New Rules, Risks, and Opportunities: 10 Things US Companies Need to Know About Brexit
When the UK formally left the European Union at the end of January 2020, it marked a key point in the long and painful “British exit,” or “Brexit,” saga. But in practical terms, what does it mean for US companies doing business with the UK or considering a transatlantic expansion? Here are 10 of the key challenges and opportunities for the post-Brexit era:
1. Supply Chain
Brexit means that the UK has left the EU Common Market. As a result, US businesses using supply chains in the UK may need to integrate additional trade rules imposed by organizations including the EU, UK, and the World Trade Organization (WTO). While a free trade agreement between the US and the UK remains the subject of ongoing talks, it may not happen until 2024. Until it arrives, some businesses may see links in their supply chains subject to longer lead times. This results from new and sometimes inefficient customs controls that can delay the transportation of goods between the UK and the EU.
2. Privacy and Data Protection
The EU’s General Data Protection Regulation (GDPR), in effect since 2016, strengthens EU citizens’ rights to privacy and data protection. As the UK ICO puts it, “The GDPR has been incorporated into UK data protection law as the UK GDPR – so in practice there is little change to the core data protection principles, rights, and obligations found in the UK GDPR.”
3. UK-EU Data Transfers
Following the end of the Brexit transition period, the UK went from being an EU member to a third country. To continue an uninterrupted flow of data between the EU and the UK, an adequacy decision needs to be met. The European Commission recently announced a draft decision on adequacy, concluding that the UK ensures an essential level of data protection and is GDPR compliant. This paves the way for a smooth EU-UK data transfer agreement post-Brexit.
Before Brexit, the UK was well known as a touchdown point for US businesses looking to expand into the wider Europe, Middle East, and Africa (EMEA) region. Today, US companies may be required to pay double tariffs on goods exported to the UK destined for re-export to the EU. The detail is outlined by the rules of origin stipulated in the Trade and Cooperation Agreement (Annex Orig-1, 2 and 2A).
5. Import Costs
When the Brexit deal transition period ended on Dec. 31, 2020, the EU’s Common External Tariff (CET) was replaced by the UK Global Tariff (UKGT), which includes a UK-applied Most Favored Nation (MFN) tariff on all goods imported into the UK, with some exceptions. The situation may change, as trade arrangements with the EU are still under discussion.
Compared to the CET, the UKGT includes an increase in the number of products that are tariff-free, going from 27 percent under CET to 47 percent under UKGT. Moreover, the UKGT average tariff decreases to 5.7 percent from the CET’s 7.2 percent, offering a potential business benefit for US-based exporters.
Before Brexit, EU nationals working in the UK for US companies were covered by the EU Settlement Scheme. Today, there are new regulations surrounding immigrants entering the UK to work for a US company, regardless of their country of origin. The main consideration is that newly arrived non-UK workers now require a visa. To be eligible, they need to meet the UK’s new points-based immigration criteria and demonstrate their job offer comes from an approved employer sponsor.
7. Mergers and Acquisitions
US businesses with UK corporations in their portfolios and those thinking about acquiring a UK business should check whether the registration of UK companies in their portfolios or among their acquisition targets might require a refresh. This will depend on whether the business is a European entity formed under EU law, a UK company with a European Economic Area (EEA) corporate officer, a UK company involved in a cross-border merger, or a European Economic Area entity.
8. New Rules for the Finance Sector
Most London-based financial institutions are losing free access to the EU market due to Brexit. Although a memorandum of understanding setting out a new framework for regulatory cooperation and equivalence determination is being pursued by both parties, many are still considering whether they need to establish new offices in their EU markets of interest. By contrast, several US-based retail and investment banks already have “passporting rights” that allow financial institutions authorized in any EU or EEA member state to trade freely in any other member state with minimal additional permitting. This means US banks can immediately conduct business for clients in the EU and the UK.
9. Higher Education
EU, EEA, or Swiss students considering educational opportunities in the UK will no longer benefit from access to UK student loans and will be charged the same tuition fees as students from the UK. From the US perspective, this places US and other international students hoping for a place in the UK’s higher education institutions on an equal footing.
10. Hiring Options
Despite the uncertainties presented by Brexit, with the dust still to settle over the final details, those who navigate the learning curve early will be much better positioned to tap into the UK as a growing market. US-based companies stand to gain commercial advantages from working with partners, such as an employer of record, to hire personnel and build teams in the UK. US-based employers may want to consider outsourcing back-office administration so they no longer need to undertake the complex and financially onerous task of setting up a subsidiary to employ UK talent.
Brexit is completely new territory for everyone with a business interest in the UK and the EU. While there are new complexities to consider, this new normal also offers opportunities for ambitious US companies seeking to build an international presence.