Four and a half years have passed since the United Kingdom (UK) voted to leave the European Union (EU). On 24 December 2020, the two parties finally struck a last-minute agreement to avoid the disastrous scenario of a no-deal Brexit. The majority of provisions included in the new “UK-EU Trade and Cooperation Agreement” (UK-EU TCA) provisionally entered into force on 1 January 2021. A few remaining provisions will be phased in over time. The agreement covers rules for selling and buying goods and services as well as rules for travel between the UK and EU. Despite this new agreement, the UK’s exit from the EU and its single market still means that companies will need to take additional steps to conduct business between the two. Under the new terms, extra paperwork is on the horizon.
ACT | The App Association members are small technology and app development companies. Many of them are ‘micro-multinationals’ that operate across borders, making trade and multi-national cooperation an essential issue for their growth and job creation. So, while the global digital economy holds great promise for our members, events like Brexit that increase trade restrictions pose an array of challenges for them.
As James Hanson of member company Layers Studio put it, “Brexit feels like a step backwards. Now, we are effectively facing more barriers to reach customers and clients by having to meet diverging UK and EU rules. This could lead to a scenario where it could be more advantageous for tech start-ups to start their business in the EU and move to ‘do whatever extra’ is needed to work with the UK, as opposed to the other way around. Smaller start-ups, that may have chosen to be based here in the Northeast of England because of limited resources, now might have to look to more expensive places like Ireland, and cities like Dublin.”
For Dylan McKee, co-founder of Nebula Labs, the future of payment processing and data flows are the biggest concern. “We build products in a safe way, to ensure the privacy of our clients’ subscribers is protected in the same way regardless of whether they are in the EU or not. Stopping data flows between the EU and the UK would be a huge hurdle for us.”, he says. Additionally, Dylan is concerned about losing access to financing as North East England’s digital tech sector is largely funded to a large extent by the European Investment Bank. He is also worried about the additional administrative burden created by Brexit: “We are enforcing more legislation on ourselves when we have so much in in place [already], only creating more paperwork and registrations. As a start-up, I would [now] prefer to be in the EU rather than in the UK to build a business.”
Certainly, the new UK-EU relationship means increased friction between the two markets, but the new trade agreement contains several positive provisions that go beyond other EU free trade agreements. With that in mind, let us go over some of the most important issues for small technology businesses included in the Brexit deal.
Data Flows
Why do data flows matter?
The seamless flow of data between the UK and the European Digital Single Market is essential to the functioning of businesses in both markets. Innovative app development companies must be able to rely on unfettered data flows as they seek access to new markets. Our members’ ability to engage in commerce, scientific collaboration, and research and development relies on the free flow of data. Cross-border data flows also underpin digital trade and the value of the data economy.
What’s in the deal?
To facilitate trade in the digital economy, the UK-EU TCA extends an explicit positive obligation in favour of cross-border data flows as part of a temporary special agreement. This means businesses can continue transferring and processing customer data from the European Economic Area (EEA) for the next six months as the UK will continue to be under the EU’s General Data Protection Regulation (GDPR). During this time, the EU and UK governments will discuss a formal data adequacy agreement to preserve data flows in the long-term. For now, this is good for the tech sector, as data can continue to flow. However, without an ‘adequacy decision’ made during this interim period, UK and EU businesses will possibly have to switch to costlier alternatives such as standard contractual clauses to transfer data across the Channel.
Tariffs and Quotas
Why do tariffs and quotas matter?
Small technology companies and app developers must be able to take full advantage of the internet’s global nature. The ‘tolling’ of data crossing political borders by using tools like tariffs and quotas to collect customs duties, however, directly contributes to the fragmentation of the internet. These practices jeopardise the efficiency of the internet and effectively block innovative products and services from market entry.
What’s in the deal?
Goods traded between the UK and the EU can be exchanged without any tariffs or quotas under the UK-EU TCA. No goods crossing the border between the two markets will face any charges or quantity limits. While this is mostly good news, the TCA does not remove new non-tariff trade barriers. These include additional regulatory processes and paperwork that may be overly burdensome especially for small businesses.
Digital Trade
Why does digital trade matter?
Ensuring that digital goods can be exported and imported seamlessly expands free trade overall. Policies like data localisation and market entry that is contingent on the transfer of source code, for example, represent digital trade barriers. Such policies seriously hinder imports and exports and thus reduce business opportunities and an economy’s overall international competitiveness.
What’s in the deal?
In an unprecedented step, the EU agreed to a full digital trade chapter in the Brexit agreement. The digital trade chapter bans data localization and the disclosure of source code as a prerequisite of doing business. The agreement also gives equal treatment to electronic signatures and electronic documents for the majority of services and allows for the provision of digital services without prior authorization. Lastly, the chapter includes obligations for businesses to protect consumers and their data to the highest standard. The UK and EU can cooperate or individually take steps against breaches of privacy or consumer rights laws. Having a digital trade chapter included in the deal is a win for the tech sector. Nonetheless, having to comply with possibly diverging EU and UK regulations may prove difficult for smaller businesses. Additionally, the deal does not include a comprehensive agreement on financial services, which is likely to be a topic of discussion in the coming months. For fintech companies, this means they will be subject to unilateral assessments by the UK and EU under the ‘Financial Equivalence Framework’.
Intellectual Property
Why does intellectual property matter?
The infringement and theft of intellectual property and trade secrets threaten the success of app developers and hurts consumers who rely on app-based digital products and services. Intellectual property violations can lead to customer data loss, interruption of service, revenue loss, and reputational damage. Strong protection of intellectual property for copyrights, patents, trademarks, and trade secrets is therefore essential.
What’s in the deal?
The TCA establishes common standards of intellectual property protection with which both parties will continue to comply. This includes high standards of protection for IP rights, including resale rights, that largely reflect existing law and international obligations under the WTO TRIPS Agreement and WIPO treaties. The immediate impact on IP rights holders in the UK or the EU will likely be limited.
What happens next?
Although the British Parliament and the 27 EU Member States approved the TCA, the European Parliament’s approval is required for the agreement to fully enter into force. The Parliament now has time to review the agreement and expects to vote on it by the end of 2021. In the meantime, the UK and the EU will have to adopt mutual ‘adequacy decisions’ to allow for the continued free flow of data. These adequacy decisions must be reached within the next six months before the temporary workaround agreed to in the TCA expires.