Brexit: Top Ten Issues for the Construction Sector

The UK officially left the EU at 11:00 pm on 31 January 2020. However, as part of the Withdrawal Agreement with the EU to help the UK transition away from EU membership, EU law continued to apply to the UK as if it were still a Member State until the end of 31 December 2020. On 24 December 2020, the EU and UK reached a Trade and Cooperation Agreement ("TCA"), which applies as of 1 January 2021.

The TCA is expressed as an ambitious, wide-ranging and balanced economic partnership, which the parties recognise must be underpinned by a level playing field for open and fair competition and sustainable development. It also relates to far more than trade and covers a host of other subjects that govern relations between the UK and EU such as health security; cyber security; movements of capital; and, intellectual property. These are vital and fundamental issues that up to this point have applied automatically by virtue of the UK's membership of the Single Market. 

We are at the early stages of understanding the nature of the TCA and its implications. What it will mean in practice for the construction sector will inevitably unfold over time. Nonetheless, however challenging it may be, parties need to engage with what the TCA means for their business and their contractual relationships. In this briefing, we identify 10 key areas that those in the industry should be thinking about now.

1. Consider customs provisions

In relation to trade in goods, the TCA creates a “free trade area” that has to comply with Article 24 of the General Agreement on Tariffs and Trade ("GATT") in order to permit “free trade”. This requirement has at least two important consequences. 

First, it is widely considered that the TCA provides “tariff free, and quota free access to the EU”. This is partly right, but mostly wrong. Goods going from the UK to the EU and goods coming from the EU to the UK only receive duty-free access if they “originate” in respectively the UK or EU. To work out whether goods do in fact “originate”, one needs to look at the detailed rules of origin contained in the Annexes of the TCA (the "Annexes"). If goods do not meet these Rules of Origin ("ROO"), import duties will have to be paid, some of which are significant. Looking at the Annexes, the ROO are strict and many UK and EU goods will not meet them, or at least won’t meet them yet. Therefore, we can expect a significant amount of change in supply chains for goods to avoid tariffs.

Second, whether or not the goods meet the ROO, importers and exporters will have to comply with new customs and regulatory procedures that simply were not there when the UK was a member of the EU. The cost and effort associated with these procedures will be significant, and it is highly likely that traders will need some time to come to terms with the new rules.

2. Understand the new position on public procurement

For those who bid for public contracts, understanding the new position on public procurement rules will be critical. Guaranteeing reciprocal access of EU and UK suppliers to each other's public procurement opportunities lies at the heart of the TCA and would appear to limit significantly the ability of procuring authorities to discriminate in favour of domestic suppliers. In particular, the TCA appears to establish a broad obligation in any UK procurement to treat EU suppliers no less favourably than UK suppliers, with a reciprocal obligation for UK suppliers in EU procurements. 

The TCA also refers to the objective of enhancing the transparency of public procurement procedures although the scope of the TCA provisions itself is not entirely clear. This is due to (a) the fact that the TCA uses different terminology from the EU public procurement directives and (b) the frequent cross-references to provisions of the WTO's Agreement on Government Procurement ("GPA"), with some of those provisions being out of date.

Nonetheless, the TCA seeks to incorporate a range of principles that are already reflected in the UK's public procurement regulations, which transpose the EU directives (e.g., the requirement to invite a sufficient number of candidates to tender to ensure genuine competition, verification of abnormally low tenders, and the ability to take into account environmental, social and labour considerations when evaluating tenders).

In practice, the provisions of the TCA are expected to make it more difficult for the UK to diverge from the EU's public procurement rules, which had been proposed in the UK Government's green paper of 15 December 2020 entitled "Transforming public procurement" (see the Ashurst update here).

3. Check VAT registrations

Suppliers need to check where they should be VAT registered. While there are numerous caveats and exceptions, as a broad rule: (i) for those providing digital services to both EU Member States and UK consumers, it may be possible to have just two VAT registrations: one under the so-called mini-one stop shop and one UK VAT registration in the UK; (ii) suppliers of goods to consumers (and other "importers") will have to consider whether they need to separately VAT register in each of the EU Member States and the UK where they are selling/importing; and (iii) suppliers of business to business ("B2B") services may only need a registration in the countries where they actually have offices.

4. Review processes for cross-border sales of goods

All B2B sales of goods between the EU and the UK that were historically treated as zero-rated intra-EU acquisitions will (with only very limited exceptions) become standard-rated imports and exports and liable to import VAT. Businesses which carry out trading between the EU and the UK should clarify Incoterms and who is acting as importer of record for customs duty and VAT purposes on all cross-border sales. They should also check supply contracts and consider including, to the extent possible, provisions dealing with documentary requirements for such imports and the allocation of VAT risk. Businesses will also need to ensure they have processes in place to satisfy all related procedural requirements for such imports.

