On Friday the 24th of June 2016, we woke to hear the UK had voted to leave the European Union. (see our article on that here).
So what does Brexit mean for health food businesses?
The answer to this question is very important to Avena Consultants and our clients, so we have put together a Q & A.
Well, the quick answer is that nobody knows what this relationship will be like yet, but it will take 2 years or more. The UK has to officially trigger article 50 of the Lisbon treaty. They do not plan to do this until the UK ship has a new captain (a little meltdown of leadership has occurred) and they need time to come up with a plan (nobody has one yet). According to EU commission President Jean Claude Junker “this will not be an amicable divorce”, fighting talk indeed. Once officially triggered, article 50, allows a two year negotiation period over the nature of the exit. Once that two year period is up, only if all 27 member states allow an extension, can the period of negotiation be extended. Two years is actually a very tight amount of time to negotiate a very complex legal retreat, especially from an EU commission that usually takes about 6 years just to implement one directive. Folks this could drag on.
The UK has various options of a continued relationship. Free market access would seem very preferential as the EU is currently the UK’s biggest trading partner, about half our goods are sold to the EU. However free market access comes with caveats. The ‘Norway’ option means remaining a member of the European Economic Area (EEA), in return Norway has about 25% EU law implemented into its own law (mostly product law), has a free movement of people agreement, but no say in European affairs. However, the Brexit campaign was won largely on the issue of immigration, so many leave voters may be unhappy to hear what the ‘Norway’ option really entails. We look then to Switzerland, which has a free trade agreement with the EU, but is not a member of the EEA. In reality this means the Swiss have signed up to the free movement of people and implements many EU product law rules into Swiss law. If the UK goes for no free trade agreement then import/ export tax and vat applied to goods and services would be very unbeneficial to business. Avena predicts UK politicians will go for a free trade agreement with the EU and become the 5th member of the European Free Trade Association (EFTA), current members include; Iceland, Lichtenstein, Norway and Switzerland. EFTA has some 28 free trade agreements of its own with countries outside the EU, including Canada.
Brexit, Farming and Food
EU law provides protection for food names like the ‘Cumberland sausage’, so post Brexit there is unease from British fine food groups about name protection continuing. Growers may have labour issues as they struggle to recruit UK workers to replace for example, the 12,000 EU seasonal workers that come to the UK every year to pick apples and pears alone. Currently GMO foods are banned in Europe, however according to leading Brexiter convervative MP, Owen Paterson, Brexit will be excellent for British farming, because we will be able to grow GMO crops. However UK consumers are unlikely to be huge fans of GMO foods. The EU was also implementing a ban on UK farmers’ most widely used herbicide, glyphosphate (Monsanto round-up), because it is potentially carcinogenic. Under Brexit this could be reversed. Farmers also receive quite large subsidies from the EU, the UK government will have to make up for those subsidies somehow, there is no guarantee they will. The price of food may also go up, as a result of economic uncertainty, inflation and the impact of trade tariffs. In the UK we enjoy a rich and diverse diet, with many imported foods such as cheese, wine, meats, health foods and supplements. Market players predict food price rises, so this may mean products considered less essential like specialised health foods and supplements will see a drop in sales.
Brexit, Trade and Import tax
As part of the EU, products to and from EU states enjoy 0% tax and custom control, VAT is paid as part of an EU wide online system. As one senior Frost and Sullivan expert explained the leading health food industry publication www.nutraingredients.com “Basically there will be a new economic wall between the EU and the UK that blocks the free movement of money, people and products”. Post Brexit all UK origin goods will be taxed upon entering an EU country and charged VAT upfront. Some countries like Norway which are part of the European Economic Area (EEA), but not part of the EU, can trade goods without VAT, however some products, like foods continue to pay excise duty. The EU does apply import tax on food and agricultural exports coming from outside the EU, for example non EU dairy products have an import tax of 36%. As a result of brexit, the UK will need to reach agreement with the World Trade Organisation (WTO) on tariff ratings, however this will not be possible during the process of exiting the EU, nor will be initiating trade agreements with other non EU nations during this period. Without a trade agreement, the EU would apply the same tariff rates it does to all WTO members. Our tariff rates for export to the EU will be comparable to countries such as the USA or China. If we use the example and the tax code for Herbal Food Supplements (2106.90.9998), we can see UK exporters of food supplements to the EU, will likely pay between 8-10% import tax and between 15-25% VAT on their exports. Companies should therefore be preparing for the tax implications of import and exported goods and planning accordingly, but they do have a bit of time on their side. The food industry should lobby hard for an EU trade agreement that includes free trade on all food products.
Brexit and Business location?
As many food product exporters to the EU, will know, it is a requirement that labels have an EU address, as a result many exporters to the EU have set up a UK company as a base, to take advantage of the EU free market. Companies may consider therefore moving their operation outside the UK to an EU state. Businesses that use a distributor model, may be less effected, as long they have access to an EU distributor. One of the main appeals of the UK as a product or company base, was that it was part of the EU free market, but English speaking. Avena predicts many food business relocations to Ireland in the coming years as a result, however if an EU/UK free trade agreement is reached this may not be necessary, but this could dependant on the nature of the business against what is ‘free’ to trade.
