Category: Policy & Business

The UK Internal Market Post-Transition

The UK Government has published a White Paper on how the UK internal market (UKIM) will operate in the future.  Due to devolution, some policy areas (e.g. fiscal and monetary policy, State Aid) are ‘reserved’ for the UK Parliament whilst some 160 others, most notably agri-food and fisheries, environment and planning as well as product standards for agri-food products are devolved competences.  When the UK was a part of the EU Single Market, it provided the legal framework to enable goods and services to flow freely.  However, with Brexit, policy-setting powers will be ‘returned’ to the devolved administrations, leaving open the scope for greater divergence within the UK.  The UK Government’s White Paper seeks to address this and forms part of a four-week consultation period and the UK Government aims to fast-track legislation from September.  In developing the UKIM system the UK Government aims to:

  1. Continue frictionless trade between all parts of the UK
  2. Continue fair competition and prevent discrimination
  3. Continue to protect business, consumers and civil society by engaging them in the development of the market.

To achieve these aims, the white paper proposes a four main types of measures:

  1. Common UK Frameworks: designed to support the functioning of the UKIM, the management of common resources and the UK’s ability to negotiate, enter into and ratify trade and other international agreements. This includes setting a baseline of regulatory coherence across the UK.
  2. Market Access Commitment: would enshrine into law two key principles:  ‘mutual recognition’ and ‘non-discrimination’ which would enable UK companies to trade unhindered across the UK.  This could mean that products supplied in one part of the UK (e.g. England) which are produced to different standards than other parts of the UK, could still be offered for sale across the entire UK market.  This proposal has ignited tensions.  The SNP for instance fears that if English standards are lowered, it will erode Scottish standards.  Furthermore, as Northern Ireland will be applying EU regulations, products deemed not to be meeting the EU’s standards will not be permitted to enter.  The Paper acknowledges Northern Ireland’s commitments under the Irish Protocol but re-emphasises that Northern Ireland will have ‘unfettered access’ to the GB market.  Whilst the UK Government is seeking to make NI’s access to the GB market as frictionless as possible, the reality is that additional regulatory requirements will need to be adhered to (e.g. Summary Declarations).  Some business groups are seeking compensation or mitigation measures the impact of such friction but are awaiting further details from Government on how to do this.
  3. Uniform subsidy control regime: legislated for in the UK Parliament (as State Aid is a ‘reserved’ matter).  That said, EU State Aid regulations would continue to apply in Northern Ireland with respect to goods as a result of the Protocol.  Services would be applied based on the UK regime.
  4. Independent advisory group and intergovernmental responsibilities: whilst the evolution of the UKIM will be overseen by the UK Parliament, the White Paper stresses the scope for expanded intergovernmental arrangements.  These will help to monitor the health of the UKIM and will help to gather evidence for its future development.  There is also the possibility of an independent advisory body being set up to examine how the UKIM should evolve but these ideas are not fully developed yet.

Although the Paper emphasises the UK’s commitment to maintain its high standards, like a lot of Government publications, its language could be open to differing interpretations (e.g. “committed to promoting robust food standards nationally and internationally, to protect consumer interests”).  On the one hand, this could mean upholding the current standards inherited from the UK’s EU membership.  Alternatively, it could signify a move to evolve standards so that they are more aligned with those applicable elsewhere internationally if that is what (some) consumers want.  Whilst it acknowledges that any changes to food safety legislation would need to be brought before the UK and devolved Parliaments, the Market Access Commitment arguably leaves open the possibility the products deemed acceptable for import into England could be placed on the market in Scotland or Wales.

The White Paper cites a coherent UKIM system as being particularly important for future Free Trade Agreements (FTAs).  This is because it would make the UK as a whole more attractive for countries to do business with it and claims a coherent framework would ensure that the UK as a whole would benefit from such FTAs and would enable UK businesses to compete internationally.  

