Brexit – transitional agreement now “urgent” to placate data-sharing concerns

SUMMARY:

MPs on the Treasury Committee have warned that 130,000 SMEs that trade with the EU would be impacted if no transitional agreement was in place.

Prime Minister Theresa May heads to Brussels today to begin the second phase of Brexit negotiations with the EU, with the hope of making progress on an unprecedented and comprehensive trade deal – which will hopefully cover data sharing arrangements between the two regions.

However, as negotiations intensify, MPs on the Treasury Committee has today warned that a transitional agreement between the UK and the EU is now “urgent”, to avoid a cliff-edge no deal scenario come March 2019 when the UK is set to leave the trading bloc.

The Treasury has said that it agrees with the Chancellor that a transitional agreement is a “wasting asset”, in that as time goes on, the benefits of such a deal diminish, as firms will begin to trigger contingency plans and move resources over to the European Union.

A transitional agreement – a set amount of time agreed by both parties post-March 2019 – will allow the UK and the EU to implement the necessary changes required and complete on investments that need to be made to ensure that business isn’t impacted.

Two areas that would hugely benefit from such a deal include free data-sharing, for which many digital services trading with the EU rely on, and custom checks at the borders – for which HMRC is rapidly investing in new systems to cope with the increased workload post-Brexit.

Commenting on the Report, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

The Treasury Committee, a cross-party group consisting of Members with a wide range of views on Brexit, is unanimous in its view that an agreement between the UK and EU27 on ‘standstill’ transitional arrangements is now urgent.

The consequences of failing to reach an agreement are dramatic and damaging. Many businesses will begin to prepare for a ‘no deal’ outcome—moving jobs and activity, and incurring potentially unnecessary expenditure—early next year.

Transitional arrangements must therefore be straightforward enough to negotiate in a matter of weeks.

Speed is of the essence. Delays to agreements caused by arguments over arcane points of principle could damage the economy. The Government should be prepared to accept the terms on which transition is offered by the EU27.

This may well include accepting EU rules beyond those of the Single Market and Customs Union; and it is likely to involve retaining, on a temporary basis, the jurisdiction of the ECJ, and the direct effect and supremacy of EU law. That is a price worth paying for stability and certainty after 30 March 2019.

The impact

We at diginomica have been covering the impact of Brexit on digital business and government IT since the result of the referendum last summer. One of the primary concerns about a no deal scenario come March 2019, is the data sharing arrangements that businesses currently benefit from as part of being in the EU.

The UK is hoping for data adequacy status upon leaving the European Union, which should mitigate the risks. Data adequacy is granted when the European Commission feels that a territory that is not part of the EU has data protection laws and practices that are aligned to the EU’s high standards.

Currently ten countries have been granted the status, including Israel and New Zealand. The USA and Canada have only been deemed to be partially adequate, and the data sharing with the USA is governed by the 2016 Privacy Shield agreement.

The British government has been warned that it faces a ‘cliff edge’ on data exchange with the EU after March 2019, when it officially withdraw from the European Union. Whilst the UK has committed to complying with the EU’s upcoming General Data Protection Regulation (GDPR), this is no guarantee that it will gain adequacy status upon exit.

The Chancellor told the Committee that “one of the scenarios we have to plan for is no data sharing […] That could be because of a bad-tempered breakdown of negotiations or equally because, in the absence of a common framework of law, we may not have a legal framework for data sharing”.

The Committee’s report states that if a transitional agreement isn’t reached – and the UK has to revert to WTO rules – it could have a big impact on businesses, particularly small businesses, that share data with EU countries, as well as on customs declarations. The report states:

More generally, goods and services trade would be affected by changes to data sharing arrangements and customs procedures. Many of these changes would occur anyway as a result of leaving the Single Market and Customs Union.

But an unplanned ‘no-deal’ scenario leaves firms with insufficient time to adapt. This is particularly the case for the 130,000 firms—mostly SMEs—that trade only with the EU, and have no prior experience of dealing with customs formalities.

Secondly, a transitional agreement would give HMRC time to ensure its new customs declaration service (CDS) is operating effectively. CDS is set to replace the ageing Customs Handling of Import and Export Freight (CHIEF) system, but deadlines are tight as the system had been planned prior to the result of the referendum.

In 2015, around 55 million customs declarations were made by 141,000 traders. The UK’s exit from the European Union (EU) could see the number of customs declarations which HMRC must process each year increase fivefold to 255 million. It has previously been said that a failed customs system could therefore lead to huge disruption for businesses, with delays potentially causing massive queues at Dover and resulting in food being left to rot in trucks at the border.

The Treasury Committee today echoed this, and said:

A ‘standstill’ transitional arrangement would also mitigate the major risk that HMRC’s Customs Declarations Service (CDS) is not ready in time for 30 March 2019. The Committee remains to be convinced that robust contingency plans exist to avoid the severe disruption to goods trade that would occur in an unplanned ‘no-deal’ scenario were this project to fail, or even be modestly delayed.

My take

As the Committee has said today, firms are starting to take action to prepare for a ‘no deal’ scenario, and this will gather momentum over time. Reaching an agreement on transition is therefore an urgent priority. Much further delay in reaching this transitional agreement and firms will begin to put their contingency plans in place, which could see investment taken away from the UK.

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