Is the services sector ready to trade in the EU after Brexit?

This article is by Nick Farmer, who is an international advisory partner at accountancy firm, Menzies LLP.

Professional and other business services firms across the UK have no time to waste in preparing for Britain’s exit from the EU Single Market at the end of the year. By taking action now, they could minimise disruption and limit damage to earnings if an agreement is reached that fails to take their needs into account.

The UK services sector contributed 81% to the economy in 2019 and accounts for around 30 million jobs. A key sub-sector, which is often described as ‘professional and business services’, comprises HR, recruitment, advertising, legal services, market research, accountancy, audit, architecture, engineering and PR and management consultancy firms.

This sub-sector alone is thought to employ around 4.6 million people and is a strong exporter of services to the EU. As such, leaving the Single Market without a deal or without securing any mutual recognition of qualifications, residency requirements and mobility rights could have a major impact on many services sector firms.

A recent report produced by the House of Lords’ services subcommittee has raised concerns that the needs of professional and other business services firms are being overlooked by UK negotiators. If nothing is done to address this, many of them could lose contracts and jobs when the Brexit transition period terminates at the end of the year. The report warns that even if a Canada-style trade agreement is reached in the nick of time, services sector exports could still face major trade barriers.

Echoing the report’s concerns, Carolyn Fairbairn, Director-General of the CBI has described her ‘disappointment’ that the needs of professional and business services firms have not been addressed during the negotiations. She has commented that any agreement reached before the end of the year should be considered a ‘starting point for a deeper relationship’.

The potential issues that could arise for firms if there is no deal, or a deal that fails to address non-tariff trade barriers, include blockages caused by jurisdictional reservations, a lack of recognition of professional qualifications, data transfer issues, loss of passporting rights and reduced business mobility. There may also be restrictions on the corporate form of some service providers – for example, LLPs may not be able to continue to operate in some member states.

While in many cases, larger corporates have found the resources required to prepare for an uncertain future, many SMEs in the services sector have not yet prepared a Brexit plan that will allow them to continue trading in the EU from the start of next year. They need to take steps to address this now, recognising that country-by-country planning is likely to be required.

Before preparing a plan, firms should seek advice from relevant trade bodies to establish what issues could arise as a result of exiting the EU Single Market at the end of the year. The advice will vary according to the type of services the business is providing. Other useful sources of advice include the Government’s transition checklist, which will provide tailored advice based on responses given to certain questions such as ‘does your business currently hire from the EU?’ And ‘do you provide services to customers in the EU?’

When drawing up a Brexit transition plan, firms should consider the following specific issues:

Market access

As the UK will be leaving the EU Single Market, businesses need to understand how this might impact their future trading relationship with EU customers. In some instances, especially more regulated sectors, it may not be possible to access EU customers directly from the UK.

This could be where an EU member state has a reservation requiring a commercial presence or establishment in the territory or if there is an economic needs test. All service sector businesses, even those in non-regulated industries, should check their market access as a priority and understand how they will be able to continue to trade with their EU customers.

Data transfer

During the transition period, it has been possible for firms to send personal data between the UK and EU without additional formalities. If the European Commission fails to grant the UK a data adequacy decision however, it will no longer be possible for European businesses to transfer data freely in this way. If UK-based firms are providing services in the EU, but don’t have any EEA offices, branches or establishments, it may be necessary to appoint an ICO European representative.

Business mobility

If your business involves visiting customers in the EU to deliver services, it is wise to consider any prior approval procedures that may apply from next year. Permits or business visas may be required to carry on activities in the EU and these are likely to vary at a jurisdictional level. The administrative burden for business visitors should be reviewed, to ensure there is sufficient time in hand to deliver on existing as well as future projects.

Embedded services

Some businesses will be trading both goods and services in the EU and this could bring additional complexity. For example, an architectural practice could be providing plans for a new building project, which involve shipping goods. However, professional architects may also be required to visit the site to liaise with stakeholders and share detailed drawings in advance. In these circumstances, businesses will need to understand both the rules that relate to the cross-border supply of services as well as goods in order to minimise disruption further down the line.

Professional qualifications

If the firm is operating in a regulated profession, it will be important to check whether any relevant UK professional qualifications will be recognised by each regulator at a jurisdictional level. This can be carried out by checking the European Commission’s Regulated Professions Database and contacting the ‘single point of contact’ for each country.

Intellectual property rights

Any existing EU trade marks will not be affected after the end of the transition period. However, intellectual property rights are likely to be affected after that date. To receive protection both in the UK and EU, new trade mark applications may need to be made to both the UK Intellectual Property Office (IPO) and EU IPO. Service sector businesses that rely on the protection afforded by the EU regulations covering unregistered design rights will also need to consider what protection will be available once the transition period ends.

Hiring EU staff

If a services sector firm is hoping to recruit workers from the EU after 1 January 2021, it will need to follow the points-based ‘skilled worker’ route. Some of the criteria for this scheme have been relaxed recently. For example, the cap on numbers of migrant workers being hired has been suspended and the thresholds applied to ‘skill’ and ‘pay’ level have been reduced. There is also some limited scope to ‘trade’ points between certain categories.

EU workers wanting to come to work in the UK will require an offer of a job from a licenced sponsor. To become a sponsor, an employer needs to apply to the Home Office and prove that their systems and personnel management are adequate to allow them demand-driven access to migrant workers.