At over 1200 pages, the Trade and Cooperation Agreement (TCA) signed by the UK and EU in December 2020 does not make for an easy read. This guide breaks it down into the key topics of interest to business. Alongside our commentary on each topic, you will also find links to the relevant provisions of the TCA. As our own analysis of the deal progresses, we will be adding further commentary, so please check back in for updates.
A business-friendly guide to the UK-EU Brexit trade deal
- Overview of the deal
- What the deal doesn't cover
- Grace periods
- Level playing field, dispute resolution and safeguards
- Financial services
- Other services (non-financial)
- Investment and M&A
- Contracts, jurisdiction and disputes
- Goods: tariffs, quotas and rules of origin
- Goods: customs procedures
- Goods: product regulation
- Data, tech and telecoms
- Employment and immigration
- Business travel
- Social security
- Intellectual property
- State aid
- Environment and climate
- Public procurement
- Competition law and merger control
- Consumer protection
- Get in touch
Overview of the deal
The TCA is of indefinite duration, although some sections (e.g. Energy) are time limited and the arrangement as a whole is subject to a review every 5 years. It may be terminated on 12 months' notice by either side but shorter notice periods apply to the provisions on aviation, road transport and fish – and termination of the section on fish leads to automatic termination of the trade, aviation and road transport provisions.
In terms of content relevant to business, the TCA is broadly similar to free trade agreements which the EU has concluded with countries such as Canada and Japan. The key differences are that the TCA:
- allows for zero tariffs and quotas on all qualifying goods trade between the UK and the EU – see Goods: tariffs, quotas and rules of origin; and
- contains mechanisms intended to manage potential divergence between the UK and the EU in future, including a "rebalancing mechanism" – see Level playing field, dispute resolution and safeguards.
THE TCA: A GOOD DEAL FOR BUSINESS?
In brief, our initial assessment of the TCA is as follows:
- in terms of market access, it represents a step back compared with EU membership, but this was always to be expected given the decision to leave the EU Single Market and Customs Union – and the TCA creates a platform from which access could potentially be improved in future, at least in some areas;
- it will allow the UK to diverge from EU regulation (in line with the UK Government's stated aim), but this approach will be easier to pursue as regards the technical detail and practical implementation of legislation, rather than the broad underlying principles.
As regards divergence, the TCA could enable the UK to seek competitive regulatory advantage by pursuing a series of "marginal gains" across key sectors. However, a more radical deregulatory approach would risk upsetting the balance of the TCA (to which the EU could respond in a number of ways, including withdrawing benefits under the agreement). For a more detailed overview of the TCA and discussion of its impact, see: The UK-EU Brexit trade agreement: a good deal for business?
Impact of the TCA on your business
When assessing the impact of the TCA on your business, it's important not to lose sight of the fact that the UK's departure from the EU Single Market and the Customs Union has many consequences which are not addressed by the deal at all, such as the impact on contracts or enforcement of UK court judgments. Meanwhile, there are many areas – such as data protection, financial services or intellectual property – where the relevant provisions of the TCA are likely to have limited practical impact. These issues may prove to be just as important for your business as the TCA itself.
In the short term, it should also be noted that the TCA offers relatively limited grace periods for businesses to adapt to new trading conditions outside the EU Single Market and Customs Union – see Grace periods.
What the deal doesn't cover
It is important not to lose sight of the fact that the TCA does not provide a comprehensive rule-book governing all aspects of the UK's post-Brexit relationship with the EU. On the contrary, there are many areas where Brexit gives rise to issues relevant to business which the TCA does not address at all or where it only does so in a partial manner. These issues fall under 3 broad headings:
The Withdrawal Agreement and separation issues
Although the relevance of the Withdrawal Agreement may seem to have receded, it will continue to play an important role for some time, particularly in relation to separation issues (see textbox below) and citizens' rights (which may be relevant to the employment and immigration status of EEA nationals working in the UK and UK nationals working in the EEA).
EXAMPLES OF SEPARATION ISSUES
Among other things, the Withdrawal Agreement contains provisions governing:
- the treatment of goods placed on the market before the end of the transition period;
- measures to ensure continued protection of intellectual rights (e.g. the automatic grant of equivalent UK national rights to holders of EU-wide IP rights which will no longer cover the UK after 31 December 2020);
- the treatment of personal data processed or obtained before the end of the transition period;
- VAT and excise duty matters in respect of transactions with a cross-border element that took place before the end of the transition period; and
- the basis on which procedures started before the end of the transition period should be completed – these range from customs and public procurement procedures through to merger control, competition and state aid investigations by the European Commission.
Arrangements relating to Northern Ireland will also continue to be governed by the Withdrawal Agreement (notwithstanding the TCA).
Issues not addressed by the TCA at all
A number of issues important to business are not addressed by the TCA at all. We would particularly highlight the following:
- Lack of a "grace period" for goods trade: There is no significant implementation or "grace" period to allow more time for businesses to adapt to the substantial increase in border red tape affecting UK-EU goods trade outside the scope of the Northern Ireland Protocol– see further this Q&A.
- Recognition and enforcement of UK judgments: The TCA does not contain any rules replacing the EU regime which (until the end of the transition period) governed the recognition and enforcement of UK court judgments in the EU (and EU court judgments in the UK). See this briefing.
- Contracts: Brexit is likely to have an impact on many commercial contracts, but the TCA has nothing to say on this. To be fair, this is not unexpected (as it would be unusual for a trade deal to address such issues directly), but for many businesses, the impact of Brexit on contracts is likely to be key. We have produced a range of guidance on this topic.
- Audio-visual services: Although the lack of coverage of audio-visual services was expected, given that the EU has been reluctant to include them in previous trade agreements, it will still be a blow to the UK audio-visual sector.
