Background to the Current Brexit Confusion
The Transitional Phase of the Withdrawal Agreement between the UK and the EU concluded on 31st December 2020, as we all know. This phase of the agreement was intended, among other things, to ensure frictionless trading between the two jurisdictions. While politicians on both sides have hailed the Trade and Cooperation Agreement as a “free trade deal”, many misinformed UK businesses have since discovered that they now face significant additional costs and must handle more responsibilities on their exports bound for the EU.
While many businesses are continuing to try to understand the complexities of the agreement, one such difficulty which has become immediately apparent is the “Rule of Origin”. In a nutshell, this rule means that any goods arriving to the UK from outside the EU, which are then exported from the UK into the EU, will be subject to customs duties. This has come as a great surprise! As exports to the EU make up more than half of the UK’s trade, the “rule of origin” will turn into a costly headache for many businesses – particularly for those businesses which continue to source their products from outside the UK or the EU.
Serious Problems Arising for British Business
Prior to 31st December 2020, it will have been common for many UK Small Medium Enterprises (SME’s) to have exclusively traded with UK and EU customers. Therefore, until that date, goods will have moved relatively freely between these jurisdictions.
It is now clear that UK business has been blindsided by this “rule of origin”. Since 1st January 2021, many businesses which have exported goods to their European customers have had to deal with the logistics of getting their products cleared by customs before securing permission to complete these deliveries. However, while this may be an initial teething problem at customs level, the “rule of origin” will now leave many UK businesses with a serious competitive disadvantage going forward and they now have a number of unattractive choices to consider.
Many UK businesses are starting to become familiar with the additional customs obligations, duties and logistical responsibilities which are associated with the movement of goods across EU borders. While these additional obligations have arisen as a result of Brexit, they were not properly anticipated or flagged when the Trade and Cooperation Agreement was reached between the negotiating teams of the two jurisdictions.
Options available now for British Businesses Trading with the EU
Due to the lack of accurate information available to business in advance of BREXIT, many UK businesses now find themselves facing a number of the problems referred to above. In addition, the timing of the recent agreement unfortunately meant that many businesses were not afforded sufficient time to properly prepare a strategy for dealing with what is now essentially a completely new EU market.
British businesses are now faced with three options when deciding how to address their EU opportunities in the future, in terms of the significant and additional costs of doing business. They are as follows:
Option 1 – Absorb the Additional Costs and Responsibilities Arising
Any UK business which chooses to continue to trade with its EU customers can decide to absorb the logistical costs and customs duties associated with this element of their business. However, this option will obviously increase their costs and therefore impact on the related profit margin arising from such business.
Option 2 – Cease Trading with European Customers
Instead of incurring any additional overheads and handling more responsibility associated solely with their European customers, a UK business may decide that absorbing such costs may render this market unviable. In this case, they may decide to cease all trading within the EU. However, this option will have the effect of reducing the business activities of the company equal to the revenue foregone by ceasing to trade in this market.
Option 3 – Set up a Subsidiary Company in a European Member State
Alternatively, if the UK business wishes to continue to service its European customers but without affecting the profit margin of its existing business model, the most appropriate option is to incorporate a company in a country which continues to be a member state of the EU. In many instances, this will eliminate the many difficulties arising as a result of the recent Trade and Cooperation Agreement and should have little or no overall effect on the level of business undertaken by the business going forward. In fact, it is highly likely that taking such a step will result in a substantially increased level of business within the EU over time.