Sector Commentary

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Consumer Markets

Contact: Neil Stockham, Partner

A sigh of relief for retailers

Notwithstanding, the late timing of the news and significant anxiety caused by the protracted negotiations, the announcement of a free-trade agreement between the UK and EU on 24 December was largely welcomed by UK retailers. The deal protects consumers on both sides of the Channel from c£3 billion in import tariffs on everyday goods. Given that nearly 80% of UK food imports come from the EU, the news should bring a collective sigh of relief to retailers and households alike around the UK.

However, while the UK and EU Governments have taken a crucially important step in reaching a free trade agreement, the hard work on implementing this new arrangement now begins to ensure there are indeed no tariffs from day one and to enable the compliance infrastructure for checks to run smoothly from the outset. The retail and logistics industries will be scrutinising the operational procedures over the coming weeks as their new trading arrangements begin in earnest.

The closure of France to UK traffic over the Christmas period provided a stark reminder of what can go wrong and how quickly hold ups and bottlenecks can disrupt key supply chains where friction prevails. So although the UK has left Europe it will still need to work collaboratively with its European trading partners to find pragmatic solutions to minimise red tape and keep freight moving.

Businesses should continue to identify when and where goods cross borders. Going forward, the movement of goods across the border between the UK and the EU will trigger compliance, registration and administrative requirements from a customs duty and VAT perspective. Read our full guidance for more information.

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Logistics

Contact: Jason Whitworth, Partner

Unsurprisingly, the Brexit transition was one of the most pressing issues for the UK Logistics sector, as revealed by our recent survey of 100 top decision makers for the BDO & Barclays Logistics Confidence Index 2020.

The deal announcement will have been met with some relief. While operators’ attitudes were perhaps slightly more relaxed about – or perhaps simply resigned to – Brexit than the previous year, possibly because they felt more prepared, nearly half (47.9%) still feared they would do less business with EU companies in the event of no trade deal being agreed. With a trade deal in place, broadly speaking, the majority of respondents felt that Brexit would have little impact on their level of business, whether trading with EU, non-EU or UK customers.

Yet our survey showed that the industry was still experiencing a mixture of nervousness and calm towards the terms of the UK’s future relationship with the EU. The Free Trade Agreement has established zero tariffs on goods, but it has put up new barriers to the flow of goods, including new paperwork, customs checks, and health/standards checks for food and agricultural products, and consequently added new costs to the expense of cross border trading.

The deal came into force on January 1 and at the time of writing there have been only a few incidents so far when drivers did not have the right paperwork. However, we are currently in the holiday season, the quietest time for trading in the year, and many anticipate delays as trading volumes increase later this month, with new post-Brexit customs systems largely untested. Reports that businesses have been stockpiling in anticipation of supply difficulties may mean less disruption in the short term but a longer curve before trading resumes at normal levels. 

Anecdotally our feedback showed some uncertainty among both hauliers and clients as to what is expected, with the government having published hundreds of pages of advice as to what businesses must do, yet reaching an agreement with only seven days’ grace before their implementation. Preparedness may depend on the resources of the business, with larger companies able to implement systems in advance more easily, and smaller distributors missing that support. The RHA estimates that 50% or more of small- to medium-sized companies might not be ready for the border checks, and warns that much of the ensuing chaos will be invisible compared to the scenes at Dover before Christmas, with freight instead held up at distribution centres round the country. Logistics businesses have reported the need to assist customers with the new requirements - providing opportunities to offer customs, advisory and consultancy services, as a result of ongoing changes to international trading agreements.

There will be other important wrinkles to iron out as the detail of the agreement is absorbed. Not least with the reduction in cabotage, with large trucks restricted in the Free Trade Agreement to three movements within the EU before returning to the UK. This will restrict the ability to tramp across the EU, impacting specific markets such as Live Events. With 85% of the European concert logistics businesses currently based in the UK, without an exemption this may present barriers in European touring, a sector already struggling following the pandemic.

It is also worth mentioning the impact on driver shortages, a perennial major problem for logistics businesses. The knock on effect of the pandemic and Brexit combined has led to a reduction in the number of EU nationals in driver roles, which had helped to mitigate the issue in previous years. Government support with measures such as funding for training and improved national facilities for drivers is being sought to encourage UK workers to fill these vacancies.

As to the wider picture, there is a level of readjustment ongoing in the logistics sector, due to the pandemic and the consequential reset of the UK’s manufacturing, consumption and buying habits during lockdown, with the supply chain in the front line of these changes. Brexit feeds into the mix just as UK businesses are already adjusting their supply chains and inventory levels and require new logistics operations to serve their customers.

There is plenty for the industry to be working on at the moment. Gauging the effect of Brexit on the sector against the backdrop of the pandemic may prove difficult. It will take some time before the trading conditions settle, and we can see how much has changed irrevocably.

