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Adjusting to the post-Brexit environment

24th February 2021

Adjusting to the post-Brexit environment

To help our valued clients through a turbulent start to the year, we’ve launched haysmacintyre’s Brexit series featuring insights from our team of specialists and industry experts, covering everything you might need to know about how the UK’s new relationship with the EU could affect your business.

Starting the series on 11 February, Natasha Frangos, Head of Corporate, was joined by Jeremy Thomson-Cook, Chief Economist at Equals Group, to discuss how UK businesses can navigate the new export and services rules.

If you’re interested in watching the full webinar and Q&A session, it can be found here.

A Brexit deal agreed – the positives and negatives

The webinar began with a breakdown of the ‘Christmas Eve Deal’ agreed between the UK and EU, that took effect on 1 January 2021.

So, what are the positive takeaways from the deal? Firstly, Thomson-Cook stressed that a deal itself was a positive, considered against the ramifications of a ‘no deal scenario’ that many feared.

Goods exporters will be pleased to see that zero tariffs apply for trade, and European Conference of Ministers of Transport (ECMT) permits aren’t necessary when moving between the UK and EU.

Moving from the ground to the skies, UK airlines are still permitted to deliver cargo and passengers to the EU under the new deal, but onward legs are now no longer possible.

However, there are negative points too, particularly for UK services doing business with the EU. The loss of automatic recognition of qualifications will be keenly felt, requiring UK professionals to now register with each individual EU nation. For goods importers and exporters, the increased paperwork around customs duties and rules of origin is sure to increase time and cost.

Equally, both sides were unable to agree a plan to minimise border disruptions around physical checks on goods of a biological nature, threatening disruption and delays at UK ports. 

While the positives have certainly been welcomed, the negatives to the UK-EU deal threaten uncertainty in months to come, which will inevitably lead to higher costs, more time spent on process and paperwork, and a decreased focus on productivity and profit.

So what does this mean for goods importers and exporters?

Importers and exporters will have been grateful to see zero tariffs on the movement of goods, although greater rules of origin apply now the UK is classed as a ‘third country’ in EU law.

Exporters must establish the applicable rule of origin classified by the Government, then develop origin determination, calculation, certification and the record-keeping process. This significant increase in process will come with an equivalent cost for businesses. Importers will also be required to provide more paperwork: a statement that they have documentary proof that the goods in question comply with the rules of origin.

We may see businesses reshoring to the EU as a result, especially given the notably low tolerances for waiving import and export duties.

Similarly, hauliers will be relieved that that ECMT permits won’t be required when travelling between the UK and EU, but this is also dampened by new rules – namely the increased paperwork now required at customs.

In the subsequent Q&A, Thomson-Cook touched on the UK recently applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), remarking that the UK opening up new customer and supplier bases will be beneficial, but the logistical difficulties of trading at a distance mean that the effect might be limited.

And for UK Services?

UK services are currently still trading on transition rules, with a deal to be agreed in March that will hopefully maintain uninterrupted business with the EU.

The biggest change may be the loss of the passporting provision, meaning that UK businesses will need to set up offices in every EU country that they wish to operate in.

Businesses will also have to assess the various ‘modes’ of business between the EU and UK, to ensure that they meet the necessary regulatory requirements for supplying EU customers.

As mentioned above, the loss of automatic recognition of qualifications is also a change that UK businesses will need to address quickly – applying for recognition in each individual member nation separately and taking into account that processes and requirements may differ significantly.

In the Q&A following his presentation, Thomson-Cook was asked how Brexit is likely to impact the UK job market. A sizeable question, this largely hinges on which sector is under examination. The COVID-19 furlough scheme has kept the market in a ‘cryogenic stasis’, he remarked, and a true picture will only emerge once the support schemes end. From an immigration perspective, the points-based immigration system has prompted a real issue in the services sector where local employers in the UK are now denied access to EU talent pools.

In the long term, this immigration change may lead to rising wages in these sectors, or potentially a significant decline in these services as staffing issues emerge. However, in the short term, office-based sectors are likely to see little effect of this change, with the key consequence being the notable increase in the amount of professional advice and support needed to navigate the post-Brexit circumstances.

Keeping an eye on Sterling

Since the Brexit transition ended on 1 January 2021, the British Pound has performed the best out of all G10 currencies, Thomson-Cook noted. However, this comes with an advisory that many in the industry expect that it will be the first to fall once the world begins to recover from COVID-19.

The UK’s recovery may be hindered by a second-round effect of Brexit, Thomson-Cook predicted – whether this takes the form of smaller issues that snowball (such as increased operational costs leading to decreased profitability) or larger pitfalls (such as ongoing negotiations over financial services).

Whilst COVID-19 is an acute pressure on the UK economy, he remarked, Brexit will likely function more as a categoric weakening in the long term. The ‘constructive ambiguity’ approach favoured by the Bank of England and potential tax hikes in the March Budget also hold potential to dampen the UK’s economic outlook, leaving Sterling in a tricky position through 2021.

The big topic in markets at the moment, Thomson-Cook remarked, is whether the UK will see inflation rise – and how long-lasting this may be. The current rallies in stock markets can be laid at the feet of ‘the great reflation trade’, namely how the inflation is expected to rise as the world recovers from the COVID-19 pandemic.

Given the hit to demand – across almost all sectors – as a result of the pandemic, inflation is unlikely to rise until consumers are enabled to spend some of their lockdown savings. Whilst global stimulus packages are welcome, Thomson-Cook compared their effect on the markets to similar packages following the 2008 Global Financial Crash, where significant inflation was predicted but never materialised.

Business and consumers can both expect interest rates to remain low, he predicted, until consumer spending picks up and inflation can rise in conjunction.

Future topics featuring in haysmacintyre’s Brexit series includes post Brexit trading for UK businesses, immigration, withholding tax, employment tax and more. Our website will be updated with further information in due course.

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