5. Think about HR issues

The TCA includes reciprocal commitments by the UK and the EU not to reduce the level of protection for workers or fail to enforce employment rights in place as at 31 December 2020 in a manner that has an effect on trade or investment. 

In addition the UK Government confirmed the final features of the UK's points-based immigration system in November 2020. This does not apply to Irish nationals, but anyone else coming to work in the UK from 1 January 2021 onwards, whether from the EEA or elsewhere in the world, will need to comply with one of the immigration routes provided for in the new rules.

Some of the steps that businesses should now have on their radar include:

• Assisting employees to achieve settled and pre-settled status: Employees who are EEA nationals and who were living in the UK by the end of 2020 can apply for settled or pre-settled status, which gives them the right to carry on living and working in the UK. The deadline for applications is 30 June 2021 for most applicants.
• Assessing the effect of employee absences from the UK: Employers may need to assist EEA nationals who lived and worked in the UK before January 2021 to review their periods of absence from the UK. Absences of more than 6 months in any rolling 12-month period may break any period of continuous UK residency and may therefore impact an individual's ability to obtain settled status.
• Keeping in touch with secondees: Employers with UK employees on secondment in the EU must keep up to date with any changes in the immigration requirements in each EU country where UK employees are seconded, and communicate those changes to the affected employees.
• Reviewing employment policies: Employers should carry out an immigration audit, including drafting, reviewing and amending policies to ensure they are compliant with the new immigration system.
• Considering using the intra-company transfer route: Multinational companies should look at whether they might use this route to transfer personnel to the UK.
• Familiarisation with the business visitor obligations: Employers who have EEA nationals who frequently visit the UK on business trips will need to understand the business visitor requirements for an intended visit from 1 January 2021.

6. Review social security arrangements

The TCA contains provisions which ensure that cross-border workers are only liable to pay social security contributions to one state at a time. This is generally the country in which the relevant individual is working although there are specific provisions (the so-called "detached worker" rules) under which, if an EU Member State agrees to apply the rules, UK workers sent to work temporarily in that State remain liable for UK social security contributions for the duration of their posting and vice versa for nationals of that Member State sent to work in the UK. Local payroll taxes may (subject to any protection under the relevant double tax treaty) also apply. Where employees are working abroad of their own volition (e.g. for COVID-19 reasons), the position may be different and should also be checked.

7. Consider environmental factors

There are a number of environmental considerations that need to be engaged with now. These include:

• Emissions: A new UK Emissions Trading Scheme (UK ETS) replaced the UK's participation in the EU ETS on 1 January. The Government intends to release guidance on how to comply with the UK ETS, alongside guidance on the small emitters and hospital opt-out scheme and the ultra-small emitters exemption, early this year.
• Trans-frontier shipment of waste: As of 1 January, new arrangements exist for the movement of waste between the UK and the EU. The UK is a party to the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, and a member of the Organisation for Economic Co-operation and Development ("OECD"). As such, the UK will be treated in the same way as any other OECD country or any country party to the Basel Convention that intends to export waste to an EU country. This means that UK waste exporters to the EU and EU waste exporters to the UK will now need to follow the EU customs guidelines as well as the EU Waste Shipment Regulation.
• Environment Bill: The Government's flagship Environment Bill seeks to incorporate into UK law a series of environmental principles which were previously set out by way of EU treaty. These include the integration principle, the prevention principle, the precautionary principle and the polluter pays principle. Both the EU and the UK have committed in the TCA to respecting a set of internationally recognised environmental principles, including, in particular, those listed above. It is yet to be announced when the Bill will be back in Parliament for further scrutiny, but it is likely that England's latest national lockdown could lead to further delays.
• Product safety/"CE" marking: The new "UKCA" (UK Conformity Assessed) product-marking regime now applies. This new marking will be used for goods being placed on the market in Great Britain and covers most goods that previously required the EU's "CE marking". The UKCA marking can be used now but to allow businesses time to adjust to the new requirements, it will be possible to use the EU's CE marking until 31 December 2021 in most cases. However, the Government encourages the use of UKCA marking as soon as possible. This is particularly relevant to product safety and environmental product laws which currently incorporate conformity assessment testing, such as RoHS (Restriction on Hazardous Substances). In addition, there are new importer responsibilities when placing a product on the market in Great Britain from the EU. The TCA includes a commitment by the UK and EU to cooperate and exchange information on non-food product safety and compliance, including market surveillance and enforcement activities and measures, coordinated product recalls, and emerging issues relevant to significant health and safety.
• Environmental Impact Assessment - EIA/SEA: While there is no immediate change to the decision-making process for major projects and plans, the Government's Planning White Paper sets out commitments to reform the EIA/SEA regimes to create a quicker, simpler framework for assessing environmental impacts. The Government had promised a separate public consultation on the issue in autumn 2020, which has not yet materialised, and which is likely to be published in the coming months. Nonetheless, the Government has reaffirmed its commitment to retaining Environmental Impact Assessment (EIA) and Strategic Environmental Assessment (SEA) procedures under the provisions of the TCA.

