24 August 2018

The government yesterday released the first in its raft of technical notices on no deal contingency planning. In total, 84 notices are expected to be published by the beginning of September, covering issues from aviation to the supply of medicine, citizens’ rights to VAT.

The 25 publications released yesterday aim to set out unilateral steps the government could take to mitigate some of the immediate economic disruption that would follow a no deal exit – from unilaterally accepting medicines that are approved by EU authorities, to underwriting EU funding to UK organisations until 2020. However, in some areas, the government recognises that discrete bilateral agreements, or reciprocal EU action, is necessary to alleviate significant disruption: the UK pointed out the necessity for cooperation between financial institutions and port authorities to manage a no deal outcome.

In a speech yesterday to launch the release, Brexit Secretary Dominic Raab sought to present the government’s strategy as sensible and pragmatic mitigation. Crucial among his arguments was that, even in the event of a no deal exit, the EU would seek to cooperate in key areas of mutual interests – this could mean agreeing to recognise UK medicines in return, or taking steps to allow UK expats to access their pensions from abroad. Many have dismissed this as overly optimistic, arguing that the EU would not accept such side deals if agreement cannot be reached on crucial withdrawal issues such as the Irish backstop.

On the one hand, it is true that a comprehensive range of bilateral cooperation agreements would be improbable in a situation where talks have broken down. On the other, the EU has also previously indicated its desire to minimise the most severe immediate disruption Brexit poses to its businesses and citizens – particularly in aviation. Speaking earlier this year, European Council President Donald Tusk said, “I am determined to avoid that particularly absurd consequence of Brexit that is the disruption of flights between the UK and the EU.” The Times last week also reported that the European Commission’s no deal plans envisage unilaterally accepting UK aircraft safety certification to help keep planes moving.

So what no deal scenario does the government’s papers outline, how can the UK unilaterally take mitigating action, and where would the UK be most reliant on cooperation with the EU to help prevent disruption?

Tariffs and customs

The government’s notices confirm that bilateral trade in goods would face a number of new costly barriers in the event of no deal. UK businesses exporting to the EU would be treated as any other third country exporter. This means goods would be hit by the bloc’s common commercial tariff – while the average EU applied tariff is around 2%, this masks much higher rates in particular sectors such as agrifood and cars. Exporters will also have to submit new customs declarations, and in some cases apply for export licences, while carriers transporting goods will need to provide safety and security declarations. All of this will significantly increase time, administrative and financial costs to trade.

On the import side, the government would have more flexibility unilaterally to reduce costs to trade. The notices formally rule out the idea the UK would enforce no new border procedures in a no deal scenario. According to the UK’s plans, EU imports to the UK will require new customs and safety declarations.

But it is worth bearing in mind that the Treasury has also been considering emergency mitigation measures to prevent bottlenecks. In a recent parliamentary evidence session, the financial secretary to the Treasury, Mel Stride, said, “There is a trade-off between keeping the flow moving, raising revenues, and security. We will not compromise on security, but particularly in a place such as Dover, where you have to keep flow moving very quickly or you end up with all sorts of problems, there may be a trade-off between keeping the flow going and revenue protection.”

Elsewhere, the government’s notices leave some room for manoeuvre on the issue of tariffs – these will be determined and published ahead of the UK’s exit, and “may be different from the EU’s [common commercial tariff].” This raises the possibility that the UK could lower duties to alleviate the price effects of no deal on UK businesses and consumers – but lower rates would have to be applied to all imports, not just the EU.

The notices also advise businesses to consider engaging customs brokers, freight forwarders or logistic providers to help manage new import and export procedures. While larger businesses may already use these services, SMEs may find this costly. Meanwhile, Brexit Secretary Raab has called for cooperation between the UK and member state port authorities to “manage shared risks” – perhaps in order to remove duplication of import/export declarations.

