Brexit | What does it mean for professional services?

New challenges are heading towards professional services not only by today’s political changes but through new technology available to clients to interpret their own financial data and automate legal, accountancy and consultancy services. Clients expectations are also changing. Revolution is upon us.

The British economy is now overwhelmingly a service driven economy, experiencing strong growth over the last 20 years, with healthy demand in professional services, set to scale on a global basis. The UK is the second largest exporter of services in the world; the EU accounting for 40% of UK exports in services trade in 2017, worth £90bn annually to the UK. A majority of these services are non-financial. The figure for exported professional services is difficult to pinpoint since firms do not tend to report the division between the import or export of services.

The prospect of a no-deal Brexit is becoming a reality following recent political debates over the May deal negotiated with Brussels. Our future options are limited and with less than 60 days until Brexit strikes, at present set for 29th March 2019, professionals and professional services need to understand their exposure in the event the current deal is not agreed and an arguably disorderly exit from the EU. If the deal is agreed, during the transitional period, market access will remain the same for UK and EU professionals working in the UK or EU who continue to have their professional qualifications recognised. This will enable professionals to provide services across the UK and EU. The transition period is due to last until 31st December 2020 with the possibility of a time limited extension. However, with a growing probability of a no-deal Brexit, planning your business beyond Brexit is critical.

Mutual Recognition of Qualifications

Trade negotiations for services are trickier than goods, since trade barriers focus upon regulations rather than tariffs. Political focus in negotiations has been towards trade in goods rather than services due to the anticipated impact upon the manufacturing sector and poorer areas of the UK, driving unemployment and living standards. Those involved in professional services are keen to secure mutual recognition of qualifications, regulations and judgments between the UK and EU post Brexit. Whilst services do not attract tariffs, they are instead restricted by non-tariff barriers such as regulations and licensing.

Current regulations simplify recognition of professional qualifications allowing UK and EU professionals to establish themselves in other Member States on either a temporary or permanent basis without the need to requalify. If a deal is reached under the Draft Withdrawal Agreement, mutual recognition of qualifications would allow equivalence to exist in the country in which the application was made. To export services to another country, regulations of that country must be met. Thus a UK accountant working in France with another office in Germany would be required to apply to both Member States for mutual recognition in both countries.

A deal which did not provide market access for all services sectors, or no deal at all, would result in the UK trading services with the EU on the basis of World Trade Organisation (WTO) rules, which would provide less favourable trading conditions than membership of the Single Market or a Free Trade Agreement (FTA). WTO terms would require the UK and the EU to comply with the ‘Most Favoured Nation’ principle: the UK would not be able to trade on more preferential terms with the EU, unless it applied those same terms to all other WTO member countries (and vice versa).The ability to transfer members of staff across borders may prove an obstacle, particularly where secondment services are required.

Faced with a no-deal scenario, accountancy and legal services could be significantly affected by non-tariff barriers to trade, forced to restructure or relocate in order to continue to export services. Trade in services will no longer be determined by the rules of the single market but WTO rules. The General Agreement on Trade in Services (GATS) introduced in 1995, is a treaty of the WTO which governs international trade in services. Trading services under WTO rules would involve much greater restrictions than exist within the Single Market.

Data Protection

Professional firms requiring access to EU data flows will need an adequacy decision for UK data regime to maintain free flow of data between the UK and EU, which are integral to provide service relationships. Firms should review the data flows and transfer mechanisms in their firms as a minimum to ensure there will be no breach in their data operations if there is a no-deal Brexit. This includes transfers of personal data from the EU to the UK and onward transfers of that data from the UK to third countries.

Even terms similar to those agreed under the most ambitious FTAs agreed by the EU, such as the current agreement with Canada, would represent a deterioration of trading conditions for UK businesses. This would be the case both for sectors in which a harmonised Single Market framework exists, and also for sectors that are reliant on the EU for elimination of non-tariff barriers to trade. In short, the UK will require the most comprehensive FTA in services ever agreed with the EU.

Risk brings opportunity

Brexit could have a positive impact, as demand for legal and accountancy services can be expected through the post-Brexit period providing advice on tax and financial implications of the UKs withdrawal from the EU. UK businesses will seek adjustment advice to adapt to a post Brexit world. We are in an uncertain environment where businesses will require expertise to assist long term forecasting, planning and identifying areas of risk. Businesses are keen to understand the position on VAT however the UK government are unlikely to dispose of VAT as this provides a significant source of revenue for the UK economy.

Leaving the EU will create challenges for all businesses. Withdrawal from the EU is likely to generate huge changes to our laws. Brexit brings huge uncertainty however conducting a legal audit of all contracts as a necessity to ensure they remain commercially viable and ascertain whether any terms or clauses could be affected by Brexit. Parties can agree, in advance, that certain contractual obligations or rights could trigger a range of alternatives, from a mere obligation to meet and discuss, to repricing or even the ability to terminate. If termination of a contract is sought, do ensure you have the right to terminate since this could mean you are in breach of that contract, giving rise to the payment of damages. Pull out those client contracts.

After Brexit, the UK is no longer included in the ‘EU’ definition. For existing contracts that are silent on the applicable law, it will generally be determined by EU rules in the ‘Rome 1 Regulation’. This will be incorporated into UK domestic law, thus the same principles will apply.  For new contracts it is advisable to state which territory governs the contract.

Understand your challenges

Opportunities can be gained through focus of operational improvements, seeking efficiency. Doing so can achieve significant competitive advantage. Focus areas would continue to seek out growth areas; entry into service sectors where competition is limited and increase productivity through technology. In short, businesses need to plan. Understanding their Brexit challenges will help control the impact with forward planning, exploring options and implementing change when the time is right. Engaging with your customers to understand their new needs and how you might meet them.

Skills shortages are starting to reflect in business growth opportunities, resulting in higher salaries, eroding profit margins. Talent management is imperative to reduce impact and identify where training and investment, be it technology or people, to benefit your current and future workforce.

Professional services face an era of disruption through Brexit, digital technology, global demographics and increase in entrepreneurship and innovation. We have a binary choice – shape the world around us or be shaped by the world around us.

Need help?

We offer a 30 minute free consultation to determine the level of planning your business requires to get ahead for Brexit. Time is running out. Contact us here 

Further reading

The Law Society provide useful guidelines (https://www.lawsociety.org.uk/support-services/advice/articles/no-deal-brexit-providing-legal-services-in-eu/) for UK solicitors practicing in an EU/EFTA member state.

The ICAEW have produced a Brexit Guide (https://www.icaew.com/groups-and-networks/local-groups-and-societies/europe/brexit-and-its-potential-impact-professional-qualifications) Recognition of professional qualifications.

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