The impact of Brexit is putting a strain on many small businesses now that trade with the EU is governed by the Trade and Cooperation Agreement (“TCA”) agreed on 24 December 2020. Lawmakers in the EU and the UK in a desperate attempt to avoid more damage on already battered economies signed a last-minute agreement approving a zero tariff, zero quota deal saving consumers billions on import tariffs on both sides of the channel.

What this agreement didn’t address was the costly customs bureaucracy that would be put into place with a minefield of checks and certificates for every shipment over the border.

Whereas large companies have the resources to deal with the extra paperwork caused by leaving the EU, smaller companies have been left no choice but to consider other options like opening a subsidiary within the EU. From an economic standpoint, Germany has the largest economy and is the UK’s most important trading partner making it one of the main destinations seen for UK firms to relocate to.

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In 2018 a record 2,062 foreign companies set up operations in Germany of which 168 were British an increase of 38% over 2016. Not really a mass exodus though.

The devil is in the detail and it’s the details that have caused many UK businesses such a headache since leaving the single market earlier this year. The chief negotiator Lord Frost said last week, "I hope they will shake off any remaining ill will towards us for leaving, and instead build a friendly relationship, between sovereign equals."

Brussels is under pressure not to make it easy for the UK, setting the tone for other countries who may be considering a similar path. Many important issues have been left up in the air. There is no clarity if the company format “UK Ltd” will be recognised in Europe. For those wishing to open a branch office this is an important issue as, directors could find themselves personally liable if the UK Ltd is no longer recognised.

Are British jobs going to be lost?

EU bosses are faced with a similar dilemma, as the UK is for many their largest single trading partner. A recent report from Bloomberg cites that one in eight German owned companies with business interests in the UK plan to relocate part of their business to Britain.

Horses for courses, as jobs are lost due to UK companies relocating abroad it’ll be offset by those jobs created as EU companies are forced to set up in the UK for the same reasons. It’s a mad world when you think about it. If only the EU could behave reasonably, all this upheaval and relocating wouldn’t be necessary.

Open a Subsidiary within the EU

A company relocation expert based in Germany said, “Under the Brexit provision, any goods will be subject to a second customs duty if it arrives in Britain from abroad and is then exported further into the European Union. Goods which have been imported from, say, China or India into the UK will incur tariffs again if sold on to the EU.”

“Experts at the Department of International Trade (DIT)
recommend having a physical presence inside the EU
as being the best way to succeed post-Brexit.”
(The Guardian) Learn more…

It seems that the problems of Brexit which have hit both sides are not just tariffs, but regulations in the form of customs bureaucracy which will lead to increased transport costs. These are not just teething problems, but new complexities that must be dealt with by all exporters. If customs brokers have to be used for every shipment to the EU, it will increase costs raising prices to the consumer.

A recent survey by the British Chambers of Commerce (BCC) found that nearly half of exporters who took part were having difficulties due to mountains of red tape and a lack of clarity and preparedness,

Can this situation be fixed?

It is up to the British government and EU counterparts to fix the issues which is stifling trade in both directions. Verifying certificates of origin, ID numbers (called an EORI number), paying VAT to release goods from customs, increased bureaucracy adding costs, and border delays. It’s governments which are allowing this to happen on both sides.

This is how the EU is punishing Britain for leaving. They are also punishing their own exporters who are suffering the same fate.

Some company directors have set up a subsidiary allowing them to operate freely withing the EU. The short term costs of such an action will be offset by a long-term physical presence.
Trade negotiations reducing the burden of regulatory compliance and checks on goods are still ongoing, headed up by Lord Frost. Agreeing to recognise each other’s conformity-assessment procedures (which have been in place since joining the EEC) would streamline procedures easing the flow of trade. Anything is possible if both sides are willing. A punishment phase was inevitable but as each problem is addressed post Brexit, common sense will see both sides under pressure to see the flow of trade resume to normal as the effects of the pandemic create a recession.