Issues only partially addressed by the TCA
Finally, there are many issues where the TCA includes some provisions but these do not necessarily provide the "full picture". We discuss these in our commentary on individual topics below but would particularly highlight the following:
FINANCIAL SERVICES AND DATA PROTECTION
In relation to both financial services and data protection, the TCA only went so far and it is hoped that the European Commission will issue decisions which will benefit UK businesses - although this is not a foregone conclusion. In relation to financial services, the decisions will relate to "equivalence" and in relation to data protection, the decision will relate to "adequacy" – but both essentially involve the Commission making an independent, unilateral assessment (outside the framework of the TCA itself) of the relevant UK regulatory regime and how it compares to the EU regime. See further Financial services and Data protection.
There are also areas where the TCA's provisions - though welcome as far as they go – will do little to remove barriers to trade or improve access for UK businesses in practice, particularly as regards provision of cross-border services and the closely linked issue of business travel, where it will often be important to check what is permitted under national rules of individual Member States (which is not always spelt out in the TCA in any meaningful level of detail). Similarly, in relation to goods trade, although the TCA allows for zero tariffs and includes some helpful simplifications, businesses still face a substantial increase in non-tariff barriers.
Finally, there are areas where the TCA essentially contains provisions which commit both sides to abiding by certain key "high level" principles of regulation (albeit that they are free to legislate as they see fit on the detail). These include: state aid, labour and social standards, environment and sustainable development, taxation, consumer protection, intellectual property, public procurement, competition law and merger control. Once again though, as these measures fall well short of full harmonisation or "dynamic alignment", businesses will still need to consider different sets of regulation at national level in many cases.
KEY PROVISIONS OF WITHDRAWAL AGREEMENT
The Brexit Withdrawal Agreement contains separation provisions on the following issues, mainly covering how matters or procedures which effectively straddle the end of the Brexit transition period are to be dealt with. However, none of these provisions are relevant to matters arising or procedures initiated after 31 December 2020.
- Goods placed on the market
- Ongoing customs procedures
- Ongoing VAT and excise duty matters
- Intellectual property
- Jurisdiction, recognition and enforcement of judgments
- Personal data
- Public procurement
- EU judicial and administrative procedures (e.g. CJEU references, European Commission competition investigations etc)
- Administrative cooperation re tax claims etc
The provisions of the Withdrawal Agreement relating to Northern Ireland are intended to govern key aspects of the UK-EU relationship into the future (for so long as the relevant protocol remains in force). In contrast to the separation provisions above (which focus on matters or procedures which were already ongoing at the end of the Brexit transition period), the protocol will apply to matters arising or procedures initiated after 31 December 2020:
A key request from the business community was that the TCA should provide implementation or grace periods in order to provide more time to adapt to new trading conditions. The TCA includes grace periods in a limited number of areas, notably:
- transfer of personal data from the EU to the UK (see textbox);
- compliance with rules of origin for goods; and
- the application of social security rules relating to posted workers (now known as "detached workers").
Grace periods are also available in respect of certain aspects of the arrangements for goods under the Northern Ireland Protocol of the Withdrawal Agreement (agreed outside the framework of the TCA).
GRACE PERIOD FOR EU TO UK DATA FLOWS
Under the TCA, transfers of personal data from the EU to the UK can continue without further action on the part of EU based controllers or their UK based counterparts for at least 4 months, with a possible extension by a further 2 months (i.e. until the end of June 2021). This is designed to give the European Commission sufficient time to reach a decision on whether the UK regulatory framework is "adequate". If it declines to do so, then UK-based businesses and their EU counterparts will need to make changes to their current arrangements for the transfer of personal data – see this briefing for more detail. The grace period is conditional on the UK not changing its data protection legislation without the EU's consent. For more detail, see under Data protection below.
However, the TCA makes few other concessions to the need for time to adapt to the new arrangements – in particular, it lacks any provision for a bilateral implementation period for businesses affected by the substantial increase in border red tape for UK-EU goods trade outside the scope of the Northern Ireland Protocol (see this Q&A).
Level playing field, dispute resolution and safeguards
In common with most free trade agreements, the TCA contains dispute resolution and "safeguard" provisions (discussed below) - but as part of the level playing field provisions, it also contains a rebalancing mechanism, which is relatively unprecedented. This has been included because the UK's stated aim is to diverge from the EU, whereas most trade agreements tend to focus on areas of convergence. The rebalancing mechanism is intended to help manage this process of divergence by allowing the TCA to be adjusted in response to significant changes.
LEVEL PLAYING FIELD REBALANCING MECHANISM
The rebalancing mechanism may be triggered where one party believes that there are "significant divergences…impacting trade or investment between the Parties in a manner that changes the circumstances that have formed the basis for the conclusion of this agreement." However, it is limited to divergences in the areas covered by the provisions of the TCA on labour, social standards, environment and sustainable development – in relation to concerns about other areas covered by the agreement, the parties would in most cases have to turn to the general dispute resolution mechanism (see below).
The aggrieved party can seek a review of the whole agreement (but may only do so from 2025 onwards) or it can convene a panel of experts to consider the specific matter complained of. It can also take unilateral measures to remedy any alleged imbalance arising from a divergence in regulation. Such measures could, however, be challenged before a panel of arbitrators, where the party invoking them would need to show that (i) a significant imbalance had arisen; and (ii) its unilateral measures represented a proportionate response to that imbalance.
For matters falling outside the scope of the rebalancing mechanism (which is limited to the level playing field provisions on labour, social standards, environment and sustainable development), the parties would normally have to turn to the general dispute resolution provisions of the TCA. However, certain provisions are excluded from the dispute resolution mechanism, mostly in areas where the EU appears to have been less concerned about the possibility of the UK diverging significantly from its current approach – examples include the level playing field provisions on tax, competition law and merger control (but not state aid).
In summary, the TCA provides for disputes to be resolved by a panel of arbitrators. If a party is found to have breached provisions of the agreement but fails to comply with the arbitrators' ruling, the other party may suspend some of its obligations under the agreement (i.e. it could effectively withdraw benefits that the TCA provides to the other party).
