Since the date the United Kingdom officially started the two-year clock to leave the European Union on 29 March 2017 we have been provided with endless amounts of information on what the social and business landscapes will look like come 29 March 2019.
Although, no one knows with any degree of certainty what form Brexit will take, the aim of this guide is to provide a concise summary of what Brexit is, what the Brexit options are and to provide some clear practical guidance on steps that can be taken immediately to Brexit-ready your business.
A Background in Brexit
Before looking at our suggested action points we set out below a brief summary of what the latest position is with Brexit.
On 14 November 2018 the government released the Draft Agreement on the withdrawal of the UK from the EU. This was approved by Theresa May’s cabinet and will soon be presented before the other 27 member states of the EU. Provided the EU accepts the Draft Agreement, the final hurdle in getting it to a stage where it can be called a “deal” will be to get it passed through the House of Commons in December 2018. The 585-page agreement is all about how the UK leaves the EU; it is not about any permanent future relationship.
Given the amount of steps to get the deal over the line, there is still a lot of uncertainty as to whether the eventual Brexit arrangements will reflect exactly what is set out in the Draft Agreement. In its current form some of the main objectives of the Draft Agreement are as follows:
- Protection of the rights of EU citizens in the UK and Britons in the UK to continue residing, working and studying;
- The framework for the economic partnership between the UK and the EU with an objective of achieving “frictionless” trading arrangements so as to minimise disruption to supply chains that are integrated across the EU with “just-in-time” processes; and
- A backstop which creates a temporary single customs territory and means Northern Ireland would stay aligned to some EU regulations on certain products.
The Draft Agreement envisages a 21 month transitional period up to 31 December 2020, during which the UK-EU relationship would retain access on the current terms to the EU single market. During this period, unless otherwise provided for, EU law that currently applies to your business will continue to do so as all the benefits and obligations of EU law will still apply. However, both parties have reiterated that “nothing is agreed until everything is agreed”, therefore, there remains a possibility that this transitional arrangement will not take place.
There are currently some differences between both side’s viewpoints about the objective and purpose of this period. We will see in due course whether it will be a period of transition where negotiations continue with an aim of establishing a permanent agreement for the UK-EU trade relationship. On the other hand it could be that it is used as an “implementation” period to effect all the necessary changes set out in the “Brexit deal” which the UK government is working towards and hopes to agree in December 2018. Therefore, according to the government’s timetable we should have a concrete idea about what the practicalities of the transitional period will be like before 29 March 2019.
Business Strategy – 10 Point Action Plan
Each business will need to make its own internal assessment of the impact that Brexit may or may not have on it. Business directors and employees in managerial positions will have the responsibility to prepare for the pre and post-Brexit periods and implement any steps that need to be taken. However, it is advisable to create a committee with members coming from all areas of your business who can provide department specific input. Not all of the actions points in this guide will apply to every single business but the principal objectives of the committee should be as follows:
- Conduct a ‘hard Brexit’ audit to pinpoint risks and opportunities;
- Monitor developments on a periodic basis to mitigate the risks associated with Brexit and seize, where possible, any opportunities that arise; and
- Create a Brexit readiness plan – this will require allocating resources in terms of implementation, and setting timelines both pre and post-Brexit.
A key concern for every business will no doubt be its ability to continue to produce goods and provide services with minimal interruption. This action point will initially be an information-gathering exercise with an objective of putting your business in a better position to be able to deal with the challenges ahead. For those businesses who source goods from domestic suppliers it is still advisable to, where possible, ascertain which goods (or components of goods) have a provenance from the EU.
In the scenario that the UK removes itself from the Customs Union there could be unprecedented disruption to supply chains. When auditing your supply chains, do not just consider timeframes but also consider supply chain bottlenecks and the VAT position on goods. Depending on the type of Brexit deal it may be that VAT will become payable at the border which could have adverse effects on cash flow.
The fact that the cost of warehouse space has increased sharply over recent times is a possible indicator that many business are already changing their supply chain processes and considering stockpiling (see below). Your overall objectives in this action point should be to ascertain potential blockages along your supply chain as well as sourcing alternative suppliers and contingency procedures in case there are delays or blocks at the UK’s border.
