Brexit can work to the advantage of UK fashion businesses say legal experts, but the appropriate measures must be put in place

Brexit can work to the advantage of UK fashion businesses say legal experts, but the appropriate measures must be put in place

Despite the ongoing uncertainty over the UK's exit from the European Union (EU), fashion companies are being advised to take steps to prepare for Brexit and "find the sources of potential growth."

At present the UK is a member of the EU. But on 29 March 2019 this will change. However, what is unknown is what will follow in place of the EU single market in which fashion businesses currently operate.

In response, UK fashion law firm Fox Williams LLP has put together 'A guide to Brexit for the UK fashion industry' to help prepare firms for the impact Brexit may have on their businesses.

It notes that the uncertainty over Brexit will continue unless a transitional agreement with the EU is put in place – but adds there are certain steps that fashion companies can and should be taking now. 

How could Brexit impact UK fashion businesses?

Rules of origin: Presently, there is no requirement for the UK to specify how much of a product is made overseas. Clothing items can be labelled 'Made in the UK' even if they are sourced from other countries. Under Brexit, however, this may change. Customs duties and rules around origin may see apparel firms burdened with higher admin costs and customs processing delays. 

Free Trade with the EU: If no deal is reached surrounding a free trade agreement with the EU by the time the UK exits, the UK's trade with the 27 member states of the EU comes under the jurisdiction of the World Trade Organization (WTO). This would mean goods traded between the EU and UK, and also the UK and other non-EU countries, are subject to customs tariffs based on WTO's Most Favoured Nation (MFN) rates. Additionally, the UK will need to reach separate trade deals with each of the countries the EU has negotiated preferential trade deals with. Until it does so, the MFN customs rates apply – which do not work in the business's favour.

Immigration: The UK Prime Minister Theresa May has proposed all EU nationals seeking work in the UK will require a permit; a preference geared towards highly skilled workers and students. For UK fashion businesses relying on workers from the EU, restrictions on the ease of movement of workers may lead to shortages of labour, and consequently increased labour costs due to demand. This will have an effect on profit margins and operating budgets of fashion businesses.

Control of laws: The UK Prime Minister has also impressed that Brexit will mean that the UK will control its own laws and the Court of Justice of the European Union (CJEU) will cease to have jurisdiction in the UK. However, to continue trading with businesses in the EU Member States, products will still need to meet EU standards. While the UK government – post-Brexit – will be able to give preferential treatment to UK businesses and favour them over EU counterparts, EU Member States could potentially apply reactive measures, putting UK fashion businesses at a disadvantage.

So what steps should businesses be taking to gear themselves up for a post-Brexit world?

Financial implications: Fashion businesses will need to consider the financial implications if a free trade deal with the EU is not agreed, as well as the implications of the outcome of trade deals with non-EU countries. Commercial agreements being negotiated should be reviewed in the context of tariffs for import and export of goods to and from the EU that could apply after Brexit.

The financial impact of trade arrangements with countries outside the EU, with which the UK will need to renegotiate tariff rates, should also be addressed. Supply and labour costs may therefore increase and fashion businesses will need to decide how to cope with the additional costs.

Commercial contracts: Fashion businesses should identify their key contracts: do they provide enough protection in respect of Brexit?; do they require renegotiating or amending? Existing contracts that include material adverse change provisions should be reviewed insofar as if the financial impact from Brexit is sufficiently serious, it could trigger a right to invoke the material adverse change provisions in the contract.

Steps may need to be taken to future-proof new contracts by including express provision for the financial impact of Brexit, such as exchange rate variation and inflation clauses, and express provisions dealing with tariffs for imports or exports to and from the EU and additional customs procedures. New contracts that reference EU law will also need future-proofing by including an express provision for whether the EU includes the UK after Brexit. Contracts will also need to provide for modification or repeal of European legislation.

Operational issues: Fashion businesses may wish to consider establishing EU based subsidiaries to provide continued tariff-free or reduced tariff access to the EU. These could also provide companies with flexibility depending on the source of manufactured products, and the eventual nature of the trade deals the UK may be able to negotiate with the EU and non-EU countries.

Supply chain arrangements may need to be reviewed and businesses may consider routing products through countries with more favourable tariffs. In doing so, the savings will need to be weighed against the additional time it will take in getting the product to its destination. Existing supply contracts may have strict deadlines with financial penalties for failing to meet them. New supply agreements will need to be flexible to absorb the impact of operational changes as a result of Brexit.

Click on the following link to access the full report: A guide to Brexit for the UK fashion industry