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Service providers: getting ready for Brexit

Overview

What should providers of non-financial services be doing to prepare for Brexit? With the transition period due to end on 31 December 2020, this briefing looks at the key issues you need to consider, whether or not there is a deal with the EU.

How will Brexit affect the treatment of UK service providers by the EU?

Don't expect too much from a deal

Although we do not yet know the final provisions of any deal, draft texts published by the UK and the EU earlier in the year indicate that any free trade agreement is unlikely to go much beyond preserving levels of access currently enjoyed by businesses from non-EU countries.  For example, where the current level of access goes beyond the EU's WTO commitments, the FTA may seek 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 is likely to result in increased barriers for UK service providers selling into the EU.   In practice, therefore, for many service sectors, the difference between "deal" and "no deal" is unlikely to be that great.

How will services businesses be affected?

Some of the practical examples of what this is likely to mean for services business are well known;  for example, in highly regulated sectors such as financial services or broadcasting, businesses based in the UK will simply no longer be authorised to carry out the same range of activities that equivalent EU businesses can undertake.   In other sectors, UK providers may find that although they still have market access in principle, the change in the UK's status from an EU Member State to a third country means that they are treated less generously than competing providers based in the EU. 

EXAMPLES OF DIFFERENCES IN TREATMENT

In some sectors, UK businesses may find that (as non-EU suppliers) they can only continue providing services to EU customers if they have a commercial presence in the relevant territory. In other cases, UK services businesses may have broadly the same level of access as they did while the UK was still an EU Member State, but are expected to comply with more onerous conditions applied to non-EU firms. An example might be insurance requirements, where Member States may be happy for EU providers to rely on insurance cover obtained in their home Member State, but may insist that non-EU firms obtain separate insurance cover locally (so UK providers are likely to face increased costs).   Another area where the shift to third country status may cause problems is where the service requires staff with professional qualifications; UK providers may find that staff with UK professional qualifications are no longer recognised as fulfilling these requirements (meaning that locally qualified practitioners may need to be engaged at extra cost).

Another key point is that in many sectors, there are no rules harmonising the position across the EU. This means that differences in treatment may vary considerably from one EU Member State to another.  Some may adopt a relatively unrestrictive approach, whereas others may have made much more extensive use of their freedom to impose more onerous conditions on non-EU providers.  Consequently, you should not assume that, just because your treatment in one EU Member State appears likely to remain the same, other Member States will necessarily adopt the same approach.

How do I work out whether Brexit will lead to a difference in treatment?

The first point to check is what commitments the EU has made under the WTO services regime (or any EU-UK FTA, if agreed).  If the EU has committed to allow a certain level of access, then you should be able to take at least a moderate level of comfort from that – because in principle, Member States should have adjusted their national laws so as to permit services of that type to be provided by non-EU firms.  Similarly, if the EU has committed to treating non-EU firms in the same way as EU providers, this too is likely to provide a level of comfort.  We can help you with this.

If there's no commitment (or there is one, but it is subject to conditions or reservations), then unless your sector in is subject to a harmonised set of rules across the EU, it will be a question of looking at the national rules in each of the EU Member States in which you have customers. The key point to focus on is whether service providers from outside the EU are treated differently from EU businesses. We can help you with this analysis by involving firms that we regularly work with in different EU Member States.

However, as explained below, the treatment of non-EU service providers is not the only issue you need to consider.  In practice, issues such as data transfers and the ability of staff to travel to the EU for business purposes may be equally, if not more, significant.

How will Brexit affect business travel to the EU?

Many services 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.   After the end of the Brexit transition, sending staff to the EU to carry out services is likely to be subject to significantly more red tape.  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), new passport and border requirements are likely to apply. 

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.  For more detail see:

POINTS TO CONSIDER IF SENDING STAFF TO THE EU IS LIKELY TO BE PROBLEMATIC

  • Can the service be delivered remotely? This may be a solution for services such as training and in this respect, the COVID-19 crisis may have helped by encouraging more widespread use of new technology.

  • Can you send an individual who is an EEA citizen?  EEA citizens, even if resident in the UK, will continue to be able to work in the EEA without the need to comply with the additional administrative requirements that UK citizens may face.  However, whilst this solution may be worth considering if you have already have EEA citizens on your staff who are prepared to move into the relevant role, advertising specifically for EEA nationals to fill that role is likely to amount to discrimination.

  • Can you engage local contractors to deliver the service? You would not necessarily need to employ such individuals directly – they could be engaged on a consultancy basis.  We can help you to source local law advice where appropriate.

How will Brexit affect the exchange of data with the EU?

