We all knew Brexit could have a huge impact on commercial contracts and on how businesses import and export goods between the UK and EU. UK businesses are beginning to see how Brexit and the end of the transition period have really affected their commercial contracts and imports and exports. In these difficult times it is essential that business owners understand the legal impact of Brexit on their commercial contracts.
The legal impact of Brexit
The legal impact of Brexit and the end of free movement for EU nationals features on a daily basis in national newspapers and television news stories. Who would have thought, back in 2016, that the general public would hear so much about the UK skills shortage and business immigration rules. However, the lack of lower skilled work visa under the UK post Brexit points-based immigration system is only one aspect of Brexit that UK companies are having to grapple with as they come to terms with the legal impact of Brexit following the UK and the EU entering into the Trade and Cooperation Agreement. This Agreement was implemented into UK law by The European Union (Withdrawal Agreement) Act 2020.
Going back, it is The European Union (Withdrawal) Act 2018 that is the legislation that transitioned the UK from EU member state to detachment from the EU in the post Brexit era. The Act transported the majority of EU regulation into UK domestic law to avoid legal chaos at the end of the Brexit transition period, namely the 31 December 2020. The 2018 Act provides for EU regulations to continue to apply in UK law until the regulations are repealed or amended by further UK legislation or regulation. Frustratingly, for those UK companies who crave certainty to help with business planning and their commercial contracts, there is no schedule of planned EU regulatory changes.
As the government could make changes to EU derived regulations it is important to bear this in mind when negotiating and reviewing commercial contracts.
The legal impact of Brexit on commercial contracts
Many UK businesses assume that if their commercial contract is with a UK company or a non-EU international company Brexit will not impact on their commercial arrangements but that is not necessarily the case. It is good commercial practice to review business relationships and commercial contracts on a regular basis. With Brexit and its aftermath, failure to review or not spotting the legal ramifications of Brexit and UK deregulation could cost your company dearly.
Brexit and the Trade and Cooperation Agreement affects UK and EU businesses that export and import goods between the UK and EU through the introduction of border controls and import and customs duties. Whilst the headline news is that the Trade and Cooperation Agreement prevents the imposition of tariffs, quotas, and taxes in EU and UK trade deals there is a major proviso. To be tariff free or duty exempt the goods must originate in the UK or the EU.
To add to the post Brexit workload, some companies have found they now require licences to export. In addition, importers and exporters of commercial goods must obtain an EORI number (that starts with GB) that enables them to export goods from England, Wales and Scotland.
For more information on this topic read our guide to Brexit and commercial contracts.
Brexit and tariffs
The Trade and Co-operation Agreement provided, in the main, for tariff free and quota free trading between the EU and the UK subject to the provisos that:
- Custom declarations are made, and
- The traded goods comply with the relevant rules of origin, and
- Any industry or goods specific regulations are complied with. For example, regulations on packaging or labelling.
Complexities arise where:
- The traded goods do not fall within the relevant rules of origin, or
- UK companies are trading with companies in Northern Ireland under the Northern Ireland Protocol because, for the purposes of post Brexit trade, Northern Ireland remains within the single market for trade purposes, or
- Excise duties are applied to alcohol and tobacco products, or
- The UK company is providing services in the EU or receiving services from an EU company. That is because the Trade and Co-operation Agreement deals primarily with goods rather than services.
Whilst Brexit was hailed as offering freedom for UK businesses, many acknowledge that even with the Trade and Co-operation Agreement there is now more risk of UK businesses running into commercial trading disputes with their EU trading partners. That is one of the reasons why it is best to ensure that all commercial contracts are updated and are as water tight as possible to minimise the risk of trade disputes and commercial litigation.
Brexit, international trade and rules of origin
The Trade and Cooperation Agreement tariff free trading is only applicable where the goods traded originated in the EU or UK. The rationale behind the rules of origin is to prevent the UK or the EU being used as a means for third party countries to circumvent tariffs and quotas by transporting their goods via the UK or the EU.
In essence, zero tariffs on EU and UK imports and exports only applies on goods moving between the UK and the EU if the goods originate in the UK or the EU. If the goods originated outside the UK or EU, or are largely made from components or products that originate outside of the EU, then duties may apply.
Commercial solicitors say that the rules of origin are not easy for either UK or EU business owners to get to grips with because often goods are part produced in more than one country. Furthermore, even if the goods are fully manufactured in the UK their components may have been imported from outside the UK and EU. The rules of origin can cause businesses a real headache as in the case reported in the media of the popular Percy Pig confectionary; manufactured in Germany for Marks & Spencer, transported out of the EU to the UK and then imported back into the EU when delivered to Ireland for sale to the end consumer.
It is vital that rules of origin are carefully checked out before entering into a commercial contract for goods that involves importation or exportation to the EU, especially if before Brexit your company only ever traded within the EU and is not used to dealing with the custom and tariff issues that arise when you are not trading within a single market. Understanding the rules of origin checks are essential when your profit may be based on figures that assume that goods can be exported tariff free. Equally, it is essential not to make assumptions on the ability of the other EU based contracting party to comply with the terms of the supply contract when the costs of exporting goods from the EU to the UK may rise to a non-commercial level because they negotiated a product price on the assumption that the goods being sold complied with the rules of origin test. Whilst your UK business may think that you have an enforceable contract with your EU supplier that may not help with your immediate supply problems, especially if the contract termination clause enables your supplier to end the contract leaving your UK business without the goods needed unless you renegotiate the price to take into account the increased export duty overheads of the EU company.