8. Will English law remain a good choice to govern construction contracts?

The short answer is yes. English law encompasses UK legislation, case law and EU law. The European Union (Withdrawal) Act 2018 ("EUWA") confirmed that, to the extent possible, all existing EU law would be incorporated into UK law on completion of the exit process. So, wherever possible, the same rules and laws apply today as applied on 31 December 2020. This achieves certainty in the short term, but Parliament is now able to amend and cancel any unwanted aspects of EU law.

The fly in the ointment is the role of the European Court of Justice ("CJEU") post-Brexit. The EUWA states that historic CJEU case law will have the same precedent status as decisions of the UK Supreme Court. As such, the UK courts will interpret EU-derived law by reference to the CJEU's case law as it stood on 31 December 2020. Going forward, however, the CJEU no longer has direct jurisdiction in the UK. This means that we could see a divergence in approach develop between the CJEU and the UK courts. However, the UK has acknowledged the role of the CJEU as "the ultimate arbiter of EU law within the EU”, and it is likely that the UK courts will have regard to decisions of the CJEU when applying EU law principles.

Contracting parties will therefore need to consider what impact EU law has on their contracts, particularly those drafted to reflect, rely upon, or fall within, certain EU laws or "safe harbours", and whether future proofing/Brexit clauses are required, particularly in relation to long term agreements.

9. Is the choice of English courts affected by Brexit?

Here the position is more complicated. The Brussels Regulations and the Lugano Convention (together the "Brussels Regime") determine the rules which are applied by EU Member State and Lugano State courts when giving effect to jurisdiction clauses and the enforcement of judgments within the Member/Lugano States. These rules mean that:

• EU and Lugano courts will uphold jurisdiction clauses that confer jurisdiction on the courts of Member/Lugano States, and
• enforcement of a judgment of one Member/Lugano State in another is straightforward.

Pursuant to the Withdrawal Agreement, the Brussels Regime will continue to apply to questions of jurisdiction and enforcement of judgments in any disputes where proceedings were started before 1 January 2021.

However, because of its reciprocal nature, the Brussels Regime could not simply be retained after 31 December 2020 by importing it wholesale into UK law. The Government confirmed that it would seek to agree similar arrangements and applied for the UK to accede to the Lugano Convention in its own right. But such accession requires the consent of all parties to the Lugano Convention, including the EU, and as yet, the EU has not given such consent.

The UK has now also acceded in its own right to the Hague Convention on Choice of Court Agreements, with such accession taking effect on 1 January 2021. The Convention operates in a similar way to the New York Convention for arbitration awards by giving effect to exclusive jurisdiction clauses and enforcement of any resulting judgment. It only came into force on 1 October 2015 and as such remains largely untested. Although better than nothing, it is not a complete substitute for the Brussels Regime.

10. How can we future-proof construction contracts to deal with the uncertainties ahead?

For parties to construction contracts Brexit means there are both known and unknown risks ahead that will need to be allocated. Some risks have been on the table for a few years, such as who bears the risk of delay of goods and materials at ports, labour shortages, and, additional customs duties. However, as this update highlights, there are also risks that are only becoming apparent now. This is particularly unwelcome in the context of the many other difficulties the industry is currently grappling with, including COVID-19, improving sustainability, and the increasingly challenging insurance market.

The days of fixed price contracts may be limited as the risks from the contractor's perspective are considered to be too high. Where they continue to be used, parties will need to scrutinise in greater depth who takes on specific risks and ring-fence them. We may see a shift towards softer pricing mechanisms with a greater emphasis on collaboration, programming and monitoring: the NEC approach.

This accords with the Government's call for a more collaborative approach to risk sharing across the industry, not only in relation to COVID-19 issues but more generally, for example, in its public sector "Construction Playbook" (published in December). The Government's stance reflects a wider call within the sector to change its culture by moving towards different procurement methods that deal with risk in new ways.

In the first instance, however, parties need to take proactive steps to engage with the TCA – and consider how they can make sure their businesses adjust and thrive in this new era. 

Next Steps

If you require further information or if you need tailored advice, please do get in touch with your usual Ashurst contact, or either of the people listed below.