That said, certain sections of the agreement, such as the provisions on state aid, contain "bespoke" mechanisms which can be invoked independently of the general dispute resolution provisions. For more detail, see State aid.
Finally, in common with most trade agreements, the TCA contains "safeguard" provisions which allow for obligations to be suspended unilaterally in response to "serious economic, societal or environmental difficulties or a sectorial or regional nature […] that are liable to persist". A party must normally give at least one month's prior notice of its intention to invoke these provisions. Any measures are challengeable via arbitration and the other party may impose proportionate rebalancing measures in response. In practice, safeguard provisions are rarely used in connection with trade agreements. However, given the political sensitivity of many aspects of the UK-EU relationship, the TCA could prove to be the exception to the rule (for example, the provisions are expressly stated to apply to "fishing activities and their dependent communities").
More detailed commentary on the dispute resolution provisions, the rebalancing mechanism and safeguard provisions will be provided in due course.
The TCA contains comparatively few provisions that specifically address financial services; it does not (and was never going to) address the critical question of equivalence, a matter which is of key significance to the UK economy and is progressing separately (see below). The TCA provisions on financial services are high level and very similar to those which are seen in the EU's other free trade agreements with third countries:
TCA FINANCIAL SERVICES PROVISIONS: KEY POINTS
- International standards: the UK and EU agree to use their best endeavours to ensure that internationally agreed standards in the financial services sector are implemented and applied – these standards include those from the Basel Committee, IOSCO, FATF and OECD.
- Prudential carve-out: while some general, high-level provisions relating to services and investment (including most favoured nation treatment) apply, specific provisions governing the supply of financial services apply to (and override) these, including a significant "prudential carve-out", meaning that neither party is prevented from adopting or maintaining measures for the protection of investors, depositors, policy-holders or persons to whom a fiduciary duty is owed by the financial services supplier or to ensure the integrity and stability of the Party's financial system.
- Clearing and payment systems: financial service suppliers from the UK and EU will have access to each other's payment and clearing systems operated by "public entities" and to funding and refinancing facilities in the normal course of business (but not access to "lender of last resort" facilities).
The UK and the EU have also agreed, in a non-binding joint declaration, to establish a Memorandum of Understanding (MoU) establishing a framework for regulatory cooperation on financial services by March 2021. The joint declaration states that the "Parties will discuss … how to move forward on both sides with equivalence determinations between the Union and United Kingdom, without prejudice to the unilateral and autonomous decision-making process of each side". Whilst this is a welcome development, in the short term, it is unlikely that the MoU will deliver much in the way of substantive improvements upon the immediate post-Brexit position as regards financial services.
EQUIVALENCE: NOT IN THE TCA
The bilateral TCA does not address the critical question of equivalence. This is a matter of respective unilateral decisions (taking place outside the framework of the TCA) and is not one of bilateral negotiation. It takes account of national interests and therefore does not involve an objective assessment of "equivalence". The UK has already announced a package of unilateral equivalence assessments over and above its temporary arrangements in some, but by no means all, areas. The European Commission's process of assessing the UK's regulatory framework is continuing. It remains to be seen how long it will take before there are meaningful mutual equivalency declarations and, if so, in which of the regulatory regimes there is such mutuality. It is hoped that the Memorandum of Understanding referred to above will, among other things, at least provide the framework for granting and withdrawing equivalence, and may help to facilitate and expedite the mutual processes.
For more information on the impact of Brexit on financial services, please see Section 1 of our Financial Services Regulation New Year briefing 2021.
Although the TCA itself has little immediate impact on derivatives (as is the case for financial services generally – see above), the end of the Brexit transition period has resulted in a number of important changes. In particular, the UK, and its domestic regulators, are now responsible for administering UK EMIR, the UK on-shored version of the European Market Infrastructure Regulation. While this is primarily of relevance to UK users of derivatives, EU and EEA users of derivatives with cross-border arrangements (such as European funds that trade with UK banks) will also need to understand the changes.
For example, there are some differences in the way in which derivatives need to be reported, certain deadlines for notifications to regulators, and some areas of regulatory divergence (which have, in certain circumstances, been mitigated by time-limited exemptions). For more detail, see our Post-Brexit checklist for UK and EU/EEA users of derivatives.
Other services (non-financial)
As regards most types of non-financial services, the TCA does not go much beyond preserving levels of access currently enjoyed by businesses from non-EU countries. For example, where the current level of access for such businesses goes beyond the EU's WTO commitments, the TCA generally seeks to entrench this i.e. it will effectively prevent the EU adopting a more restrictive approach in future. However, given that the UK has been used to an enhanced level of access based on EU membership, such an approach will still result in increased barriers for UK service providers selling into the EU from 1 January 2021. Some services, such as audiovisual services, are not covered by the TCA at all.
For more detail, see our briefing, Services providers: getting ready for Brexit (updated January 2021). Service businesses may also need to consider the impact of the TCA and the end of the Brexit transition period on business travel to the EU and data flows.
The TCA also contains specific provisions relating to professional qualifications, delivery services and legal services, which are outlined below. For telecoms services, see Data protection, tech and telecoms and for maritime transport services, see Transport.
KEY RELEVANT PROVISIONS: SERVICES AND INVESTMENT (GENERAL)
The main provisions of the TCA relevant to services provision generally are as follows – see below for coverage of specific issues/types of services i.e. professional qualifications, delivery services and legal services.
The TCA does not contain any provisions requiring mutual recognition of professional qualifications. Instead, it envisages that professional bodies in the UK and EU (or in individual Member States of the EU) may make recommendations to the TCA Partnership Council for mutual recognition arrangements, which the parties may then decide to adopt. However, such arrangements are likely to take some time to put in place. For example, the EU's trade agreement with Canada contains similar provisions and has been in operation now for over 3 years, but so far it has not led to any arrangements of this type. The upshot is that there is currently no mutual recognition of professional qualifications between the UK and the EU.
