Active acceleration: helping technology companies grow internationally

Preparing your service business for Brexit

Let’s start thinking about services

Queues at borders, empty shelves, customs backlogs….all of the headlines about how Brexit might affect the UK seems to focus on the import and export of goods. Whilst there is no doubt that there will be seismic changes in trade regulation, what about services? What is the impact of the leaving the EU going to be on a service business? How should you be preparing your service business for Brexit?

What is the Services sector worth to the UK?

Actually the largest part of the UK economy is made up of services.

“The services sector is the largest part of the UK economy, forming approximately 80% of the UK’s gross domestic product. Over the decade from 2008 to 2018, it has been the best performing sector in the UK economy”

ONS Report

And how much of that is sold into the EU? In 2018 the ONS estimates nearly £73 billion worth of UK services were sold to the EU. This was an increase of a staggering £10 billion on the previous year.

What exactly is a service?

In its simplest terms a service is anything that is paid for that is not a tangible good. It can be provided locally or it can be delivered remotely. Quite simple really.

What is not simple at all is how the rules on delivering services is going to change in 2021.

So how will services change then?

At the moment UK business can sell the services they market in the UK into any other EU country. This is key principles of the EU Single Market for Services:

“the freedom to provide or receive services in an EU country other than the one where the company or consumer is established (Article 56 TFEU)”

Put another way – the rules that the company follows in the UK are fine for the rest of the EU.

On 31/12/2020 (unless the transition period is extended) the UK will leave the Single Market for Services.

On 01/01/2021 the UK will be a “third country” (not part of the EU).

On 01/01/2021 the rules for selling services will all be different. And they’ll differ depending on what you sell, where you sell and who you sell it to.

So does that mean UK companies won’t be able to provide services into the EU? Of course not. As the ONS has found, there are more than 70 billion reasons why both the EU and the UK will like them to continue to do so. But the rules are going to change.

Be very clear. The transition period is no indication of what is coming.

What changes exactly?

The good news is that only one big thing is going to change. The bad news is that it will affect every part of how you do business with your EU customers.

That one big thing is that UK services business will move from operating on “Home Country logic” to “Host country logic”. Home Country logic means what we’ve stated above – the rules that the company follows in the UK are fine for the rest of the EU. Host country logic means that you have to follow the specific rules of each country you are selling into. These might differ. By country. By industry. By sector. By service .

Home Country and Host Country rules

How does that affect your service business?

Well the impact could be felt in any number of ways. No longer is anything mutually recognised by the country or countries that you are selling your services to. So for example:

  • you will have to follow local consumer legislation if you have a B2C service (country by country)
  • you will have to comply with local requirements(country by country) on your sector (e.g. professional indemnity, insurance)
  • you will have to check your industry qualifications are recognised (country by country) if you work in a regulated industry (like architecture or engineering)
  • you might need to apply for local licences for your service (country by country)
  • you will have to have a representative in the EU if you sell Software as a Service (SaaS) products
  • you might have to have a representative in the EU if you collect personal data
  • you will have to register for VAT in every country that you sell into if you are selling digital services
  • the £8818 / €10,000 VAT threshold won’t count any more. You will have to charge VAT on every sale you make
  • if you are applying to protect new Trade Marks or Designs – then you will have to apply in both the UK and the EU
  • you might be subject to local immigration and employment legislation if you run a training course on your services or send a team to manage implementation
  • you might need a visa to attend a trade show in an EU country where you have customers
  • you might need to pay import and export duties on taking any samples or products along with you to that same trade show

You get the point – what will change is dependent on your sector, your service and the countries you sell in.

So what should you do now?

Of course there will be ways to work with and through all of these changes. It will take time, it will take sector specific knowledge and it may well need investment. But it can be done.

The measures might be as straightforward as hosting your services in an EU or registering for VAT. You might need to open a representative office or a full subsidiary or work through a partner.

One thing that is absolutely clear – you should start planning now.