VATLive > Blog > Europe > UK-EU Brexit trade deal done

UK-EU Brexit trade deal done

  • Dec 24, 2020 | Richard Asquith

Today details of the EU-UK Brexit Trade and Cooperation Agreement will be released. It is the first EU tariff and quota-free deal with any country.  Who 'won'? What to watch for in any deal? And why was a deal always probable this year. You can sign-up for our free 12 Jan 2021 'Brexit: the morning after' webinar with the leading speakers on trade, customs and VAT to understand what the new trade deal means now that Brexit is 'done. 

The deal will not change Brexit Customs and VAT changes coming into place 1 January 2021, including customs, VAT and border checks, regulatory barriers and end of rules allowing many services to be sold across borders.

Who 'won' in the negotiation? UK got sovereignty; EU got better access and control

In terms of initial narrow objectives, both sides 'won' in their defensive strategies in the negotiations: UK wanted 'sovereignty' over its laws and borders; EU wished to preserve the integrity of the Single Market. And both sides will be relieved on a no-tariff deal.

The UK's strategy has been to offer up as little as possible to avoid significant alignment with the EU and European Court of Justice oversight and claim regulatory sovereignty. On the Level Playing Field fair competition issues, no dynamic alignment on state aid was agreed - an important win. Labour and environment commitments are impact focused, rather than matching EU rules. The UK has secured limited cross-retaliation between areas of the agreement instead of the threatened ‘lightening tariffs’. But this will now be the heart of future trade disputes and tariffs.

The UK 'lost' in four critical areas of its original objectives:

  1. No mutual recognition of product standards testing ('conformity assessments') meaning companies will have to follow and seek approval under two regimes;
  2. No process for recognising equivalence of food safety measures;
  3. No framework for mutual recognition of professional qualifications; and
  4. No 'equivalence' recognition on financial services, preventing free selling from the UK's powerful sector.

The EU has better access to UK markets than vice versa. The EU has limited services freedoms for the UK - in which it holds a major surplus with the EU. It looks like the EU got the deal it wanted based on the UK's red lines even if it did compromise on the details.

GOODS AND CUSTOMS

  • Tariff and quota-free trade on all goods. However, to be entitled to this, businesses must track and self-certify the 'rules of originon its exports to the EU to avoid tariffs. Some sectors will have higher thresholds than others. There may be a transition period so that traders do not have to implement full processes on 1 Jan 2021. 
  • But customs declarations will remain a new requirement for all goods movements between the UK and EU. This will affect around 240,000 UK businesses and 200,000 EU businesses who will have to complete over 200 million declarations for the first time. The UK has granted a six-month phasing in of these requirements; but the EU has imposed them from 1 January 2021.
  • This includes separate regimes on sanitary and phytosanitary (SPS) border controls which regulates human, animal and plant health issues from 1 January 2021. The UK will have ''listed status" with the EU for live animal and related product trade. But this does mean dual regulatory regimes and costs.
  • There will be simplified requirements for businesses that gain ‘trusted trader’ approval and mutual recognition of Authorised Economic Operator (AEO) status which allows for accelerated goods clearance.
  • Increased customs co-operation and reduced bureaucracy at the borders, including specific provisions at roll-on roll-off ports, wine, pharmaceuticals, chemicals and automotive - 'facilitation arrangements'. Cooperation on risk management and post-clearance audit, review and appeal processes, temporary admission, publication of information, customs brokers, non-requirement of pre-shipment inspections and relations with the business community

SINGLE MARKET - GOODS

  • Goods will need to demonstrate the meet both EU Single Market and UK laws and technical regulations and certification. This relates to the EU's CE marking that indicates conformity with health, safety, and environmental protection standards for products sold within the European Economic Area.
  • The deal does not offer the broad mutual recognition of conformity assessment that the UK wanted, allowing it to approve goods on behalf of EU – so two sets of conformity assessments. There will be limits on low-risk goods and self-certification. 
  • There will be measures to prevent significant future unplanned divergence.

SINGLE MARKET – SERVICES

  • Basic commitments on no requirements for local subsidiaries to provide services, and no discrimination between different resident businesses. But extensive exceptions for specific sectors and activities to limit freedom of services compared to full EU membership. Much on a country-by-country basis.
  • Work VISA-free arrangements will be 90 days but limited to representing a company at trade fairs, contract discussions etc. Heavy restrictions on actually providing contracted services. This is a loss for the UK which wanted no restrictions as it us a major service exporter to the EU.
  • There is no longer automotive recognition of professional qualifications. Whilst the UK wanted comprehensive coverage, there is a framework for recognition of qualifications in future. Both sides intend to reach a Memorandum of Understanding within three months.
  • Financial services 'equivalence' is not included as the EU wants more information and has no plans to move forward. But agreement on regulation may be reached by end of March 2021. This would cover over 40 areas - only two covered so far. But the UK did get Financial Services excluded from any cross-retaliation. 
  • The UK loses access to the EU internal energy markets. As a net importer of energy the UK will however retain controls over continuing operations of interconnector cables.
  • Separate agreements on nuclear energy 
  • No intellectual property right provisions, but this area will be protected by international agreement (Paris agreement). No geographical indicator provision, but both sides will act to protect existing rights.

