British companies start to grapple with ‘Brexit 2.0’

For many Britons, Brexit was a one-off event involving a vote in the 2016 referendum, but for UK exporters such as Brandauer, a Birmingham-based specialised components maker, trading outside the EU has been a journey of continuous adaptation.

From handling German value added tax to mastering the intricacies of six-digit EU customs codes, Brandauer chief executive Rowan Crozier said his small company has managed to retain its EU customers thanks to precision components used in a wide range of industries including carmakers, construction and pharmaceuticals.

But Crozier is aware that in many ways Brandaeur’s Brexit journey is only just beginning as the EU introduces rules on carbon border taxes, plastic waste management and supply chain monitoring.

This means EU rules are starting to diverge from UK equivalents. “Divergence is an ongoing headache,” he said.

Trade and industry experts warn the rising volume of future EU regulations is leading to “Brexit 2.0” as the 27-nation bloc introduces rules that — even when they are mirrored by the UK — create fresh barriers to trade.

“We’re getting new [EU] legislation continuously,” said Fergus McReynolds, director of EU affairs at the manufacturers’ trade body Make UK. “So as the UK stays static, you’re having to treat the EU and the UK as two completely different markets from a regulatory perspective.”

McReynolds said Make UK’s members are focused on three main EU regulations: the bloc’s upcoming carbon border tax, implementation of plastic packaging rules and draft supply chain due diligence laws being discussed by member states.

The introduction of the EU carbon border adjustment mechanism is likely to have a significant effect on companies trading with the bloc, according to George Riddell, director of trade strategy at consultancy EY, who is helping UK businesses that export to the EU prepare for the measure.

From October this year EU companies will have to compile reports on the carbon emissions attached to some imported goods, including steel, aluminium and fertilisers, with businesses having to buy certificates to cover emissions embedded in products from 2026.

The paperwork and costs associated with the carbon tax will land on UK companies who supply components to EU businesses covered by the regulation — which affects products as prosaic as nuts and bolts. As a result, some of these UK companies will be more difficult to trade with for EU businesses. 

“From 2026, there will be cost pressures factored into where you choose your suppliers,” said Riddell.

The British government is consulting industry over introducing a UK version of the EU carbon border tax, but without legally binding linkage between the two schemes, domestic businesses will still need to demonstrate compliance with the bloc’s rules, said William Bain, head of trade policy at the British Chambers of Commerce.

“[The EU carbon border adjustment mechanism], packaging legislation, supply chain legislation are becoming an issue for UK companies on how they best order their compliance without incurring huge additional costs,” he added.

British MPs were warned at a meeting in Brussels this month that they needed to track EU legislation to help UK companies respond.

Nathalie Loiseau, a senior French MEP who co-chairs the UK-EU parliamentary partnership assembly, said the two sides have “started to diverge”.

“There is lots of legislation going through at the EU level . . . and we need to be aware of the impact,” she said. “Businesses on both sides of the Channel are saying the same thing: we want high standards and we do not want to diverge too much.”

The issue affects services companies too. Accountants MHA warned that EU tax rules for virtual services will change in January 2025, meaning British businesses providing online facilities to consumers will have to pay VAT where the customer resides rather than in the UK, as now.

Sue Rathmell, partner at MHA, said: “UK businesses providing virtual [business to consumer] services to the EU, such as webinars, online conferences or advertising software, require swift input from [HM Revenue & Customs] in response to the EU’s intention to overhaul place of supply rules from January 2025.”

McReynolds said one of the biggest challenges for business was the widely differing approaches of individual EU member states to implementing regulations such as the bloc’s requirement to recycle plastic packaging. 

Some countries, including Spain, apply rules more strictly than others, with some EU businesses now insisting that UK companies provide proof that plastic components of manufactured goods also comply with the regulations, he added.

When the UK was an EU member, such rules were transposed automatically on to the British statute book and companies were presumed to have complied for the entire single market.

As a non-member, that presumption of compliance has been removed. “Post-Brexit British firms have to comply with the domestic interpretation of EU directives of 27 different regulatory regimes,” said McReynolds.

Both Make UK and British Chambers of Commerce say that now the UK is no longer automatically transposing EU law, the British government needs to do more to assess the impact of the bloc’s future regulations, as well as using the Trade and Cooperation Agreement between the two sides to co-ordinate better with Brussels.

The UK Department for Business and Trade said the agreement was “opening up new opportunities” for British businesses in the EU.

“We will continue to assess the impact new EU laws could have on our trade interests, as we do with other trading partners.”

However, Bain said there needed to be much broader discussion about regulatory developments on both sides. “We need to get a lot better at this. Everybody has to up their game.”

Make UK has called for the government to create a central register of impending EU laws and to help British companies with analysis of what they mean for business.

The alternative for British companies is a repeat of the chaotic and costly learning curve that followed the implementation of the Trade and Cooperation Agreement in January 2021, barely a week after the eleventh-hour deal was struck between the UK and the EU, said Crozier.

Based on past form, he was not optimistic. “We’ve been flying blind all the way through as manufacturers. We didn’t know what Brexit we were going to get until the very last minute, and I’ve no faith that it won’t be the same scenario all over again.”