Brexit and Nutrition and Health Claim Regulation 1924/2006
While the UK is still a member of the EU, before it officially leaves, all EU regulations will apply. However an EU regulation by its nature automatically becomes part of a member state’s law, without national legislation being drafted to implement it. Once the UK officially leaves the EU, no EU regulations will apply, unless they are specifically drafted into new UK laws. In reality this means that the Nutrition and Health claims regulation will apply in the UK for approx. 2 or more years. However if the UK negotiates a free trade agreement to become part of the European Economic Area (EEA) then the Nutrition and Health claim regulations will likely still be in place, this is the case in Norway. In Switzerland, which has a free trade agreement but is not a part of the EEA, they have ensured uniformity of cross border goods by implementing the Ordinance on the Labelling and Advertising of Food since March 2008. The relevant Swiss provisions closely follows the EU Regulation on Nutrition and Health Claims. So given that the UK is likely to want a free trade agreement with Europe, they may well implement similar laws to incorporate EU food regulations into UK law in the future. It should be noted that any company wishing to export goods to an EU country has to be comply with EU law anyway.
Brexit and Product Compliance Rules
According to Robert Verkerk, head of the Alliance for Natural Health “Nearly all of the most restrictive and limiting legislation facing UK operators in the natural health sector emanate from Brussels”. The EU has many Directives covering rules on medicines, traditional herbal products, food safety, food labelling, food supplements, slimming products and these rules have all been transcribed into UK law. For example the EU Food Supplement Directive 2002/46/EC, is almost identical to The Food Supplements (England) Regulations 2003 SI 2003 No. 1387 and so on. The notion that UK regulators will be more liberal in their approach to rules post Brexit does not necessarily hold true. For example the MHRA were highly instrumental in drafting EU Directives such as the Traditional Herbal Medicinal Products Directive (THMPD) 2004/24/EC. In fact, UK regulators are can be restrictive in nature, so according to many industry insiders they will not necessarily become more flexible outside the EU.
The other aspect of EU food law change in the UK is a practical one. Given that Brexit is such a complex legal process the legal priorities will be; continued market access and protection of key industries, like the City of London finance sector. Avena predicts that cosmetic, medicines and food law will remain very similar to EU law for years to come, because changing laws is time consuming and costly and free trade agreements with Europe will require a uniformity of product law in any case. It will be up to the health food industry to mobilise and lobby for a more liberal approach to advertising and claims post Brexit.
Brexit and the Make-up of the United Kingdom
Avena Consultants Ltd is based in Scotland where every region and a total of 62% of voters wished to remain in the EU, a ‘material change’ has occurred prompting the First Minister of Scotland, Nicola Sturgeon to initiate talk of another Scottish referendum on continued union with the rest of the UK, plus separate talks with the EU on whether or not Scotland can remain a member regardless (very unlikely). Scotland would have to gain independence from the UK to join the EU again. Scotland does not have a central bank, so joining the euro as currency could be a long way off, as it will not meet the criteria. The Swedish are supposed to adopt the Euro once they meet the ‘criteria’. However this is a position they have not met since they joined Europe in 1997, many would say deliberately. Constitutional changes to the make-up of the UK may occur in future, but are by no means guaranteed.
We live in interesting times, companies should continue to comply with EU law if they want to sell their products in the European Union and also the UK, for at least the next two years, if not longer or permanently. All depends on what the UK’s long term plan for a trade agreement will be. Understanding trade, tax and location implications and keeping abreast of this changing environment will also be very important. Business will survive and adapt to this, it always does. Our main finding from a compliance point of view, is that its business as usual. So get in touch!
Filloon. W (June 2016) What Will Brexit Mean for Food in the UK? http://www.eater.com/2016/6/24/12023732/brexit-uk-food-restaurants
Sydney Morning Herald (June 2016) Brexit: Britain’s dreams of a Swiss miracle look like a fantasy, http://www.smh.com.au/business/world-business/brexit-britains-dreams-of-a-swiss-miracle-look-like-a-fantasy-20160623-gpqqx9.html
Starling, S (June 2016) Industry reaction: What #Brexit means for UK & EU nutrition sectors http://www.nutraingredients.com/Regulation-Policy/Industry-reaction-What-Brexit-means-for-UK-EU-nutrition-sectors
Alliance for Natural Health ( Feb 2016) EU ‘In or Out, potential Impacts on Natural Health in the UK, http://anhinternational.org/2016/02/24/16122/
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Norwegian Food Safety Authority (2014) Health and Nutriton claims regulations http://www.mattilsynet.no/language/english/food_and_water/health_nutrition_claims/health__nutrition_claims-2
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Keating, J (July 2015) “ More and More EU Countries Are Rejecting theEuro” http://www.slate.com/blogs/the_slatest/2015/07/15/will_another_country_ever_adopt_the_euro.html
What will Brexit mean for Iconic British Food http://www.bbc.co.uk/news/uk-england-36624655
UK Government (Feb 2016) The process for withdrawing from the European Union, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/503908/54538_EU_Series_No2_Accessible.pdf