Accreditations – Authorised Economic Operators
One way to reduce the impact on delays to sourcing goods post-Brexit is to apply for Authorised Economic Operator (“AEO”) status. It is an internationally recognised quality mark that gives quicker access to specific customs procedures and even the right to be ‘fast tracked’ in some cases. If there is a ‘no deal’ Brexit, AEO status could become a necessity for UK businesses with an international element.
Even if your business does not directly import or export goods to and from the EU it may be worthwhile either directly asking companies you deal with along your own supply chain whether they are AEOs or alternatively undertaking your own EU AEO database search to check their status. The results of this will help in assessing the impact Brexit might have on your business.
The popularity of AEOs has risen sharply in the lead up to Brexit which means there can now be a significant delay in processing applications. Approval from HMRC needs to be sought and reports indicate that this can take up to six months.
Businesses that are reliant on the EU for imports and exports should contemplate the impact a ‘no deal’ Brexit would have on the goods they produce and/or the services they provide. There are likely to be delays of some form post-Brexit while new systems are implemented and businesses will need to consider how long they can continue to function without immediate access to certain goods.
The government has already advised the NHS to stockpile 6 weeks’ worth of medicine to give continuity should there be significant border delays. Many other companies have also stated that they are stockpiling items to counteract both shortages and mitigate against potential price fluctuations following Brexit. In the assessment carried out by your Brexit Committee you should consider what “just-in-time” processes your business relies on and whether any element of stockpiling is feasible.
Similar to other action points, it may be useful for you to know whether the businesses you source goods from are also taking similar measures. An alternative is to source domestically produced products and it may be useful to start considering this option now.
Mitigating against currency risk
One aspect of Brexit which is almost certain is that it will have an effect on the trading value of the pound. As the effect is dependent on what deal is struck and the “mood of the markets” it is not possible to ascertain what will happen to sterling. Currency movements affect every business differently. We suggest you consider how currency movements may affect your business and how these might be mitigated.
- What currency are you being paid in?
- What currency are you paying out in?
- Will fluctuations in both the GBP and Euro currencies affect existing and future contracts?
- Are you in a position to take steps to mitigate against currency fluctuations?
As a general rule of thumb, if you can take any steps now to protect your business against currency risk these should be taken.
One of the areas within any given business which has potential to be affected severely by Brexit is the contracts and agreements you have entered into (or will be entering into). Most contracts drafted prior to the Brexit referendum will not have any provisions to mitigate against the changes Brexit can have to performance of those contracts. There is a risk that due to Brexit certain provisions could become ineffective, uncertain or have undesirable consequences. Therefore, you should review key contracts to assess any implications Brexit might have on them.
One of the most obvious contractual consequences will be in relation to definitions that refer to the “EU” in a territorial or jurisdictional context. When the UK is no longer part of the EU then there may be some ambiguity as to the territorial scope of contracts such as licencing agreements or even restrictive covenant clauses with a pan-European element.
In particular you should review any long term contracts, contracts with more than a 3 month notice period (or shorter depending upon the importance of the contract) and non-sterling contracts. You may need to amend some of the terms of these contracts to give you greater flexibility in the event of adverse Brexit consequences. For example, it may be useful to consider your termination rights within those contracts which will be in force at the time of Brexit. Should you run into any financial or operational difficulties (i.e. tariffs, supply delays, extreme price fluctuations etc.) it will be useful to know your options ahead of time.
Following a review of your contracts, if it is clear that they could leave you exposed you should consider renegotiating or varying them to include provisions that provide extra certainty in respect of Brexit (please see the action point below in terms of “Brexit clauses” which provides a useful starting point on what could be included when re-negotiating contractual terms).
The UK’s intellectual property laws are fundamentally shaped by those EU IP regulations that have been transposed into UK law. Even though it is still unclear what the impact of Brexit will be on these IP regulations there are some things that can be done now to prepare your business, regardless of what the outcome is.