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Financial Services

Contact: Neil Fung-OnHead of Financial Services

Brexit: What does the agreed deal mean for UK Financial Services sector?

On 24 December 2020, after years of discussion and a final nail-biting fortnight of negotiations the UK and EU agreed a Trade and Cooperation Agreement. While the agreement secures tariff-free cross border trade of goods, which will be a relief to UK manufacturers, it effectively amounted to a no-deal scenario for financial services.

To be determined

The treaty did not secure access to the EU for British-based banks, insurers and other financial firms. The EU will determine whether or not to grant equivalence to British firms in the coming months. Brussels said in its Christmas Eve statement on the agreement that it will grant equivalence rights “when they are in the EU’s interest”.
Equivalence is not the salve some proponents would claim. It makes for a shaky foundation for businesses to build upon as equivalence can be withdrawn by the EU at just 30 days’ notice. In July 2019, Switzerland lost equivalent status and EU investment firms were no longer allowed to trade on the Swiss stock exchange.

The UK’s position vis-à-vis pursuit of equivalence is currently ambiguous. Andrew Bailey, Governor of the Bank of England, has told MPs that following EU rules on financial services indefinitely would be too high a price to pay for access to the single market. “I would strongly recommend that we don’t become a rule taker. I think that is a very bad place to end up in. If the price of that is no equivalence, then I’m afraid that will follow.” Meanwhile, the City minister, John Glen, has said that Britain will not seek to engage in regulatory arbitrage and does not intend to diverge from the EU’s rules. He stated that Britain would not be “seeking to wilfully diverge in every area for the sake of short-term presentational gain”.

In the absence of equivalence it is important to note that there is an alternative framework for co-operation in place already. On a global level, both the UK and EU member states are bound by international standards bodies such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). Furthermore UK regulators have quietly signed Memoranda of Understanding with ESMA and individual EU National Competent Authorities (NCAs) which permit certain cross-border activities to continue on a country-by-country basis.

Aside from the matter of equivalence, detailed arrangements relating to data sharing and migration remain to be agreed which are key to financial services firms. The UK has also unilaterally amended its VAT rules which may benefit some financial services and insurance businesses – read more.

Potential immediate impacts

In anticipation of losing access to the EU single market, many UK Financial Services firms established independent operations on the continent and transferred jobs and assets there. Now that the deal has been agreed and the position with respect to single market access clarified, we anticipate many more firms will follow, particularly smaller firms who may have waited to see the outcome of the negotiations before executing Brexit plans.

It remains to be seen whether the lack of equivalence granted to UK venues will lead to fragmented liquidity and increased costs in the longer term. However on the first trading day of 2021, the Financial Times reports that nearly €6bn of EU share dealing shifted away from the City to facilities in European capitals.

Looking to the future

The UK will now focus on securing advantageous individual trade deals and regulatory cooperation with key financial services hubs across the world, looking beyond Europe to Singapore and New York.

While the question of equivalence has yet to be resolved, there is clearly appetite within the UK government to flex our newfound freedoms. There is an outstanding consultation by HM Treasury to explore how the UK regulatory framework could be adapted to our new position outside the EU. This consultation could result in a complete overhaul of the current ‘twin-peaks’ approach for financial services regulation.

In November 2020, the Chancellor announced a review into current listing rules with a view to encouraging firms to list in London rather than New York. For insurance firms, some changes to Solvency II are expected in the coming months following the Treasury’s Call for Evidence in October 2022. The government has said that it wants to make it easier for insurers to invest in long-term infrastructure projects.

This year’s COP26 climate conference will be held in Glasgow and presents an opportunity for the UK to present itself as a leader in green finance, building on Rishi Sunak’s December announcement outlining proposals to support sustainable financial flows and the issuance of the UK’s first Sovereign Green Bond in 2021.

The UK is positioning itself to benefit from its EU exit and thrive outside the single market. Ultimately, there is a balance to be struck between deregulation in the interest of competitive expansion and maintaining the integrity of the markets and our existing consumer protection framework.  

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Manufacturing

Contact: Richard Austin, National Head of Manufacturing

Since the EU referendum in 2016, UK manufacturers have been on a topsy turvy journey and whilst quite late in the day, the news that the EU and UK signed a new Trade and Cooperation Agreement (TCA) brings huge relief for UK manufacturing, which accounts for 53% of the UK’s total goods exports (Make UK 2020/21). With the EU being the UK’s largest trade partner, the end of the transition period means immediate changes in how manufacturers will now be trading with the EU and the wider world.

The initial announcements that the TCA allowed for tariff-free access for goods moving between the UK and EU was positive news for the sector. However, taking a deeper dive into the details, this does not mean there will be blanket tariff-free access for all goods in all circumstances. In order for goods moving between the UK and EU to obtain this benefit, manufacturers will need to demonstrate ‘originating’ status within the UK or EU by meeting preferential rules of origin. Where goods originally come from a third country or are made up of components from elsewhere, then duty may apply depending on the type of product, the level of transformation performed in the UK and the arrangements in place. 