The TCA requires both parties to adhere to certain high level principles concerning their regulation of delivery services. These relate to issues such as licensing, the role of independent regulators and the behaviour of national operators subject to universal service obligations (such as Royal Mail in the UK). These provisions are unlikely in our view to require any significant changes to the UK's existing framework for regulation of delivery services.
Subject to certain exceptions, the TCA allows UK lawyers to use their home title when providing services in the EU (and vice-versa). Although this is helpful (and, as the UK government has pointed out, unprecedented in an EU trade agreement), it falls some way short of the level of access to each others' markets that UK and EU lawyers enjoyed until 31 December 2020.
Investment and M&A
There is little of direct relevance to mergers and acquisitions in the TCA and it would be unusual for a trade agreement to contain extensive coverage of this area – although there are some provisions on investment (see below). However, the fact that we now have a Brexit trade deal resolves the immediate uncertainty and should boost deal activity in 2021. There is no doubt that the uncertainty of the past few years (rather than the fact of Brexit itself) has had an impact on deal-flow in the UK and any outcome that provides certainty is welcome news for the M&A market.
WIDER IMPACT OF BREXIT ON M&A
Of course, some transactions will be impacted by added complexities in relation to merger clearances (see Competition law and merger control) and due diligence as a result of parallel but diverging regimes. In addition, whilst the TCA provides welcome clarity in certain areas, there remains considerable uncertainty over what the UK Government's longer term post-Brexit strategy is, in particular which areas of UK law it will look to "de-Europeanise" first. For more detailed discussion of the impact of Brexit on M&A, click here.
TCA foreign investment provisions
The TCA contains provisions on investment similar to those in the EU's trade agreements with Canada and Japan. For example, each party agrees not to impose measures such as limitations on foreign-owned shareholdings or requirements for its own nationals to be represented on boards of directors. The TCA also includes commitments by each party to treat the other party's investors no less favourably than its own investors in like situations (or investors of any third country when it comes to establishment). However, for the most part, these are obligations that the UK and EU already meet and where they do not, the TCA carves out "any existing non-conforming measure" as listed in the Annexes to the agreement. The overall effect is therefore to lock in existing levels of openness to investment from outside the EU or the UK, as the case may be.
Whilst this is helpful, the TCA does not oblige the parties to improve upon existing levels of openness. In particular, the EU is not obliged to give UK investors the exact same rights that they enjoyed before the end of the Brexit transition period, when they would have been treated as EU investors (enabling them, for example, to rely on provisions of the Treaty on the Functioning of the European Union to tackle a wider range of potentially discriminatory measures). That said, this weakening of investor protection is only likely to be material in a minority of cases; as a general proposition, UK businesses will continue to be able to acquire EU businesses (and vice versa) in much the same way as they have done to date (although note the points made below about the impact of Brexit on the wider investment landscape).
THE WIDER INVESTMENT LANDSCAPE
As regards the wider investment landscape beyond the issues addressed by the TCA (which primarily relate to foreign ownership), the end of the Brexit transition period will lead to material changes where the activities have a financial services element, notably in relation to the following areas:
- Marketing between UK-EU and access to capital markets – for example, UK issuers will no longer be able to "passport" an investment prospectus into the EU (and vice versa), which will add time and cost to fundraising in Europe and companies which are listed on markets in both the UK and the EEA will now be subject to regulation by two separate regulators (which, again, will have time and cost implications)
- Cross-border investment activities between UK-EU – for example, dealing, underwriting, investment advice and investment management which have previously been carried out in reliance on financial services passporting arrangements may no longer be possible (subject to any future decisions on equivalence)
- Other specific regulations that impose requirements on certain activities in financial instruments – such as mandatory clearing of certain derivatives, mandatory posting of collateral for uncleared derivatives, trading obligations or reporting obligations
In all these areas, the TCA provides little, if any, assistance and so far, there are no relevant equivalence decisions (and in any event, equivalence is unlikely to be achievable for all pre-Brexit financial services activity).
KEY RELEVANT PROVISIONS
Contracts, jurisdiction and disputes
Jurisdiction, recognition and enforcement of judgments
The TCA does not contain any rules replacing the EU regime which (until the end of the transition period) governed jurisdiction in relation to disputes with a UK-EU dimension or the recognition and enforcement of UK court judgments in the EU (and EU court judgments in the UK). See this briefing. However, as explained in the textbox below, the Brexit Withdrawal Agreement does contain provisions governing how legal proceedings initiated on or before 31 December 2020 should be dealt with.
Brexit is likely to have an impact on many commercial contracts, but the TCA has nothing to say on this. To be fair, this is not unexpected (as it would be unusual for a trade deal to address such issues directly) but for many businesses, the impact of Brexit on contracts is likely to be key. We have produced a range of guidance on this topic.
KEY RELEVANT PROVISIONS
NOTE: As explained above, the TCA does not contain any provisions which deal directly with contracts, jurisdiction or disputes. However, the Brexit Withdrawal Agreement does contain provisions governing how legal proceedings initiated on or before 31 December 2020 should be dealt with (broadly speaking, the relevant EU law should continue to apply, even if the dispute is not finally resolved until after 31 December 2020):
- Brexit Withdrawal Agreement – separation provisions on jurisdiction, recognition and enforcement of judgments
Goods: tariffs, quotas and rules of origin
The TCA will result in zero tariffs and quotas on all qualifying goods trade between the UK and the EU. Whilst this is a significant benefit, it does not mean that UK-EU goods trade can continue largely as it did before 1 January 2021. In particular:
- Border red tape: The TCA does very little to reduce the additional border red tape that will apply, such as the need for customs declarations (indeed, in some areas, such as proof of origin - see next bullet - it means that extra paperwork will be needed); and
- Origin requirements: In order to benefit from preferential treatment under the TCA, suppliers will need to prove that their goods "originate" in the UK or EU, as the case may be - which will not always be straightforward. For example, goods imported from say, China, which have only undergone limited processing in the UK, are unlikely to qualify if subsequently exported to the EU (whereas prior to 1 January 2021, this would not have been an issue).