Finally, it must be emphasised that without the proper regulatory framework, the coherence of the UKIM could easily unravel.  From 2021, one part of the UK (i.e. Northern Ireland) will be applying a different regulatory framework.  The greater the divergence between the UK and the EU in the future, the more challenging it will be to maintain UKIM coherence.  This will present significant hurdles for many aspects of agri-food regulation such as food standards and GM.  Until the post Brexit regulatory framework has bedded in and a new ‘steady state’ emerges with respect to the UK-EU trading relationship, it would be sensible for the UK to choose to have ongoing regulatory co-alignment with the EU.  This could then be reviewed in a few years’ time if required. 

UK Border Operating Model

On 13th July, UK published its plans for how the customs border between GB and the EU will function from January 2021 onwards when the Transition Period ends.  Although there is a lot of detail in the 206-page document, many agri-food businesses are still scratching their heads as to how they can operationalise its contents in the months ahead, especially as more information is still required in several areas including sanitary and phytosanitary (SPS) regulatory checks.  The document did not cover how the Irish Protocol would be implemented and further detail is expected on this in the near future.

Key Aspects of the UK Border Operating Model

A full copy of the UK Border Operating Model (BOM) is accessible via: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/899991/200713_BPDG_-_Border_Operating_Model_FINAL_1320_edit.pdf

The key points from an agri-food perspective are:

  • Three-stage approach to introducing UK border controls: our June article set out how border controls on imports to the UK would be phased-in.  However, UK exports to the EU (and goods going from GB to NI) will be subject to full controls from 1st January 2021. To recap, the phasing of import controls will be as follows;
    • January 2021: businesses will need to keep records of imported goods and consider how to account for VAT on imported goods.  They would then have six months to complete customs declarations on these consignments with applicable tariffs only becoming payable once the customs declarations have been made.  Safety and security declarations would not have to be made initially.  Regulatory checks would be required on products of animal origin and other high risk products (e.g. plants).
    • April 2021: pre-notification and health documentation required for all products of animal origin and all regulated plants and plant products.
    • July 2021: declarations required at the point of importation for all goods and tariffs must be paid.  Full safety and security declarations will be required.  Increased checks for animals, plants and their products which will take place at GB Border Control Posts (BCPs).
  • The ‘Core’ Model: sets out the requirements that will apply to all goods moving between GB and the EU.
    • Customs declarations: will be required on EU imports and exports. Some ports will require pre-lodgement of customs declarations prior to the movement of goods, which will particularly affect ‘roll on-roll off’ (RoRo) movements.
    • Customs duties (imports): to pay the UK Global Tariff (where applicable) importers will need to determine the origin, classification and customs value of their goods.  There are options to defer any payment that is due as noted above.
    • VAT: will be applied on imports from the EU.  VAT registered businesses can avail of postponed VAT accounting.  Non-VAT registered importers have the same options available to report and pay import VAT as they do for customs duties.
    • Safety and security declarations: will become applicable to all EU imports and exports.  They will apply to exports from 1st January and to imports from 1st July once the UK BOM is fully operational.  For goods leaving the UK for the EU, these declarations will need to be submitted 2 hours in advance of departure for short-sea journeys (e.g. Dover to Calais), 1 hour via Eurotunnel, 30 minutes via air and 24 hours for containerised shipments.
  • Additional Requirements: relates to controls applied to specific goods movements.  These frequently relate to foodstuffs and agricultural products and includes the following items:
    • International Conventions: such as Endangered Species of Wild Fauna and Flora (CITES) and temporary import of non-perishables without the application of customs charges (ATA Carnets).  CITES will apply to some agricultural products.  It will require additional authorisations to import and export via designated points of entry/exit.  These will be overseen by the Animal and Plant Health Agency (APHA).  ATA Carnets are useful for temporarily importing/exporting samples, equipment for tradeshows etc.  They simplify the customs processes.  However, it does not exempt traders where additional export permits and licenses (i.e. non-customs related) are applicable.
    • Sanitary and Phytosanitary (SPS) regulations: will apply to animal products (products of animal origin (POAO) and animal by-products); fish, shellfish and their products; high-risk food and feed not of animal origin (HRFNAO); live animals and germinal products; equines; plants and plant products.  These will obviously have a major impact on agri-food traders.  The BOM has set out specific requirements for each category and agri-food companies should review the sections relevant to their businesses.  For imports into the UK, requirements will include:
      • Import pre-notifications: importers give advanced notice of consignments arrival into GB to the relevant regulatory authority.  This will be done via the Import of Products, Animals, Food and Feed System (IPAFFS) and importers should register to join IPAFFS via: https://www.gov.uk/guidance/import-of-products-animals-food-and-feed-system
      • Health certification: must accompany the consignment during its passage and each species/type of product must have a different health certificate.  This has scope to create significant challenges for consignments containing multiple products (e.g. for retail).
      • Regulatory checks: documentary and identity checks will be applicable to goods arriving from the EU.  Physical checks to ensure imported products are complying with GB SPS and labelling requirements will be carried out on a proportion of consignments (which will vary by product).  A proportion of physically checked products will also be sampled (e.g. for laboratory testing).
      • Entry via Border Control Post (BCP):  a BCP is an inspection post designated and approved in line with that country’s relevant legislation for carrying out checks on animals, plants and their products arriving from the EU.  Goods subject to SPS checks will need to enter GB via a BCP.  The capabilities of each BCP to receive and check goods vary.  Accordingly, importers need to ensure that imported consignments enter via the appropriate BCP when this step becomes mandatory (from July 2021).
    • Controlled goods: include ammonium nitrate-based fertilisers, fish,  plants and plant-based products which present biosecurity risks and need to enter via a BCP.  From January 2021, traders must submit a standard customs declaration (or a simplified customs declaration if they are authorised to do so).
  • Devolved competences: the BOM notes that areas of food safety, the protection of human, animal and plant health, and the environment, are devolved to the governments of Wales and Scotland which may lead to differences in precise requirements and enforcement bodies. Although the UK Government claims to be working with the devolved administrations on these issues, it could give rise to friction within the UK internal market, particularly for agri-food, an issue explored further in our accompanying article. 