Manufacturers have complex, highly integrated and global supply chains and it is now imperative that they understand the origin of goods and parts to weigh up the relative costs and merits of tracking a full supply chain or accepting tariffs. Whether UK businesses are looking to import or export, there are a number of risks they need to be aware of. Read more on the rules of origin here. While easements are in place until 31 December 2021 allowing businesses to avoid providing supplier declarations, manufacturers must be confident that goods meet rules of origin. Businesses now have the important task of beginning preparations to trade under the new agreement by the end of the year.

With many manufacturers operating just-in-time models, COVID-19 demonstrated how supply chains could be impacted overnight halting production for days if not weeks. Going forward, to trade seamlessly with minimal disruption, Businesses need to ensure they have the necessary paperwork under control - whether that is VAT, customs, workforce planning or adjusting contract terms.

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Shipping

Contact: Richard Greiner, Partner

As with most business sectors, the eventual conclusion of the UK-EU Trade and Cooperation Agreement (TCA) came as welcome news to the shipping sector. Set out below is a commentary including some specific analysis of the TCA covering maritime transport, the movement of goods, fisheries, employment and tax issues as well as the future outlook for the sector.

While much of the UK maritime sector’s activity supports trade flows across the globe, there is significant maritime trade between the UK and the EU. Therefore, the inclusion of maritime transport in the TCA was important, in particular the section on International Maritime Transport Services (IMTS) which covers both freight and passenger transport. The IMTS section maintains the principle of unrestricted access to international maritime markets and trades. It applies both to ships flagged in the UK or EU member states and to ships operated by companies either in the UK or EU member states.     

However, there are a number of practical issues for shipping not covered by the TCA. For ships’ operations, one of these issues is that Certificates of Competency (CoC) for crew issued by the UK are no longer automatically recognized in the EU. The EU has an existing mechanism for EU-wide recognition of CoC’s from a third country, such as the UK. But, for the UK, this will take some time during the course of 2021 to put into effect. In the interim, management of CoC validity will require close attention.  

The TCA established a framework with zero tariffs and no quotas on goods moving between the UK and EU. However, the UK withdrawal from the EU, as widely trailed, has put up new barriers to the flow of goods, including new paperwork, customs checks, and health/standards checks for food and agricultural products. The implementation of all these new procedures is presenting numerous practical challenges including to shipping and certainly will take some time to fully bed in. To read more on this from BDO, please refer to the analysis by our Logistics experts here.  

One of the most contentious areas of the TCA negotiations was on fisheries, particularly with quota shares of fish. Eventually a compromise was reached, such that UK fishing boats will secure an increased share of the UK fish quota phased in over a five year transition period up to 30 June 2026.

For employers, non-UK nationals are a key component of the shore-based workforce in the UK shipping industry. Employers who had EU citizens already on their payroll should encourage them to apply for pre-settled or settled status by the deadline, 30 June 2021, in order to maintain employment continuity for these personnel. Beyond those EU citizens who fulfil these criteria, in order to employ any further non-UK nationals, employers must engage with the UK ‘points based’ immigration system. 

The TCA included a Protocol on Social Security Coordination. After so much uncertainty prior to the TCA, it is positive for employers from a social security perspective that the protocol largely confirms the position prior to withdrawal. Thus it can only be possible for an individual to be within the social security legislation of one country at a time and the potential scenario of compulsory double social security contributions will not arise - read more. That said, the employment taxes aspects of engaging EU crew members following the UK withdrawal from the EU will continue to present numerous practical issues, much as they did prior to the withdrawal. 

Most of the UK tax rules as they affect shipping were not dependent on EU membership and thus most UK tax reliefs survive post the UK withdrawal from the EU. As a result, the UK will continue to be a business-friendly base from which to conduct shipping activities. In particular, the UK tonnage tax regime for shipping remains in place. Under the TCA, the EU State Aid regime will no longer apply though, of course, the UK’s own competition rules will continue in force. It is welcomed that the UK government is pro-actively considering enhancements to the existing tonnage tax regime. 

The TCA provided welcome certainty in many aspects of the future business operating environment between the UK and the EU. The UK continues to offer excellent infrastructural support for shipping businesses, including unrivalled industry knowledge and expertise, and is the principal legal jurisdiction for shipping. Now outside the EU, the UK will continue to develop and it is important that the maritime sector remains in focus. As an example, the Freeports initiative should help encourage new investment, innovation and employment. All these factors, combined with the presence in the UK of leading maritime organisations, mean that the UK will continue to flourish as a centre of global shipping excellence following withdrawal from the EU.

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