the EU’s VAT IT systems, such as the VAT Mini One Stop Shop (Moss), an online service that allows EU businesses selling digital services across the EU to report and pay VAT via a single return and payment in their home country.
In the case of No Deal, businesses selling digital services to EU consumers will have to register for the Moss non-union scheme, which applies to third countries. This means they will have to register in an EU member state, which can only be done after 29 March and must be done by the 10th day of the month following a sale.
This means that if a UK business sells a digital service into the EU on 30 March, for example, it must register by 10 April. The alternative will be to register in each EU member state where they make sales.
Businesses will also see their access to the EU’s VAT refund system revoked, and will have to start using existing processes for non-EU businesses. These can vary from member state to member state.
As mentioned by TechUK’s Walker, the introduction of postponed accounting for import VAT will mean that UK VAT registered businesses importing goods will account for the import VAT on their VAT return, not at the port of entry – in the same way that they currently do with goods from outside the EU.
No Deal for fintech
The loss of passporting rights – the ability of firms, financial market infrastructures, and funds authorised in any European Economic Area (EEA) country to carry out many activities in any other EEA country – has been well established as a consequence of multiple Brexit scenarios.
The government’s notice on financial services reiterated the consequences of the loss of passporting rights for UK-based financial services firms operating in the EU, including fintech firms, such as the ability to enable customers in the EU to access their services.
The government said it remained committed to resolve these issues as far as possible on the UK side, but noted that this would depend on reciprocal action from the EU, which cannot be guaranteed, particularly in the event of No Deal.
Following a No Deal Brexit, UK-based payment services providers will immediately lose direct access to central payments infrastructure, such as Target2 and the Single Euro Payments Area (Sepa), which means customers would face higher costs and slower processing times if transacting in euros. The government said it hoped to align payments law to maximise the likelihood of the UK remaining part of Sepa as a third country.
The cost of making cross-Channel card payments is also likely to increase, with such payments no longer covered by the EU’s surcharging ban, which stops businesses from charging consumers for using a specific payment method.
When it comes to transfers of personal data between the UK and EU, the government has yet to publish a technical notice covering this, but stated its intention to.
Horizon 2020 and Erasmus+
Having already agreed that the eligibility of UK researchers and businesses to take part in the EU’s Horizon 2020 R&D programme will remain unchanged for the duration of the programme, the government said that nevertheless, in the event of No Deal, UK organisations may still be unable to access funding for Horizon 2020 projects after 29 March 2019.
In this event, the government has already said it will guarantee funding for bid-for EU projects submitted before 29 March for their full duration, although this does not necessarily cover consortia including UK participants, something that is still being worked out.
Since July 2018, the guarantee now also covers funding for successful bids where UK organisations can take part in Horizon 2020 programmes as a third country until the end of 2020.
Therefore the government intends that UK researchers and businesses can continue to participate in Horizon 2020 calls open to third-country participants, and has proposed a cooperative accord with the EU on science and innovation, but it is still considering other measures that may be necessary to support UK R&D following a No Deal exit.
Current recipients of Horizon 2020 funds will soon be asked to give initial data on their projects to UK Research and Innovation (UKRI) to help deliver the underwrite guarantee if it is needed. The same guarantee has been offered on a similar basis to student participants in the Erasmus+ programme.
Broadband state aid
With the government’s broadband roll-out programme, Broadband Delivery UK (BDUK) having been a reasonably successful example of a programme run under the EU’s existing rules governing state aid, continuity of funding for any future projects that may be required as the UK moves towards improving access to full-fibre broadband means that state aid legislation will be extremely important.
Ultimately, the government wants to create a UK-wide subsidy control framework to ensure control of anti-competitive subsidies, but to begin with, the government will unilaterally transpose EU state aid rules into UK law ahead of the Competition and Markets Authority taking on the role of enforcement and supervision.
It is important to note that at the risk of UK companies being excluded from EU markets, the UK’s state aid rules will have to mirror the EU’s whether there is a deal or not.
In the event of No Deal, the CMA will immediately take over state aid regulation in the UK, with the new regime applicable to all businesses operating in the UK, whether British, European or from somewhere else. Public authorities will then need to notify state aid to any undertaking to the CMA, not the EC, while existing approvals of state aid will remain valid through the transposition of EU state aid law.
TechUK’s Walker added: “While these notices show that the government is aware of the many challenges facing us in the event of No Deal, it is worth noting that this is just the first tranche of papers.
“Many of the issues of highest importance to the UK tech sector, such as the status of EU citizens, the free flow of data and the rolling over of existing EU trade deals, are missing. It is vital that businesses are given the opportunity to make a full assessment of the situation as soon as possible in order to plan accordingly.”