Business Preparations

The Government listed several actions that businesses need to take to prepare for the changes ahead. It emphasised that the UK’s negotiations with the EU will have ‘no impact’ on the need to take these actions. Key points include:

  • Apply for a GB EORI number: VAT registered businesses with EU trade have been previously enrolled with an EORI number. Businesses should check for this before applying.
  • Apply for an EU EORI number: businesses exporting to the EU will need to apply for this number irrespective of whether they use a customs intermediary.
  • Get a customs intermediary: the UK Government rather blithely stated that “customs declarations are complicated” and that businesses should procure the services of an intermediary (e.g. Freight Forwarder).  The challenge is that the demand for these services is set to heavily outweigh their supply. The Government estimates that 50,000 extra private sector customs agents will be required.  Whilst additional personnel can be trained up, this takes time and new personnel are more prone to making errors.  This, in turn, can add further strain and costs to businesses in addressing such errors.
  • Apply for a Duty Deferment Account (DDA): this will need to be authorised by the HMRC but would enable businesses to defer payment of duties as opposed to making payments for each consignment.
  • VAT on imported goods: businesses need to be prepared to pay or account for VAT on imports from the EU.  For VAT registered traders this can be done via postponed VAT accounting from January 2021.  Non-VAT registered businesses, or businesses not using postponed VAT accounting will need to report and pay import VAT via customs processes.
  • Commercial Arrangements: businesses are advised to work with their supply chains to ascertain how best to navigate the new requirements.  International traders are also advised to check the contractual obligations for international commercial transactions which are outlined in the Incoterms rules.  This because some of the changes under the BOM may alter the default legal responsibilities and requirements that such traders are expected to undertake with respect to EU trade.

