An excellent event at the Institute of Directors today on
the impact of Brexit on Britain's trade in services - congratulations to all the speakers. This is vital to understand and address in some detail, because services amount to
80% of the UK economy, 80% of UK jobs,
a third of UK exports of which 40% go to other EU countries based on the principle of free movement of services.
Yet most services are not covered by free trade deals with third countries. So even if Britain were to leave the EU and eventually negotiate trade deals, that wouldn't help UK exporters of services.
There will always be "No Deal" for most services, so the UK's "No Deal" warnings are permanent for services. This is why
Liz Truss is suddenly making "liberalising trade in digital and services" one of three priorities at the WTO. She's too late, and it will never happen for the reasons given below, so it's time to get cracking on mitigation...
While the problem for services post-Brexit isn't news to me, I'm still absolutely stunned to see so little information about it in the media. Partly it's the age-old assumption that 'business' means 'big business' while nearly all UK businesses are small -
99% of UK businesses (5.7m) employ fewer than 250 people. Only 8,000 UK businesses employ more than 250 people.
5.4m UK businesses are 'micro-enterprises' who are either sole traders or employ up to 9 people.
'Businesses' are people - many of them sole traders selling their time and expertise across the EU. Eve online,
business is personal.
I've posted on the impact of Brexit on services many times, here and on
Pragmatist and for several law firms. I've tended to focus on the
Brexit impact on financial services because that's my main area of expertise - and they are the largest of the UK's services exports, relying on valuable EU passporting rights
which they will lose. As a result, 7000 jobs have moved so far, with more to follow if Brexit proceeds, and the costs of splitting capital/liquidity to support separate EU subsidiaries will cost customers €60bn a year by 2030.
But I've also mentioned the need for a new basis for
transferring personal data from the EU27 to the UK, and I've even shared
my own personal Brexit-proofing journey in adding Irish qualifications and consulting to an Irish law firm, for the same reason that it makes sense to
switch EU contracts from English law to Irish law.
So I was thrilled to learn of today's event and I was not disappointed. I'm sharing my notes (anonymised) and I understand the video will be available via the IoD site. Worth watching!
What laws govern the export of services?
Every country regulates what services can be offered to its residents to some degree. Regulations get tougher the more money residents might lose, or the greater the gap in knowledge between the service provider and the customer - that's why financial services are so heavily regulated.
Permitting foreign service providers to sell their goods or services in your country is a matter of trust and control, or political will and legislation ("trust is good but control is better").
Trade law on goods developed first, and rules on services followed - in particular:
- EU membership entitles firms to free movement of services based on mutual recognition of professional/trade qualifications and legislation that ensures individual member states don't drop their standards or supervision. That freedom falls away on Brexit day (subject to any agreed transition).
- Some services remain unregulated today (e.g. management consultants) and some are given mutual recognition status only at trade body level rather than by governments (e.g. architects). That shouldn't change on Brexit.
- Some regulation is based on outcomes, rather than dictating how qualifications are actually obtained or what subjects have to be studied to gain 'equivalence' or 'mutual recognition' (e.g. lawyers). This could diverge on Brexit, and 'equivalence' findings and mutual recognition will not automatically apply, can take a long time to be granted and are subject to withdrawal on little notice without appeal.
- Financial services passporting represents the most advanced form of free movement in services, since authorisation in one EU member state allows certain services to be provided in all member states. That will not be possible after Brexit (subject to any transition).
- In stark contrast to financial services passporting, the 'equivalence' regime that is available to third countries (and post-Brexit UK) is only available for certain types of financial infrastructure (e.g. exchanges) and some investment services, and can be withdrawn without appeal on 30 days notice (e.g. Swiss stock exchange) - so equivalence is not reliable.
- Other services that can be supplied to EU countries after Brexit will be based on a patchwork of national access rights, which vary in terms of scope and conditions.
- Outside the scope of EU trade rules (and where only minimum standards are set), the member states (like any other country in the world) can set tougher standards where they see greater potential adverse impact. The UK will be treated like any other non-EU country for that purpose. The UK government has tried to helpfully list where different EU countries have different rules for different services (will that stay up to date?).
- There is a WTO rule (article 7 of GATS) aimed at preventing one member country from discriminating against another member ('most favoured nations' or 'MFN'). Free trade agreements also contain MFN clauses that require one party to offer the other any similar benefit that has been offered to another country. The EU seems to ignore the WTO requirement (which the Swiss have complained about to no effect so far), but does allow MFN clauses in its free trade deals with very limited scope (won't cover mutual recognition or equivalence decisions, for example, just legislation and 'national treatment'). Critically, the EU insists on its own regulatory autonomy. Only the European Commission (and ultimately the European Court of Justice) can decide whether a service etc meets EU rules.
Immigration and visa restrictions go hand-in-hand with constraints on services, since people often have to be physically present to provide services. So free movement of labour is also critical to the free movement of services. That freedom entitles Brits to live, work and retire freely in 30 countries, but is lost on Brexit. Related entitlements to healthcare and so on will also fall away...
What are the practical impacts of Brexit?
Well, if you're among the 5.4m 'micro-enterprises' and export goods or services to the EU,
the VAT rules will be a big problem. You currently benefit from hard-fought exceptions under the VAT Mini One Stop Shop (MOSS), but those will
disappear on Brexit day (what if part way through contracts?). The
HMRC warning states:
Businesses that want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU member state. This can only be done after the date the UK leaves the EU. The non-Union MOSS scheme requires businesses to register by the 10th day of the month following a sale.
Alternatively, a business can register in each EU member state where sales are made.
EU consumers are already ceasing to buy from UK suppliers, and EU suppliers are geo-blocking UK customers and suppliers from applying to their sites. So forget bidding for service contracts from the UK, and many EU business people have stopped traveling to do business in the UK.
Work permits will be needed after Brexit, but can’t be applied for before then. These may be needed for speaking at conferences (unless asked a question first), giving training sessions, working on projects and so on.
Booze cruise etc to the EU for cheaper, duty free consumer goods may impact small retailers and their service providers.
If you're a director of a company, you have a duty to promote the success of the company, as well as a duty to exercise reasonable care, skill and diligence. You need to be able to demonstrate that in the context of Brexit - which is a known unknown. That would likely include: board discussions, a sub-committee, minutes, briefing papers, presentations, risk registers, scenario planning, supply chain analysis to identify suppliers at risk who may need to be replaced/helped (using the wrong type of pallet, say, or their trucks may be allowed into the UK by UK authorities, but will struggle to back into EU); and resolutions taking action to address threats and opportunities.
What can you do if your services are impacted? It depends on threats and opportunities identified, but some examples:
- Set up a new subsidiary in an EU27 member state;
- Rewrite contracts with new governing law and other pertinent changes;
- Establish a new basis for transferring personal data from EU customers/suppliers to the UK;
- Consider the tax impact of moving business activity to an EU27 country (or, for instance, whether withholding tax exemptions still work for entities owned by UK companies)
Time to get cracking!