LEVEL PLAYING FIELD

  • There will be best efforts towards not entering into unfair competition on Level Playing Field rules. This includes upholding shared environmental, labour, tax transparency and labour conditions. 
  • There will be a rebalancing mechanism in the case of significant divergence (no lightning tariffs) with a material impact on trade or investment. But there are differing rules on dispute settlement (see next section) - but they do not stop the option possibility of retaliation in the case of a breach. There will be limits on state aid for specific failing businesses or banks.
  • UK will set up an independent state-aid authority, but only to examine measures after they have been introduced.
  • The subsidy controls are weaker than the EU set out to achieve, but tougher than other deals with Japan or Canada. They largely follow EU state aid rules.

AGREEMENT GOVERNANCE

  • A cross-framework Governance and dispute resolution will be negotiated between the UK and EU, without reference to the ECJ (a UK redline). This does mean there can be cross retaliation between areas of the agreement – an EU win.
  • There is a sliding scale of accelerated discussions starting with Joint Partnership Council and some 30 sub committees for each area of the Agreement. 
  • If no agreement, can then refer to independent arbitration tribunal for a 160-day ruling limit. If either side fails to abide by any decision, the other party can suspend parts of Agreement – ‘cross retaliation’ – meaning the imposition of tariffs if significant divergence by the UK from EU rules. 
  • Serious breaches e.g. on environment, may result in immediate suspension of the Agreement.
  • If either side breaks international law, then referrals may be made to WTO appellate body.
  • Certain sectors are excluded: fishing; financial services; competition; state aid subsidies. EU companies will have to seek redress in UK courts if they feel there are unfair advantages.
  • In the Trade & Cooperation Agreement, there is only one reference to the European Court of Justice in reference to UK participation in EU programmes.

TAXATION AND VAT

  • Cooperation on taxes, including VAT Mutual Assistance, with both sides agreeing to uphold global standards on tax transparency and fighting tax avoidance.
  • There are commitments on tax standards and anti-avoidance measures, data sharing and preventing aggressive tax planning in line with OECD. But there is no dispute resolution mechanism and unenforceable. They do not prevent rate competition. 

PERSONAL DATA PROTECTION AND ADEQUACY

  • EU has not decided yet to recognise the UK’s personal data protection regime as adequate. The UK had already incorporated into English Law the EU’s GDPR requirements
  • Four-month transition period (which may be extended to six months) on 'data adequacy' has been granted to the UK, allowing data to continue to flow. This will enable the EU to review and approve an adequacy decision. It is not expected that there will be a hold-up on this EU decision.

FISHING

  • The major last negotiating blocker in December 2020.
  • The UK is out of the EU’s Common Fisheries Policy and is independent in terms of managing is coastal waters
  • UK will take back 25% of the current UK waters fishing catch over a transition period of five and half years. There will then be discussions from 2026 on the share, with EU able to retaliate with tariffs or lockout from EU electricity markets.
  • The EU has successfully linked the agreement on fish to other aspects of the economic relationship.

TRANSPORT

  • No restrictions on aviation passenger and cargo; UK airlines lose right to fly between EU locations (which can be circumvented with local subsidiaries)
  • No additional licences or permit requirements on road haulage between UK and EU. This is particularly important for the UK-Ireland land bridge. But restrictions on UK hauliers making cabotage (picking up return loads from EU). They may no only make a return delivery instead of the current one inside EU delivery, too.
  • Unrestricted access to each other’s maritime ports

JUSTICE & SECURITY

  • Provisions for asylum/returns reference, but much left to country-to-country bilateral talks.
  • The UK and EU have stayed closer on many issues than expected. But the UK has lost access to many important databases, such as SIS II wanted or missing persons, that it wanted to retain.
  • It is not clear what will replace the EU international arrest warrant.

OTHER

  • UK will be consulted on future countries apply to join the EU; but no veto - which means UK cannot stop Scotland joining in the future.
  • Separate agreements on security information
  • Nationals travelling as tourists, working or living in EU/UK will retain some social, pension and health benefits. Tourists will enjoy same healthcare rights. Existing EHIC cards may be used until they expire or new arrangements are agreed.
  • Travellers (holidays etc) may only stay in the UK/EU for 90 days in any 180 day stretch without a VISA.

THE FUTURE - NI and services may be the schisms

With a thin deal in place which avoided the chaos of tariffs and the souring of political relations, both sides now need to move quickly to pick-up on the unfinished issues such as financial services equivalence. This includes setting up the overarching committees, but also for the UK to learn how it can influence future EU trade policy - not least because NI is part of the Single Market and will diverge as the UK and EU go their separate ways.  Indeed, NI and the lack of services coverage in the Agreement will be the likely source of near-term schisms.

Why a deal was always likely:

  • The economic costs and trade chaos of a no trade deal were too huge for either side to risk taking on in the midst of a COVID-19 pandemic
  • The essentials of the deal that has emerged was largely well known this summer.
  • The bad faith created between each side’s most important ally going into 2021 would have made a rekindling of talks challenging in 2021, and would risk souring cooperation in other vital areas including security and defence. 
  • A deal, and the compromises it required, were always relatively simple and obvious to achieve.
  • The appearance of delays in getting a deal done were quite possibly cover to run down the clock to prevent close scrutiny and push-back in the UK by Brexit sceptics
  • The US presidential outcome meant multinational cooperation is now the tone for 2021; this put pressure on the UK to be seen to stay close with the EU. A US-UK trade deal would be unlikely to come without and EU-UK deal first.
  • COVID lockdowns, and new strain mutation heightened the risks of isolationism for the UK, again promoting a deal to keep trade going.

VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which won International Tax Review's 2020 Tax Technology Firm of the Year. Richard trained as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.
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