For many businesses, the ability to exchange data with trading partners in the EU is critical.  Where the information in question is personal data, the position is complicated by the requirements of data protection law.  There are two key issues that services businesses trading with the EU need to consider:

TRANSFERS OF PERSONAL DATA FROM THE EU TO THE UK

There is a particular problem relating to EU businesses which transfer personal data to the UK;  in short, unless the UK receives an "adequacy ruling" from the EU before the end of the transition period (which is not guaranteed), EU firms will need to take additional measures in order to continue to comply with the requirements of EU data protection legislation.  The key takeaway point is that UK services businesses should be talking to their EU trading partners now to ensure that, if necessary, those measures can be put in place by 1 January 2021 with a view to ensuring that data flows can continue.  The situation has been further complicated by a number of recent CJEU judgments. For more detail, see: Brexit, your business and data: personal data transfers.

Handling personal data from the EU after Brexit

UK businesses which handle personal data relating to EEA citizens may also need to take a number of other steps, including in some cases:

  • appointing a representative in the EU; and

  • considering whether they can still benefit from the "one stop shop" principle, which allows a single data protection authority to be designated as the lead supervisory authority (LSA) for organisations. After the end of the transition, the UK Information Commissioner's Office (ICO) will no longer be able to fulfil this role for UK businesses.

For more detail, see:  Brexit, your business and data: processing European personal data.

Is it preferable to provide services to EU customers through an EU subsidiary?

Providing services to EU customers through an EU subsidiary may be worth considering, but it is not a step to be taken lightly. The key advantage of doing so is that an EU-incorporated entity will be an EU legal person;  it should therefore be able to benefit from the same treatment that a UK firm received before the end of the transition period (even though it will ultimately be owned and controlled by a non-EU person). Such a step would only be possible in sectors where the Member State in question permits so called "Mode 3" access, which is the right for non-EU service providers to establish themselves in the EU. But it is reasonably common for countries to permit Mode 3 access, because it encourages inward investment by non-EU businesses.

KEY POINTS TO CONSIDER

  • Incorporating an EU subsidiary is only worth considering if provision of services through a UK entity is going to become materially more difficult after the end of the Brexit transition – which may not always be the position.

  • In most cases you are likely to need a genuine presence – a mere "brass plate" operation is unlikely to be sufficient. In addition, if you operate in a highly regulated sector, the EU subsidiary may need authorisation from local regulators, which is likely to take time to obtain. Careful consideration will also need to be given to issues such as local employment law and the tax position (e.g. how best to extract revenue from the subsidiary).

  • An EU subsidiary is unlikely to assist if one of the main difficulties you face at the end of the Brexit transition is the extra red tape associated with sending UK-based staff to work in the EU (because that problem is essentially concerned with the citizenship of the individuals concerned and the EU's approach to so called "Fly In Fly Out" access, rather than the location of the supplier).

I don't sell to customers in the EU – do I need to worry about anything?

If you don't sell to customers in the EU, you may well have less to worry about – but there are still a number of issues to consider:

Reliance on EU suppliers: goods

Many services businesses such as those in the retail or hospitality sectors rely on EU suppliers for key inputs, such as the goods which they sell.  So far as goods suppliers are concerned, the key questions to ask are as follows:

  • If there is no deal, what tariffs will apply? Note that these are usually paid by the customer.

  • Do your suppliers expect to increase prices because of the extra costs of dealing with additional border red tape (arising from the UK's exit from the EU Single Market and Customs Union at the end of the Brexit transition)? Note that in some cases, EU suppliers could decide to stop serving the UK altogether in order to focus on customers within the EU Single Market and Customs Union.
  • What steps have your suppliers taken to minimise the risk of delays/shortages arising out of the introduction of additional border red tape? What steps have you taken to mitigate that risk?

GOODS SUPPLY CHAIN MITIGATION STRATEGIES

For more information on what you can do to mitigate the impact of Brexit-induced disruption to goods supply chains, see the following briefings:

Reliance on EU suppliers: services

Businesses relying on EU suppliers of services may have less to worry about because the UK is a relatively open market for services (and therefore the end of the Brexit transition may make little difference to the ability of many EU service providers to access the UK market).  However, it is possible that EU staff needing to travel to the UK to perform services may face additional red tape, as outlined in section 2 above.  You may also need to consider data issues (see section 3 above).

Reliance on workers from the EU

Many UK services businesses have historically relied quite heavily on workers from the EU, for a wide variety of roles right across the skills spectrum. The end of the Brexit transition and the move to a points-based immigration regime for all non-UK citizens, including those from the EU, will make the process of recruiting non-UK citizens more complex and costly.  For more information on these changes and what employers should be doing to prepare, see:

For further information, please contact

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