What is clear from the UK BOM is that significant changes are afoot, even if there is a trade deal with the EU.  The obligation is on businesses to ensure that they have undertaken the necessary preparations ahead of January.  The Government  estimates that 215 million additional customs declarations will need to be made to UK authorities for imported and exported goods (costing £7 billion), with additional documentation needed for most agri-food products.  Many of the IT systems intended to manage these procedures are still under development, let alone being tested.  No wonder there is grave concern that there will not be enough time to make the necessary preparations. 

There is also evidence that some businesses have begun to stockpile so that adequate supplies are available on the GB side or the EU side of the border so that they could cope in a worst-case scenario.  Similar trends were also witnessed last year as the prospect of a No Deal Brexit emerged.  However, for perishable agri-food products, stockpiling is not very viable. 

 

Welsh Schemes Update

The Glastir Woodland Creation grant is currently open and the application deadline has been extended until 31st July.  The application process has had a number of changes made to it and claimants are advised to check the online guidance for updates.  The Glastir Small Grants scheme will open for a further round of applications between the 27th July and 4th September 2020.  The theme for this round is water.  Grants will be available for capital works to carry out projects which will impove the water quality and reduce the risk of flooding.

Scottish BPS Loan Scheme

The Scottish Government has announced a National Basic Payment Support Scheme will operate in Scotland again this year.  This will see Scottish farmers and crofters being able to access upto 95% of their estimated 2020 BPS payment (to a maximum of £133,638) earlier than the usual official December date.  Offer letters will be sent to eligible claimants in August with the first payments being made in September. The Scottish Government has said it is operationg the loan scheme to support its farmers’ and crofters’ cash flow through the Coronarvirus pandemic and the uncertainty of Brexit. 

Trade and Agriculture Commission: Membership

The membership of the new Trade and Agriculture Commission has now been announced.  As we reported last month (article here) this new body has been be set up to advise on UK food standards under future trade deals.

The Commission is to be chaired by Tim Smith (ex Tesco Technical Director and Chief Executive of the Food Standards Agency).  Farming Unions are well represented with members from NFU England, Scotland and Wales (Cymru) as well as the Ulster Farmers’ Union.  The Farmers’ Union of Wales is also represented as are the British Retail Consortium, UK Hospitality and the Food and Drink Federation.  Furthermore, it includes several members who are perceived to be more free-trade oriented (e.g. Shanker Singham (Institute of Economics Affairs) and Sir Lockwood Smith (Former New Zealand Trade and Agriculture Minister).

The Commission will report directly to International Trade Secretary Liz Truss.  Its terms of reference are advising on:

  • Trade policies the Government should adopt to secure opportunities for UK farmers, while ensuring the sector remains competitive and that animal welfare and environmental standards in food production are not undermined.
  • Advancing and protecting British consumer interests and those of developing countries.
  • How the UK engages the WTO to build a coalition that helps advance higher animal welfare standards across the world.
  • Developing trade policy that identifies and opens up new export opportunities for the UK agricultural industry – in particular for SMEs – and that benefits the UK economy as a whole.

The Commission will only operate for a six-month period.  It will submit an advisory report at the end of its work which will be presented to Parliament by the Secretary for International Trade.  More details can be found at https://www.gov.uk/government/news/trade-and-agriculture-commission-membership-announced 

Whilst seen as a lobbying success for the NFU, and the interests of farmers are well-represented, it has to be noted that its findings will be advisory only.  It contains some ‘heavy hitters’ who will be strong advocates of free trade and may be more favourable towards less stringent international standards compared to those currently operating in the UK and the EU.  Although the Government emphasises at every opportunity that the highest standards will continue to apply to British farming, some Ministers adopt a looser tone when speaking about ‘high quality’ food that will be available to consumers post-Brexit. 

Another noteworthy dynamic will be how the Commission interacts with the Devolved Administrations, some of which are likely to be at odds with what the Westminster Government eventually decides on the food standards it intends to adopt in the future.  Finally, the Commission’s six month remit means it is highly unlikely that any Free Trade Agreement will emerge with the US before the Commission is wound-up. 