In the short term, these changes are likely to result in disruption to goods supply chains. In the medium to longer term, they may well result in structural changes to UK supply chains in particular. For more information on changes to arrangements for UK-EU goods trade and what businesses need to do to comply, see our Brexit Goods Q&A.
Goods: customs procedures
The TCA provides for both the UK and the EU to cooperate on customs matters. Among other things, it includes provisions requiring the parties to:
- allow "trusted traders" with either UK or EU Authorised Economic Operator (AEO) status to benefit from simplified procedures;
- endeavour to establish a single window to enable traders to submit documentation (which could, in time, simplify relevant paperwork requirements);
- cooperate to facilitate high volume roll-on roll-off ferry traffic and other similar services (e.g. Eurotunnel); and
- cooperate on VAT issues (see Tax).
These provisions are welcome and provide a useful foundation to build on. However, they are unlikely to do much in the short term to alleviate the probable disruption to supply chains arising out of the UK's departure from the EU Single Market and Customs Union; for more information on changes to arrangements for UK-EU goods trade (including an explanation of why disruption is likely) and what businesses need to do to comply, see our Brexit Goods Q&A.
Goods: product regulation
The TCA's provisions on product regulation offer some improvement on the position that the UK would have faced in a no deal scenario. In particular, there are special provisions for medicines, chemicals, motor vehicles, wine and organic products.
HOW FAR COULD THE UK DIVERGE FROM THE EU?
For most products, there are no concrete promises not to row back from product standards, for example in respect of environmental performance or safety. However, both sides commit to using international standards as a basis for technical regulations except where these would be ineffective or inappropriate for fulfilling the legitimate objectives pursued. The parties will ensure transparency through an enhanced version of the WTO's technical barriers to trade (TBT) notification system, which would have applied even in the absence of the TCA. Any proposed measure which could be a barrier to trade must be notified through the WTO TBT system, and other countries have a right to review, comment on and, in extreme cases, raise objection through the WTO to the proposed measure. In the case of the TCA, there are additional mechanisms for each party to object to proposed measures, and the agreement's dispute resolution mechanisms could be invoked if necessary. In practice, the WTO TBT system combined with the additional mechanisms in the TCA are likely to impose at least some constraints on the UK's freedom to diverge from the EU's approach.
Product regulation - impact on business
There are some positive signs for product regulation, including commitments not to discriminate against "remanufactured" goods, and to exchange information on non-food product safety and non-compliance (the EU already operates a system (RAPEX) for disseminating information on dangerous products).
That said, most businesses involved in UK-EU goods trade (including the areas mentioned above) are likely in practice to face a significant additional regulatory burden. Following the UK's exit from the EU Single Market and Customs Union, they will generally need to take extra steps to prove that their products meet the relevant standards. For information on what businesses need to do in order to demonstrate compliance with relevant standards when importing or exporting goods, click here. More detailed commentary on the TCA's provisions concerning product regulation will follow in due course but in the meantime, the following briefings highlight some of the key issues:
KEY RELEVANT PROVISIONS
Goods: Technical Barriers to Trade (TBT)
- TBT provisions – main body of TCA
- TBT – motor vehicles annex
- TBT – chemicals annex
- TBT – medicines annex
- TBT – wine annex
- TBT – organic products annex
Goods: Sanitary and Phytosanitary (SPS)
Data, tech and telecoms
In the short term, the key point to note about the TCA's provisions on data protection is the "data bridge", which provides a 4 to 6 month "grace period" in relation to transfers of personal data from the EU to the UK – see Grace periods for more detail. This is to allow more time for the European Commission to assess whether the UK's data protection framework will offer adequate protection. If it declines to do so, then UK-based businesses and their EU counterparts will need to make changes to their current arrangements for the transfer of personal data (see below).
Apart from the data bridge, the TCA is of limited assistance to business as regards the impact of Brexit on exchange of personal data between the UK and the EU. We are in the process of updating our guidance, but the key issues are highlighted in our briefings below:
Beyond that, the TCA contains a number of provisions which commit both parties to maintaining a high level of protection of personal data, notably in Part Three (on law enforcement and judicial cooperation on criminal matters) and Part Six (which sets out key high level principles across a range of topics from democracy and human rights to counter-terrorism and combating climate change). These are likely to constrain the UK from radically deregulating in this area. However, if the European Commission issues an adequacy decision in respect of the UK (which the UK has requested and remains a key UK policy objective), this is likely to act as a far more significant constraint on the UK's freedom to change its data protection regime in future.
The TCA contains some helpful provisions locking in existing levels of openness for tech sector businesses and providing protection against future restrictions in some areas. The following points are of particular note:
- both parties commit not to impose tariffs or customs duties on digital transmissions (e.g. software downloads) and accept a broad definition of "computer-related services"; and
- both parties commit not to impose new data localisation requirements (subject to e.g. a number of public policy exceptions).
However, welcome as these provisions are, they do not commit the parties to increasing access for the tech sector over and above existing levels of openness for non-EU or non-UK businesses, as the case may be. For further details please see our briefing.
Links to the key provisions relating to telecoms are below; further commentary will be provided in due course.
Employment and immigration
As part of the level playing field section, the TCA contains provisions committing the UK and the EU to the maintenance of certain standards in relation to labour and social policy, including fundamental rights at work, fair working conditions and employment standards, and business restructuring. If one party believes that there are "significant divergences… impacting trade or investment between the Parties in a manner that changes the circumstances that have formed the basis for the conclusion of this agreement", it can seek to invoke the rebalancing mechanism with a view to adjusting the agreement in response to these changes. See Level playing field, dispute resolution and safeguards.