Regulatory recognition

Yesterday’s notices focused on medicines regulation as one area in which the UK would seek to take unilateral action to minimise disruption to supply. In the event of no deal, the UK would commit to accepting batch testing of medicines carried out by EU, EEA and some EU partner countries. It would also directly recognise medical devices approved for sale in the EU. The aim would be to prevent new regulatory barriers to importing EU medicines, avoid disruptive border inspections, and preserve reliable supply for the NHS. The government also commits to keeping such procedures in place for as long as is necessary, and offering a long lead time (in some cases two years) to allow businesses to prepare for any changes.

The Brexit Secretary expressed hope that the EU would take reciprocal measures to recognise medicines approved by UK regulatory authorities, given the UK starts from a position of full alignment with EU rules. But there is little evidence that the EU is considering this at the moment: advice issued by the European Medicines Authorities has specified that medicines sold into the EU post-Brexit must be certified within the EEA.

VAT

If the UK leaves the EU without a deal in March next year, it will also leave the EU-wide VAT area – this means VAT could be payable at the border on goods moving between the UK and the EU. Businesses have already warned that this would lead to significant cash-flow issues. Yesterday’s notices suggest the government would unilaterally introduce a postponed accounting system for import VAT in the UK – rather than paying VAT as a good enters the country, businesses would instead account for any payments as part of periodic VAT returns. This would apply to all imports, not just those from the EU. Some have raised concerns that this system would be open to fraud.

However, not all goods would benefit from UK VAT deferment – parcels under £135 sent from the EU would be liable for VAT at the point of purchase, raising concerns of increased costs for UK consumers.

Nor would the UK be able to reduce disruption for businesses exporting to the EU. Under EU procedures, VAT payments on UK exports may be due at borders to EU member states, leading to delay and cash-flow adjustments. UK businesses selling directly in EU countries would also need to be registered for VAT purposes in all member states where they do business.

Financial Services

The government laid out some options for unilateral no deal mitigation covering financial services – for instance, the UK would take measures to allow EEA firms passporting into the UK to continue operating for up to three years, during which time they should apply for authorisation from UK regulatory authorities. However, UK notices warn that unilateral action “is not sufficient to fully address the risks [in financial services], and coordinated action with the EU is necessary.” It highlights the risks to some EU customers of failure to maintain necessary continuity on the EU side – including inability to access lending services, insurance schemes or annuities.

Funding

In line with earlier pledges from the Treasury, the government’s notices commit to underwriting EU funding to UK organisations until 2020 – from agricultural support to certain humanitarian aid programmes. However, the papers also note that agreement with the EU will be necessary in some areas, where the UK would be seeking continued participation in EU programmes – such as Erasmus and Horizon2020.

Northern Ireland

Very little concrete information has been provided on how the UK would manage the Irish border in the event of no deal. The government once again committed to upholding the Good Friday Agreement, and “would stand ready to engage constructively to meet our commitments…recognising the very significant challenges that the lack of a UK-EU legal agreement would pose in this unique and highly sensitive context.”

Both the British and Irish governments have previously pledged to keep the border open – while the Irish government is also preparing no deal contingency plans, these focus on East-West trade and envisage no new operations at the land border. The question will be whether this is legally viable in the longer term – will Ireland come under pressure from the EU to secure its external border? Will the UK face challenges at the WTO for discrimatory practices if it offers preferential treatment to goods crossing the Irish border? And of course, not all issues on the island of Ireland can be addressed in the immediate term by a ‘do nothing’ approach – preserving the North-South energy market is a clear example.

Financial settlement

Many Brexit-supporting MPs have stated that the UK would not pay its £39 billion financial settlement to the EU in the event of a no deal. Indeed, as one of his first acts as Brexit Secretary, Dominic Raab sought to increase the UK’s leverage by arguing the payment of the financial settlement should be conditional on concluding the long-term UK-EU FTA. It is notable then that he stressed yesterday that a no deal outcome would bring “a swifter end” to British EU budget contributions, “mindful of our strict legal obligations.

Yesterday only marked the first of the government’s publications, but the increased clarity over its contingency plans is welcome. Importantly though, key questions still remain in the most controversial areas, including citizens’ rights and the Irish border.