Scotland Farm Business Survey 2018-2019

The Scottish Government has published the results of its Farm Business Survey (FBS) for 2018-2019, focusing on Farm Business Income (FBI) and Total Income From Farming (TIFF).  The survey found in 2018-19 average FBI in Scotland was £39,000.  Of this £5,000 was from diversified activities and £43,000 from CAP support and other payments, meaning without these, the average farm made a loss of around £9,000 from agriculture.  The survey reveals that, without CAP support and other payments, only 28% of farms make a profit form their agricultural activities.  General Cropping, Dairy and Cereals farms on average make a profit from agriculture, with Livestock farms in the LFA the least profitable and receiving the highest support payments.  The full report can be found at: https://www.gov.scot/publications/farm-business-survey-2018-19-profitability-scottish-farming/pages/1/

BPS 2020 Penalties

The RPA has simplified the penalty process where an over-claim has been made for BPS in 2020.  In 2016, the EU introduced a ‘yellow card’ system for over-claims whereby first time offenders had their penalties reduced, but then increased if found to over-claim in another year.  The RPA deemed this too complicated for claimants to understand and for their IT systems to administer.  Therefore for 2020 where the over-claim is;

  • Up to 2 hectares or 3% of the area determined, no penalty will be applied
  • >2 hectares or between 3 and 10% of the determined area, the penalty will be 0.75 times the difference of the over-claim
  • >10% of the area determined, the penalty will be 1.5  times the difference of the over-claim

The RPA has updated page 104 of the 2020 BPS Guidance to reflect this change https://www.gov.uk/government/publications/basic-payment-scheme-rules-for-2020?utm_source=edeac403-3ee5-4418-8f29-122329994f4a&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate#history

Welsh Future Farm Support

The Welsh Government has confirmed its intention to press ahead with the Sustainable Farming Scheme as the centre-piece of its post-CAP farm support.  However, the new system will be designed and introduced only slowly over the next few years.

The Government has published its response to the analysis of the ‘Sustainable Farming and Our Land’ consultation.  This can be seen at https://gov.wales/sites/default/files/consultations/2020-07/our-response-sustainable-farming-and-our-land.pdf.  It has outlined the next stages of development;

  • economic analysis of the Sustainable Farming Scheme (SFS) will be undertaken.  The findings of this will be published next summer and no final decision on scheme design will be made before this analysis is available.
  • there will be a transition period from the current BPS to the new arrangements.  The Government has already stated that the BPS will continue in its present form for the 2021 claim year (see December Bulletin).  There is no indication of when the transition will start and how long it will take.  
  • a Agriculture White Paper will be published before the end of the year.  This will pave the way for an Agriculture (Wales) Bill which is due to be introduced during the sixth Senedd term.  As this is after the next national elections in May 2021, there is a chance that a new administration will be in place with different policy priorities.  

Future Trade Arrangements

On 9th July, the EU Commission released an update on its readiness for the changes to the UK-EU trading relationship once the Transition Period ends on 31st December.  The update (available here), was released just after the latest round of negotiations in London had finished which confirmed that ‘significant divergences’ remained between the UK and the EU’s positions. 

Changes in any Scenario

The key message is that significant change is going to happen from 1st January, irrespective of whether the UK and the EU reach a Deal, as the UK will become a third country from that point in its dealings with the EU.  Businesses must begin preparations now as barriers to trade will emerge in both directions. These changes include;