The key implication of this for future UK policy on employment matters is that the UK may well be somewhat constrained in how far it can diverge from EU regulation without risking the loss of benefits under the TCA. There has been no official confirmation from the Government as to what changes, if any, it may seek to make to employment law now that the Brexit transition period has ended. However, those hoping for wholesale, radical reform may be disappointed once the detail emerges. We will provide an update as and when the Government's plans for post-Brexit employment law become clearer.
The TCA is unlikely to have a significant impact on the UK's immigration regime, where a new points-based regime has been introduced, which applies equally to non-EEA and EEA nationals moving to the UK after 1 January 2021. The new regime will make it significantly more difficult to recruit EEA nationals than under previous EU free movement rules. The key issues remain as highlighted in our briefings below:
Many businesses need to be able to send staff to visit existing or prospective customers or suppliers in the EU for a variety of reasons, ranging from negotiating new contracts to provision of services at the customer's location or delivery of training. From 1 January 2021, sending staff to the EU to carry out services will often be subject to significantly more red tape. Whilst the TCA contains provisions allowing short term business visits without visas or work permits, these are unlikely to cover provision of services. Even where the visit is simply to meet prospective customers, conduct market research or to negotiate a new contract (to be performed in the UK) - all of which could fall within the short term business visitor provisions - new passport and border requirements will still apply to UK passport holders.
The key point is that after 31 December 2020, it is no longer a question of simply jumping on a plane or the Eurostar to visit an EU business; thought will need to be given to the exact purpose of the visit in advance and if services are to be carried out, requirements for work visas will need to be considered. We are in the process of updating our guidance to reflect the provisions of the TCA, but the key issues remain as highlighted in our briefings below:
The TCA contains comparatively few provisions that specifically address tax matters, although some of the provisions addressed elsewhere in this guide have a bearing on tax, notably:
- The prohibition on customs duties and export duties – see Goods: tariffs and rules of origin; and
- The level playing field provisions on the state aid, which are likely to constrain the UK's ability to offer certain types of tax relief – see State aid.
Overall, these are arguably the most significant provisions of the TCA in terms of their impact on tax.
In addition, as part of the arrangements for customs cooperation (see Goods: customs cooperation), the TCA includes a Protocol on VAT which is outlined in the textbox below.
WHAT DOES THE VAT PROTOCOL DO?
The Protocol provides for the UK and EU Member States to:
- request VAT information from each other and introduce arrangements for the automatic exchange of VAT information (the type of information to be exchanged is to be determined by a specialised committee);
- spontaneously supply each other with certain VAT information e.g. in relation to missing trader fraud; and
- make a request that another State enforces a claim relating to VAT, customs duties or excise duties, including taking precautionary measures (where possible under local law) if the claim is contested or the instrument of enforcement has not been finalised in the requesting State.
It will be apparent from the above that the VAT Protocol is essentially a state-to-state mechanism; it does not materially assist businesses with any of the VAT issues arising out of the end of the transition period. For more information on VAT issues relating to the impact of Brexit on goods trade, see the following:
- Our Q&A on Brexit and goods trade
- Video explainer: Why are there import VAT and customs duties on sales of goods to UK consumers by EU sellers?
- Video explainer: Why are UK businesses restricting deliveries of goods to Northern Ireland?
Level playing field
Finally, the level playing field section of the TCA includes commitments by the parties to observe certain international standards in relation to governance and standards in tax policy. These provisions are not subject to the TCA's dispute resolution mechanism, which would make them difficult to enforce in practice. However, historically, both the EU and the UK have supported the relevant international standards, which suggests that a serious failure to respect them in future is unlikely. The textbox below headed "Mandatory disclosure of tax planning" provides an example of how the UK has already diverged from existing EU rules on tax matters, within the confines of the level playing field.
MANDATORY DISCLOSURE OF TAX PLANNING (DAC 6)
The TCA limits level playing field obligations relating to the disclosure of tax planning arrangements to adherence to the OECD's mandatory disclosure rules, which are considerably more limited in scope than the EU Mandatory Disclosure regime (DAC6). This has given the UK the ability to publish regulations which limit the scope of DAC 6 in the UK with effect from 11pm on 31 December 2020. Reporting under DAC 6 will still be required by UK intermediaries and taxpayers for a limited time, but only arrangements which trigger the D Hallmarks (arrangements which obscure beneficial ownership or which thwart effective OECD CRS reporting) will be reportable. HM Revenue & Customs has confirmed that this change also applies to arrangements entered into prior to 1 January 2021. Over the coming year, the UK Government intends to repeal the legislation implementing DAC 6 in its entirety and implement the OECD's mandatory disclosure rules instead. This change will reduce the DAC 6 compliance burden on businesses that focus mainly on the UK, but those with wider EU operations will still need to operate the full rules.
Although the TCA contains a reasonably substantial section on intellectual property (IP) rights, the main effect of these provisions is simply to commit the UK and the EU to maintaining a high level of protection for businesses in this area. Many of the provisions reflect commitments that both parties have already made in international agreements but there are some areas where the TCA goes further; for example, both the EU and UK commit to retaining an artists' resale right and taking measures to facilitate collective management of copyright. Taken as a whole, these provisions make it unlikely that there will be radical change to UK law in this area.
The key practical implications of Brexit for IP remain as set out in our briefing: Implications of Brexit for holders of IP rights and domain names.
WHAT ABOUT EXHAUSTION OF IP RIGHTS?
IP rights are said to be "exhausted" when the goods have been placed on the market in a given territory. This is important for distributors and retailers because once IP rights have been exhausted, the IP owner cannot object to any further re-sale or distribution of those goods within that territory (and possibly further afield, depending on the position in other territories on exhaustion). The TCA provides for both parties to adopt their own independent (and potentially different) positions on exhaustion.