An IP audit is advisable as it will be the starting point in preparing your business to be in a position that is as far as possible ready to face Brexit. Some fundamental points we suggest addressing are as follows:
- Identify which of your IP rights are likely to be affected and action any possible further applications/registrations with a view to maximising protection over these rights.
- Does your business rely on EU registered IP? If so, the current suggestion is that all EU registered rights will automatically have the benefit of the equivalent UK registered right at the end of the transition period. However, this level of detail is still to be resolved.
Some of the UK’s law in respect of specific types of IP will likely undergo very little change after Brexit, for example the UK’s membership of the European Patent Convention (“EPC”) will not be dependent on the UK’s membership of the EU resulting to little impact on patents. It is also unlikely the UK’s current copyright laws will change (unless they are amended by Parliament).
Depending on what types of IP your business uses or holds, you should assess each on an individual basis and seek professional advice accordingly to assist in protecting your IP.
You should take the necessary steps to ensure any EEA or Swiss nationals among your workforce have the right to continue to work in the UK post-Brexit. Please note a few of the considerations which we recommend you (and your workforce) should have:
- EEA nationals automatically acquire permanent residence status (“PR”) once they have exercised their treaty rights here in the UK for a continuous period of five-years (in reaching this required period absences totaling up to 6-months per year are permitted). Although the acquisition of this status is automatic, you should advise those in your business to which it applies to make an application at the Home Office to obtain documentation to evidence this.
- Any EEA nationals which have not been resident in the UK for five-years may apply for “pre-settled status”. This allows for EEA nationals to remain in the UK for five-years from the date they are granted pre-settled status. Voluntary applications will open fully by 30 March 2019 (it will become mandatory from 1 January 2021 to 30 June 2021).
- There is also the possibility for EEA employees to apply for “settled status” provided they have been resident in the UK for five years. The application opening times are the same as mentioned above for pre-settled status.
- Another option would be to apply for British citizenship. An application can be made 12 months after acquiring PR or settled status. It is worth noting that other criteria needs to be met when obtaining British citizenship and it may have an effect on your employees’ current nationality and personal tax position. Please note that although there are two routes to citizenship (in this context), PR and settled status routes, there is a requirement in relation to PR to show economic activity and comprehensive medical insurance which may be an extra hurdle for some applicants.
The importance of this for your business it to ensure your employees have the necessary rights to work in the UK following Brexit. Although, as a business owner you will be unable to take any of the above steps on behalf of your EEA national employees, simply raising their awareness will be a step in the right direction.
If you are negotiating and entering into contracts which will continue to be in force after Brexit then you should consider including appropriate “Brexit clauses”. The objective of such provisions is to address the uncertainty that surrounds Brexit. If performance of obligations under a contract have the potential to become commercially impractical due to Brexit-related events then you should be looking to draft into your contacts clauses which, for example, permit either the contract in question to be terminated or for certain provisions to be varied as a result of a defined event occurring.
The specifics required in terms of the triggering events and their consequences will differ from sector to sector. Some examples of events which many companies may wish to consider referring to in a ‘Brexit clause’ are currency fluctuations or when required licences/consents are lost. A suitable mechanism for price adjustment or postponement in performance of the obligation could be the desired consequence of such events.
It is not advisable to rely simply on the standard “force majeure” boilerplate clause for this purpose. The reason for this is because such clauses are designed to take effect when an event occurs outside of the parties’ control. If a contract is being entered into now it could be argued that the parties knew about Brexit and should have made consideration for Brexit when drafting the contract; therefore, because this is arguably within the parties’ control it is potentially outside the scope of force majeure.
Look for opportunities
Although most commentators look at the many negative implications that are connected with Brexit, it will no doubt also create opportunities for businesses. Depending on what type of Brexit we have, there is a possibility that there will be an increased scope for inward investment of capital within the UK and a lot of this will be directed towards SMEs.
Being pro-active and looking for opportunities will put your business in the best possible position to make the most from Brexit and the opportunities it creates.
If you have any questions regarding the information discussed in this update please do not hesitate to contact Neale Andrews or Thomas Connor in our Corporate and Commercial team.
The contents of this update are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this update. © Mundays LLP 2018.