  • UK will leave the Single Market, Customs Union and all international agreements negotiated by the EU will no longer be applicable. (For trade, the UK is working on Continuity Agreements to replicate existing EU agreements).
  • Trade in Goods (note that these changes will not apply with respect to EU trade with Northern Ireland, due to the Irish Protocol):
    • Customs formalities: will apply and controls will be applied on a risk basis on exports into the EU from 1st January.
    • Economic Operators Registration and Identification (EORI) number: UK-issued EORI numbers will no longer be valid and companies will need a new EU EORI number or appoint a EU customs representative where applicable.  This is a crucial pre-requisite to doing any trade with the EU in the future.  
    • Authorised Economic Operator (AEO) authorisations or other authorisations: issued in the UK will no longer be valid in the EU. Where companies wish to obtain EU authorisations, they will need to apply in an EU Member State. 
    • Rules of Origin: originating status of goods traded between the UK and the EU will need to be proven, if it is to avail of any preferential treatment (e.g. under a UK-EU Free Trade Agreement (FTA)). Goods not meeting origin requirements will be subject to customs duties. 
    • VAT and excise duties: will be applicable upon importation into the EU from the UK. 
    • Product certification, authorisation and labelling: UK exports will need to comply with EU rules and will be subject to regulatory checks concerning safety and regulatory compliance controls. Labels for products placed on the EU market, issued by UK bodies will no longer be accepted in the EU (but existing stocks of products placed on the EU market before 31st December will still be permissible).
    • Pre-existing EU(28) WTO Tariff Rate Quotas (TRQs): it is intended that these will be apportioned based on historical trading patterns. However, other WTO members have raised objections to this approach and it remains to be seen how this issue will be resolved to the satisfaction of all parties (i.e. EU, UK and other WTO members). 
    • Additional information by product category: has been made available, in the form of Readiness Notices, by the EU Commission. Businesses trading with the EU should familiarise themselves with the applicable notices (accessible here). 
  • Trade in Services: UK companies and nationals will no longer have the freedom of establishment and provision of services when operating in the EU and vice versa for EU nationals and companies supplying services and operating in the UK.  Authorisations granted by UK authorities under the EU Single Market Framework will no longer apply from 1st January.  Whilst the agri-food industry primarily concerns goods, many products now have a service element as well.  Businesses offering services to the EU need to ensure that they are complying with the new requirements, this could potentially entail establishing a subsidiary company in the EU.
  • Irish Protocol: in previous articles we have reported that the Protocol would apply on goods trade, meaning that there would be no regulatory barriers on trade between Northern Ireland (NI) and the Republic of Ireland and the rest of the EU.  In that sense, Northern Ireland would be seen as an assimilated EU Member State with respect to its trade with the EU, whilst remaining part of the UK Customs Territory.  Regulatory checks imposed by the EU on third country trade would be applied to points of entry into NI.  This includes products shipped from GB into NI.   

No Trade Deal Scenario

The issues covered under the auspices of the Withdrawal Agreement (e.g. citizens’ rights, financial settlement and the Irish Protocol) will continue to apply even if the UK and the EU cannot agree a future trade deal.  However, as previous articles have noted, the application of customs duties to UK-EU trade will have the biggest impact under a No Trade Deal scenario.  The agri-food sector would be the worst affected as it is subject to the highest tariffs which have the potential to devastate UK-EU trade in some areas (e.g. sheepmeat exports to the EU).

Conclusion

It is clear that whichever form the future UK-EU relationship takes, significant changes to agri-food trade between both parties is imminent.  Businesses should no longer be adopting a ‘wait-and-see’ approach or hoping for an extension to the Transition Period.  They must prepare now and ensure that their supply-chains are secure, both on the inputs and outputs side.  In many EU Member States, businesses are preparing for the worst and hoping that a somewhat better future relationship will emerge.  We are unlikely to know what form that might take until October.  Preparations need to be well underway by then. 

CS Deadline

The RPA has announced that those struggling to get a Countryside Stewardship (CS) Mid-tier application submitted by 31st July deadline can ask for an extension.  It recognises that, in particular, agents working on a number of applications are finding it is taking them longer to gather all the information required because of Coronarvirus restrictions.  In such cases, it is possible to email the RPA at [email protected] by 31st July to request an extension.  The email subject heading should be ‘CS 2020 Mid-Tier application extension’ and details of the application, such as business name, SBI and application number should be included.  No specific evidence is required as to why the application cannot be completed on time.  It is possible to phone the RPA helpline (03000 200 301) if email is not possible.  Once the RPA have been informed, this will give the applicant until midnight on 31st August to get their Mid-tier submission in.  The extension does not include the four simplified CS Wildlife offers; the deadline for these remains 31st July.