Brexit Occurs – But What Happens Next?

Traders the world over selling to EU customers will likely know that the UK “Brexited” from the European Union on 31 January 2020 at midnight (Brussels time). By such act, it is now no longer a Member State. The EU Council signed off on the ratification process on 30 January, with the European Parliament consenting to the departure a day earlier, on 29 January. Although Brexit has occurred this is far from the end of the broader Brexit debate; the next big question is whether a free trade agreement can be negotiated and adopted in time, before the end of this year.

Hong Kong traders may have wondered on Brexit day, “What exactly happens on 1 February 2020?”. The simple answer is that the EU and the UK will enter into the transition period. As announced by the European Commission in its Q&As of 24 January, this time-limited period was agreed as part of the Withdrawal Agreement and will last until at least 31 December 2020.

Until then, happily for Hong Kong businesses selling their goods to EU customers, it will be business as usual: for citizens, consumers, companies and investors in both the EU and the UK. However, the UK will no longer be represented in the EU institutions, agencies, bodies and offices, although EU law will still apply in the UK until the end of the transition period. The EU and the UK will use the period to agree on a new partnership for the future, based on the Political Declaration agreed between the EU and the United Kingdom in October 2019. The Political Declaration was published in the Official Journal on 31 January 2020.

The Commission will adopt comprehensive draft negotiating directives as from 3 February. It will then be for the EU Council to adopt its mandate. Formal negotiations with the UK can then begin. As for the structure of the negotiations, this is yet to be agreed between the EU and the UK.

As for the transition period itself, this is a time-limited period, starting on 1 February 2020. The exact terms of the transition period are set out in Part Four of the Withdrawal Agreement. It is currently foreseen that the transition period ends on 31 December 2020. It can be extended once by up to one to two years. Such a decision must be taken jointly by the EU and UK before 1 July 2020. However, the UK Prime Minister has famously declared that he will not seek an extension, which leaves the future relationship in doubt, as a hard Brexit could still occur after the end of this year.

During the transition period, the UK will no longer be an EU Member State. However, the Court of Justice of the EU continues to have jurisdiction over the UK during this period. Importantly for the UK, though, during the transition period, it will be able to conclude international agreements with third countries and international organisations even in areas of exclusive EU competence, provided that these agreements do not apply during the transition period.

All EU law, across all policy areas, will still be applicable to and in the UK, with the exception of legal acts which were not binding upon and in the UK before the entry into force of the Withdrawal Agreement. In particular, the UK will remain in the EU Customs Union and in the Single Market with all four freedoms – including the freedom of movement of goods which will be of particular relevance to Hong Kong sellers – and all EU policies applying.

Of particular relevance to cross-border traders, the Withdrawal Agreement provides that goods lawfully placed on the market in the EU or the UK before the end of the transition period may continue to freely circulate in and between these two markets, until they reach their end-users, without any need for product modifications or re-labelling. This means that goods that will still be in the distribution chain at the end of the transition period can reach their end-users in the EU or the UK without having to comply with any additional product requirements. By way of exception, the movement of live animals and animal products between the EU market and the UK market will, as from the end of the transition period, be subject to the applicable rules of the Parties on imports and sanitary controls at the border, regardless of whether they were placed on the market before the end of the transition period.

Thus, the Withdrawal Agreement ensures that a good that has already been placed on the market can continue to be made available on the UK market and the EU Single Market after the end of the transition period. This applies to all goods within the scope of the freedom of movement of goods as set out in the Treaty on the Functioning of the European Union, such as: agricultural products, consumer products – e.g., toys, textiles and cosmetics – health products (pharmaceuticals, medical devices), and industrial products such as motor vehicles, marine equipment, machinery, lifts, electrical equipment, construction products and chemicals. However, live animals and animal products, such as animal-derived food, will, as from the end of the transition period, have to comply with the EU or the UK's rules on imports from third countries.