Until the end of the Brexit transition period, the position in the UK and the rest of the EEA was that IP rights were regarded as exhausted when goods were placed on the market anywhere in the Single Market (which, until 31 December 2020, included the UK). For example, goods imported from say, Japan, into the UK, could be transported to France and sold there without the Japanese rights holder (or any of its licensees in the EEA) being able to object on the basis of its IP rights. However, from 1 January 2021, so far as the EU is concerned, the Japanese firm's IP rights in the EEA will not have been exhausted by placing the goods on the market in the UK. The Japanese firm will therefore be able to object to a UK business exporting those goods to France, on the basis that it has not given its consent to the use of its EEA trade marks (or other relevant IP rights) for the marketing or sale of those goods in the EEA. The UK, meanwhile, is taking a different approach from the EU to exhaustion. It will continue to regard IP rights as having been exhausted in respect of the UK as soon as goods are put on the market in the EEA. So, if the Japanese firm were to put its goods on the market in France, it could not then use its UK IP rights to prevent them being exported to the UK.
The upshot of this is that businesses importing goods into the UK will need the consent of the rights holder in the EEA if they subsequently wish to sell the relevant goods there. Meanwhile, IP rights holders in the EEA will have significantly more scope to restrict the supply of their goods from the EEA into the UK.
The state aid provisions of the TCA are summarised below but for a more detailed discussion of the issues, see our briefing: State aid and the EU-UK trade deal: the newly plotted level playing field.
The level playing field section of the TCA contains extensive provisions on state aid. These are primarily designed to address the EU's concern that, following the end of the transition period, the UK would only be bound by WTO anti-subsidy rules. The latter are significantly narrower in scope than the EU state aid rules (e.g. they do not cover services) and more difficult to enforce. Among other things, it would not necessarily have been possible for businesses which believed that they had been harmed by UK subsidies (or other forms of state aid) to seek remedies through the UK courts. The EU regards the possibility of such private enforcement as an important discipline on the UK's future approach to the award of state aid. The state aid provisions also provide a "bespoke" mechanism under which either party can retaliate relatively swiftly if it considers that the other has awarded aid in breach of the TCA (see below).
WHAT THE TCA REQUIRES THE UK TO DO
The TCA requires the UK to implement a domestic state aid regime based on high level principles similar to those underlying the EU regime, covering both goods and services (unlike the WTO regime, which only applies to goods). UK courts must have the power to review the compliance of UK subsidy measures with those principles (and award appropriate remedies, including the recovery of state aid). The UK is also required to set up an independent authority to oversee its state aid regime.
Whilst the UK's regime is likely to be similar to the EU's in some respects (particularly as regards high level principles), it will not have to mirror all aspects of it. In particular, the TCA does not require the UK to follow the EU's approach of requiring most subsidies to be approved by the European Commission before being implemented (unless, for example, they fall within a block exemption). The UK Government has indicated that it will consult on legislation to implement its own domestic state aid regime early in 2021. In the meantime, it appears that – despite the lack of legislation implementing a UK domestic state aid regime - a business wishing to challenge a UK state aid measure implemented after 31 December 2020 could bring a challenge in the UK courts based on the European Union (Future Relationship) Act 2020. See further UK Government guidance on state aid.
"Bespoke" state aid dispute mechanism
The TCA also contains special procedures for disputes concerning the alleged award of specific subsidies (or other state aid measures) in breach of the principles outlined above. An aggrieved party must first request consultations about the alleged state aid measure. However, if it has not received a satisfactory response within a specified (relatively short) period, it is free to take "appropriate remedial measures" on a unilateral basis. As with similar measures under the "rebalancing mechanism" for the level playing field (see Level playing field, dispute resolution and safeguards), these measures can be challenged through arbitration. Other issues – such as a failure by the UK to implement its own domestic state aid regime, as outlined above – can be dealt with through the general dispute resolution provisions (again, see Level playing field, dispute resolution and safeguards).
Environment and climate
As part of the level playing field section, the TCA contains provisions committing the UK and the EU to the maintenance of certain national standards, including in relation to environmental protection and sustainable development.
It is difficult to say, without further detail or practical experience, how hard the non-regression provisions will bite: on the one hand the parties affirm their right to set their own policies and priorities and determine appropriate levels of protection, whilst on the other hand committing not to weaken or reduce levels of protection below those in place at the end of the transition period. Note that there is no commitment to track each other's ambition moving forward except in respect of targets already set, and there is an explicit recognition that the purpose of the provisions "is not to harmonise the standards of the Parties" – but see below under "Future regulation").
Carbon pricing and climate change
The parties agree to have an effective system of carbon pricing in place as at 1 January 2021, and to maintain it "insofar as it is an effective tool for each Party in the fight against climate change". The parties further agree "to give serious consideration" to linking the UK's nascent emissions trading scheme to the EU's established scheme (EU ETS).
Some of the commitments on climate change, arguably, do not go any further than a promise to do what must already be done, that is to adhere to international agreements and commitments on climate. Of course, the EU may use the enhanced enforcement mechanisms and the threat of rebalancing measures to ensure that the UK does respect these obligations (see below).
Although there is no express obligation on the parties' to keep pace with increases in the other's environmental standards, if one party believes that a significant gap is opening up, it may be able to invoke the level playing field rebalancing mechanism with a view to adjusting the agreement in response to these changes. This may apply where a party believes that there are "significant divergences… impacting trade or investment between the Parties in a manner that changes the circumstances that have formed the basis for the conclusion of this agreement". See Level playing field, dispute resolution and safeguards.
The key implication of this for future UK policy on environmental matters is that the UK may well be constrained in how far it can diverge from EU regulation without risking the loss of benefits under the TCA.
The TCA makes modest but significant improvements to the "baseline" level of access to each others' procurement markets which the UK and the EU would have enjoyed without a trade deal. That "baseline" level of access was greatly improved by the fact that both parties are now signatories to the WTO Government Procurement Agreement (GPA). The UK acceded to the GPA in its own right on 1 January 2021 and the TCA provisions build on that foundation. The upshot of this is that, although the level of guaranteed access to EU procurements will diminish somewhat, UK firms will continue to have access to a very significant proportion of those opportunities (and vice versa as regards EU firms wishing to bid for UK procurements).