Testing the supply chain
To ensure that your business can export tariff free to the EU or receive imported goods it can feel as if your purchasing and sales teams need a degree in the minutia of the Trade and Cooperation Agreement, your company supply chain and logistics. Whilst this may be second nature to UK companies used to trading with non-EU companies, many UK businesses are still struggling to get to grips with the complexities of the ‘rules of origin’ and either paying tariffs because it is easier to do so rather than face the paperwork or running the risk that forms have not been completed in accordance with the rules of origin.
Whilst some UK companies have got their accountants to see if it is cheaper to pay tariffs than complete the import/export paperwork (and in some cases it is) it is essential that the rules of origin do not lead to your company being exposed. For example, does your existing commercial procurement contract commit you to buying your widgets that you use in your manufacturing process from Japan? Does your sales contract with an EU company provide for you to ship your manufactured goods to France but with no provision for a price increase because of tariffs. If so, your company is stuck in the middle. Joined up commercial legal advice and a review of your supply chain and sales commercial contracts would have minimised these risks.
Importing and exporting post Brexit
One thing is certain, if you are in a UK business where you are importing or exporting goods into or out of the EU things cannot or should not stay the same. Inaction is either likely to lead to unbudgeted costs and tariffs making EU sales less profitable, to supply chain issues or, at its most extreme, to financial meltdown because your business becomes unprofitable as the importing and exporting of goods into and out of the EU, and your commercial procurement contracts and sales and supply chain contracts, have not been managed effectively.
There is no one solution for all UK companies. Nor does the solution depend on whether you are a start-up, SME or a long-established brand. The post Brexit trade solution is dependant on the sector you are in as well as your existing procurement and sales contracts and their review provisions and the availability of other suppliers or markets. For example, in an ideal world, after Brexit and with the worldwide supply chain crisis you would trade within the UK. For many companies that is not economically feasible as they need to buy goods from outside the EU, add value within the manufacturing or branding process and then sell on to where the market for the goods is; often in the EU.
Whilst there is no blanket legal solution to maintaining profitability and importing and exporting after Brexit, commercial contract solicitors recommend that all UK businesses:
- Take stock of where you are – this exercise may have been carried out after Brexit or just before the end of the Brexit transition period, but it is important that taking stock is repeated. This is far more than a ‘stock check’ but a multi-disciplinary look at your procurement, manufacturing and sales and should involve either your in-house or external accountants and your business advisers as well as your commercial solicitors.
- Keep on top of the law – although you may think you know the law and regulations applicable to your industry as the UK retained EU regulations you may find that the UK slightly amended the regulations you complied with through UK legislation. In addition, the UK government is committed to deregulation and more significant changes may be introduced through further UK legislation.
- Review your commercial contracts – although UK businesses were advised to review their supply chain agreements and their sale and distribution agreements before Brexit many either did not do so or with changing suppliers and sales need to do so again. A holistic approach to all your commercial contracts is needed so your business can extract itself from contracts where it may be economically in your best interests to do so, whilst also ensuring that with supply or other key contracts the other contracting party does not have the ability to terminate the contract early leaving you without an alternate supply of components or a sales source.
- Consider opening a base in the EU – this may appear to be an expensive solution but that is why a multi-disciplinary or joined-up approach to your business is required. Hundreds of large and small UK-based companies have already opened sister companies in the EU to help reduce the red tape and expense associated with Brexit having looked at the figures and ascertained that the cost of setting up an EU base is economically viable. For more information read our article Doing business in Europe: setting up an EU base.
- Assume the worst with supply chains and border delays – whether you are of the school of thought that supply chain issues are all down to Brexit or a more fundamental world-wide problem, you should consider future proofing your business relationships to anticipate supply chain issues and border delays. That way disruption should be minimised and the negative impact on profits reduced. If you have the finances available consider investing in or leasing additional commercial property for storage purposes.
- Look to new markets – whether in the UK or outside the EU there may be new business opportunities. The Department for International Trade is actively encouraging UK companies to explore global markets for their goods and has developed an interactive tool to look to market options for your goods. The tool can be found on the government website. In a changing economic climate, it is also worth UK manufacturers looking to see if they can buy their component parts from markets outside of the EU with the same or improved costs, quality and timings given the EU rules of origin that may justify looking further afield for imports.
Commercial contracts after Brexit
Even if you audited and reviewed your commercial contracts before the end of the Brexit transition period you cannot afford to relax and assume that your contracts remain fit for purpose. Commercial solicitors emphasise the importance of reviewing and checking:
- If your commercial contracts refer to the up-to-date regulations for your industry. For example, labelling or packaging or warning requirements.
- Currency clauses to ensure they remain appropriate.
- Delivery commitments especially if you have had to renegotiate transport costs or can no longer rely on deliveries being made on time.
- Additional costs faced by your company. For example, because you cannot comply with the rules of origin without significantly increasing your costs of production.
- Data protection and IP issues and rights. These areas may require review if for example you have now commenced trading online in EU countries or in a new EU country.
- The review provisions and the ability of either party to terminate the commercial contract.
- The enforceability of the commercial contract.
For more information on the importance of reviewing your commercial contracts read our article Why you should regularly update your commercial contracts.