For customs, VAT and excise purposes, the Withdrawal Agreement will ensure that movements of goods which commence before the UK's withdrawal from the EU Customs Union should be allowed to complete their movement under the Union rules which were in place at the start of the movement. After the end of the transition period, the EU rules will continue to apply for cross-border transactions that started before the transition period in terms of VAT rights and obligations for taxable persons, such as reporting obligations, payment and refund of VAT. The same approach applies for ongoing administrative cooperation, which, together with exchanges of information that started before withdrawal, should be completed under the applicable EU rules.

Hong Kong traders may be asking if Northern Ireland will remain in the EU's Single Market for goods. The Withdrawal Agreement’s Protocol on Ireland/Northern Ireland is a fully legally operative solution that avoids a hard border on the island of Ireland, protects the all-island economy and the Good Friday (Belfast) Agreement in all its dimensions, and safeguards the integrity of the Single Market. It will become applicable at the end of the transition period. Northern Ireland will remain aligned to a limited set of rules related to the EU's Single Market in order to avoid a hard border: legislation on goods, sanitary rules for veterinary controls (“SPS rules”), rules on agricultural production/marketing, VAT and excise in respect of goods, and state aid rules.

However, Northern Ireland remains part of the customs territory of the UK. It will therefore be able to benefit from future Free Trade Agreements (FTAs) that the United Kingdom may conclude with third countries, provided that this does not prejudice the application of the Protocol. Future UK FTAs may provide that goods produced in Northern Ireland have access to third countries on the exact same conditions as goods produced in other parts of the UK.

The EU's Customs Code will apply to all goods entering Northern Ireland. This avoids any customs checks and controls on the island of Ireland. As far as customs duties are concerned, EU customs duties will apply to goods entering Northern Ireland if those goods risk entering the EU's Single Market. No customs duties will be payable, however, if goods entering Northern Ireland from the rest of the UK are not at risk of entering the EU's Single Market. This applies to all goods that are not subject to further processing and that meet the criteria that a Joint Committee will establish in order to determine the risk of the onward movement of that good, taking into account the specific circumstances in Northern Ireland. For goods from third countries not considered to be at risk, the customs duties applicable in Northern Ireland will be the same as in the other parts of the UK.

The Joint Committee will establish, by the end of the transition period, the criteria for the above risk assessments and may amend the criteria during their application. Such criteria shall take into consideration issues such as the final destination of goods and value or risks of smuggling.

Northern Ireland will continue to apply the Union Customs Code and will remain aligned to relevant rules of the Single Market needed to avoid a hard border on the island of Ireland. The necessary checks and controls will take place on goods entering Northern Ireland from the rest of the UK, including for example, Border Inspection Posts to ensure that the necessary sanitary and phyto-sanitary (“SPS”) controls are carried out. UK authorities will implement and apply the provisions of Union law that the Protocol makes applicable in the UK in respect of Northern Ireland. Therefore, all checks will be carried out by UK authorities, with appropriate supervisory and enforcement mechanisms for the EU.

The UK may reimburse duties levied according to Union law in case the UK duty is lower, subject to EU state aid rules. As for VAT, in order to avoid a hard border on the island of Ireland, while protecting the integrity of the Single Market, the EU's VAT rules for goods will continue to apply in Northern Ireland. The UK government's Revenue and Customs department (HMRC) will remain responsible for applying VAT legislation, including the collection of VAT, and the setting of VAT rates. The UK will keep revenues accruing from this tax. In addition, VAT exemptions and reduced rates applied in Ireland may also be applied in Northern Ireland.

On 31 January 2020, hours before the withdrawal of the UK, Commission President Ursula van der Leyen declared that “as the sun rises tomorrow, a new chapter for our Union of 27 will start.” It was a day of great sadness for some, and one of jubilant celebration for others. Undoubtedly, the “new chapter” will bring with it changes that Hong Kong traders may need to be alerted to, especially if negotiations for a future FTA are rocky for the most past, and the chances of a hard Brexit become a reality once again.