Both the TCA and the GPA will also constrain the extent to which the UK can diverge from the EU's approach in future, at least as regards the key principles underlying its national procurement regime. However, in our view, these obligations will not prevent the UK from pursuing at least some meaningful reform of its rules in this area; indeed, at the time of writing, it was already consulting on this. For more detail on all the above, see our briefing:
Competition law and merger control
The level playing field section of the TCA contains provisions requiring the UK and EU to respect certain very high level principles in the fields of merger control and competition law (i.e. antitrust law, not state aid, which is dealt with separately in the TCA). As such, the UK will be free to diverge from the EU, at least as regards issues of relative detail (indeed its national merger control regime has always been somewhat different from the EU Merger Regulation).
These provisions are not subject to the level playing field "rebalancing mechanism" or the general dispute resolution regime of the TCA, which means they would be difficult to enforce in the event of a perceived breach. However, both the UK and EU have well established competition law and merger control regimes and there are no indications of a desire to pursue radical reform. As a result, we would not expect these areas to provide much of a focal point for future disputes between the parties.
The TCA also provides for the parties' competition authorities to cooperate as regards competition law and merger control. Beyond that, however, the TCA will make little difference in practice to either competition law or merger control and the key issues arising out of the end of the Brexit transition period remain as set out in our briefings below:
The UK and the EU commit to taking certain measures to protect consumers in relation to e-commerce transactions and air transport. It is likely that at present, both parties already have sufficient measures in place to comply with these provisions.
If the UK were to seek to deregulate in either of these areas in a fairly radical way, leaving consumers with substantially less protection than before, then it would risk being in breach of these provisions. For example, the aviation provisions require reimbursement or compensation to be available for denied boarding, cancellations or delays. This protection was put in place following an EU Directive and has been retained by the UK. If in future the UK were to remove this protection, that could amount to a breach of the aviation consumer protection obligation in the TCA. However, as a general proposition, provided that a reasonable level of protection is maintained, the TCA is unlikely to constrain either party from pursuing its own particular approach to consumer law.
Beyond the e-commerce and air transport provisions highlighted above, the TCA does not impose any specific constraints on the UK's future policy as regards consumer protection. However, there are numerous references to consumer law measures in the TCA, reflecting an underlying expectation that both parties will maintain a reasonably high level of protection.
WHAT HAPPENS TO CROSS-BORDER CONSUMER ENFORCEMENT?
The TCA does not seek to preserve UK participation in any of the cross-border enforcement mechanisms of the EU's consumer protection regime, such as the Consumer Protection Cooperation Regulation or the European Small Claims court, nor does it seek to establish similar mechanisms. The UK Competition and Markets Authority could seek to agree enforcement cooperation mechanisms with its EU counterparts, but these are likely to be more limited in scope and may well take time to put in place.
The TCA contains provisions on road transport (both haulage of goods and passenger transport), aviation and maritime transport. These provide welcome certainty in terms of connectivity and access to the parties' respective territories, particularly compared with the likely position in the event of no deal. However, transport operators' rights are reduced as compared to the position prior to 1 January 2021 – see text box below:
RIGHTS FOR TRANSPORT OPERATORS
The following examples illustrate how the TCA preserves certain rights for transport operators, but at a reduced level when compared with EU membership:
- Airlines: Although a UK airline can continue to operate flights to EU airports, it can no longer, for example, use the same plane to take passengers to another destination within the EU and then fly back from there to the UK; rights are restricted to UK-EU routes only.
- Road haulage: Similarly, a UK haulier can continue to transport goods to and from the EU, but is restricted to two laden journeys within the EU before returning to the UK (whereas previously it was free to undertake as many journeys as it wished within the EU before returning to the UK).
More commentary on the TCA's transport coverage will follow in due course.
Energy has its own section of the TCA and many provisions relevant to energy, particularly renewable energy, will be covered by the level playing field provisions on sustainable development. In addition, energy equipment may be impacted by the provisions on product regulation and barriers to trade.
There is broad commitment to maintain current principles governing the energy market, to support security of supply and sustainability. Familiar concepts which promote competition, such as transparency of pricing, unbundling and freedom for consumers to switch suppliers are all mentioned.
WHAT'S HAPPENING TO INTERCONNECTION?
A key pre-Brexit concern was whether interconnectors supplying gas and electricity between the UK and the EU would continue to operate as before. The Agreement contains detailed provisions aimed at ensuring that trade over and use of interconnectors is fair, transparent and non-discriminatory. The parties are to work on an agreement relating to compensation for the costs of hosting cross border flows of electricity between EU and UK transmission system operators; until such agreement is in place, fees may be charged for use of the transmission system for import and exports between the UK and EU.
Early evidence suggests that there is some loss of efficiency in energy trading, mainly on account of UK traders having to use third-country capacity allocation tools rather than through market coupling. The Agreement envisages the conclusion of a new agreement on "Multi-region loose volume coupling" [Annex ENER-4], within 15 months (i.e. by April 2022).
ENERGY EFFICIENCY AND RENEWABLE ENERGY
The parties confirm their commitment to promoting energy efficiency and renewable energy. This commitment is underlined with specific provisions on subsidies in the energy sector [Annex ENER-2]: subsidies may be limited to low carbon energy generation, and, in an apparent concession to emerging technologies, subsidies may be awarded other than through competitive procedures where there is insufficient supply to ensure a competitive process.
The UK also commits to maintain the renewable energy and overall energy efficiency targets under its National Energy and Climate Plan, which it was required to prepare under the EU's Clean Energy Package.
Duration and termination
The TCA's provisions on energy are due to expire on 30 June 2026, although they can be extended beyond that date by agreement.