Note: The following article was written by AGN International, a worldwide association of separate and independent accounting and advisory businesses. James Moore & Co. is an AGN member firm.
Impacts of the Post EU-U.K. Trade and Cooperation Agreement (TCA)
Since 11 pm (GMT) on Dec. 31, 2020, it would seem that everything has changed and nothing has changed. Is the United Kingdom a more or less attractive place to do business? Take the long-term stalwart of the U.K., the U.S. and the ‘special relationship’…
In the U.S., the TCA struck on Christmas Eve was broadly welcomed. It removed a major potential source of friction between Boris Johnson’s government and the incoming Biden administration. But has Brexit reduced the value of the UK’s relationship with the U.S. as it is no longer in the corridors of power in Brussels, influencing EU decisions? And is Britain still the ideal access point for businesses seeking a platform from which to launch their European ventures?
“There is no question that we have lost a significant element of our value to the US by no longer being around the EU table,” said Kim Darroch, a former British ambassador to the US and the EU, and national security adviser to the British government.
But this is politics – what does the actual trade data tell us?
Currently, the U.K. is the 5th largest export destination for U.S. goods and services, and 7500 US businesses have operations in the U.K. There is no doubt that the U.K. remains an important, if junior, business partner with the U.S. President Biden will inherit a ‘work in progress’ for the long-trailed U.S./U.K. trade deal, which it seems is now likely to compete for Biden’s attention with the emerging demands for a bigger more important deal with the EU bloc.
Data produced by the U.K. Office of National Statistics indicates that foreign inward investment in the U.K. continued to grow after the EU referendum result and grew in all but four quarters to the third quarter of 2020. Data pertaining to ‘Inward Investment Flow’ indicates that the UK has been ranked first in the EU in six of the last ten years.
What’s changed commercially as a result of the deal?
The U.K. has tariff-free, quota-free access to the EU, one of the three biggest markets in the world. Admittedly there are now some new burdens and possibly costly ‘tariff-free barriers’ – red tape in normal business parlance. But one might assume that familiarity and technology will smooth these out over time. U.S. (or any) businesses using the UK as a stepping stone into Europe still needs to adhere to the structures of EU regulation on goods and services entering the bloc – as they and UK businesses did before Brexit. Whether the U.K. will ultimately deviate from these regulations (a “Singapore on Thames” – see below), only time will tell, but there would have to be a good economic case to do so and little seems likely in the short term.
Rules of origin could be important.
Something that may have an impact is the TCA’s complex set of regulations in the area of ‘Rules of Origin’. EU customs authorities will require goods entering the EU from the U.K. to prove their ‘origin’. Where multiple countries are involved in the manufacture of a product, the ‘origin’ will normally be determined by the proportion of ‘economic value’ attributed to a particular country. An EU list of ‘preferred countries of origin’ determines if and what duty will be paid on the item. Recent reports suggest this is already creating delays, and the jury is out on how this will affect complex assemblies such as motor vehicles.
While there have been no major alterations to U.K. corporate tax laws, there are some special conditions attached to certain transactions and funds, some automatic exemptions may no longer exist, and there are plenty of non-tariff barriers to think about. There are reports that some online retailers in the EU are refusing to deliver goods to the U.K. because of increased VAT costs and red tape, and vice versa. Read the recent AGN GBV Technical Alert: EU-UK Trade and Cooperation Agreement (TCA) UK VAT Requirements – An update to earlier ‘Post Brexit UK VAT Requirements).
Ultimately a major EU concern was to try to ensure that it is not easier to do business in the U.K. than other member countries. Former UK Chancellor Philip Hammond alluded to this with his threat to create a “Singapore on Thames”, shorthand for Britain becoming a low-tax, lightly regulated economy that can out-compete the eurozone…located only 20 miles off the shores of the EU.
This seems to have been averted for now, but there is still much to be negotiated in relation to the services economy, especially the financial services sector. The TCA confirms that the EU & U.K. maintain their markets open for financial service operators from the other party to supply services where they have an actual physical presence. But equivalence in areas such as mutual recognition of professional qualifications is dropped. Also, there are no equivalence mechanisms in the TCA and as things stand remote promotion and delivery of financial services products (in either direction) will be limited. There is talk of a regulatory cooperation deal by March, but it is unclear how far-reaching this will be.
For now, the UK remains the 5th biggest economy in the world, with the 3rd biggest trading bloc on its doorstep, and English as its native tongue. The pragmatic view that there are opportunities for businesses to land in the U.K. and springboard into the EU has not disappeared. The positive reasons why companies in the U.S. (or anywhere else) would come to the U.K. remain similar:
- They speak English – still the most frequent language of global business.
- The domestic tech business boom and a strong digital economy.
- A highly qualified workforce in a (comparative to some EU jurisdictions) employer-friendly regulatory regime.
- Physical and digital connectivity to the world, not just Europe, from the prime meridian.
- Security of the British financial and regulatory institutions, and access to world-class professions and creative industries.
Some will undoubtedly argue that certain EU territories can approach or exceed those U.K. features, and businesses will doubtless judge relative merits much as they always have. Of course, without the U.K. the EU remains a formidable economic bloc worth $13.5 trillion – even with the TCA, the UK’s government (Office of Budget Responsibility) forecast the U.K. economy will be 2% to 3% smaller after ten years than if the U.K. had “remained”.
But, as they say, “other forecasts are available” – some indicating the opposite. At $2.4 trillion, the U.K. is not an economic minnow and, perhaps outside the machinations and compromises of the EU, increased responsiveness can rank as an alternative to sheer bulk. Trade is like water and will flow along the path of least resistance. So the medium-term challenge to the U.K. must be to reduce, automate and smooth over, the non-tariff barriers (the red tape), and to seize future opportunities with speed and agility.
It’s still very early days, but on current evidence, it would seem there could still be advantages available by locating in “Cool Britannia.”
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