Grant Strachan : Market uncertainty is a taste of things to come

Grant Strachan is an associate in Brodies’ commercial services division with a specialist focus on food law

At present, no less than two thirds of Scottish food produce is exported to EU member states and, when whisky and other drink exports are added in, the current value is some £2.5bn a year from a UK total of £23bn.

Inevitably, then, there is concern about what a potential no-deal Brexit on 31 October would mean. The industry in Scotland is planning to grow to an overall value of £30bn by 2030.

This is considered ambitious but realistic, though safeguarding Scotland’s trading relationship with the EU is likely to play an important part in achieving it. “A no-deal Brexit is not supported by the food and drink industry,” says Grant Strachan, a Senior Associate at law firm Brodies. “If this does materialise, there will be a considerable impact on the food and drink sector.

“There is a lot of work going on in the background, the EU is a very important market for the sector in Scotland, though the US and Asia are significant too.”

One of the biggest issues in the event of no-deal, Strachan adds, is that of food labelling and standards. “UK food businesses exporting to the EU will need to have what is known as a responsible operator based in an EU member state, whose role will be to verify that food labelling information complies with EU law. “The concept of a responsible operator is an EU regulatory requirement. It requires that a food business operator placing a product on the EU market must have a responsible operator in an EU member state or, alternatively, the FBO must have access to an EU importer.

“Post-Brexit, unless there is a transition period, a UK address will no longer be valid for sales within the single market. But at present, a small Scottish company is unlikely to have an address in another member state. So they will have to either set up a new EU company, use an existing EU distributor as the responsible operator, or engage a standalone EU-based importer. Any of these options would likely lead to increased compliance costs.”

EU products coming into the UK will still be identified as of EU origin, but as the UK will become a ‘third country’ whose goods are no longer assumed to comply with the harmonised single market framework, UK products will no longer be able to be labelled as EU origin.

Another big issue is likely to surround tariffs. The UK has said that it wants to continue tariff-free arrangements with countries currently covered by EU free trade agreements, but negotiations with at least some of these countries are proving difficult, with many discussions off-track or deals not considered possible.

“The default position is that in the absence of a free trade agreement, we will revert to World Trade Organisation (WTO) rules. So UK exports to the EU would be subject to the EU’s standard tariffs on third country goods, and that will hit some products more than others”, says Strachan. “It’s true that a weaker pound will help food and drink exports stay competitive, but sub-sectors like fishing and agriculture are subject to some of the highest tariffs so will be significantly impacted, and that is going to make our products less appealing to EU consumers.”

It is also important to remember that currency fluctuation works both ways: if Sterling is weak against the Euro that may boost our exports, but at the same time it makes imports of raw materials, including food products that simply cannot grow in our climate, more expensive. However, the UK Government is proposing to reduce or remove the existing EU tariffs on many such products, which could open up new and potentially cheaper sources of supply from non-EU countries.

Yet another consideration for the sector is that of time to market. Much of Scotland’s reputation for quality food and drink comes from the fact that its products are pure and fresh, which means being available to consumers quickly.

This is particularly true of our fish and seafood, which can command premium prices in Europe. However, the delays at ports predicted in the event of a no-deal Brexit could damage this advantage. “At the moment, scallop pickers in skye can get their produce to Dover in 12 to 18 hours,” says Strachan. “But if there are delays at the border, and produce has to be frozen instead, that naturally impacts the price.

“That would hit margins. For small producers, ease of transit is incredibly valuable in protecting these. Having to freeze fish and seafood could increase costs and push down prices, which would detrimentally impact local producers.”

So what can Scotland’s food and drink producers do to protect themselves?

The lack of clarity over an eventual Brexit settlement – if any – is a real impediment to an industry which, like others in Scotland, needs certainty in order to service its markets. It also has to deal with supply chains that can be incredibly complex. “We are really encouraging companies to properly evaluate these and to understand them,” adds Strachan.

“If UK companies do export to the EU, then they should proactively assess the tangible steps that can be taken now to ensure continued market access – revisit product labels, assess the viability of creating an EU hub or look to engage existing distributors or standalone importers to act as a responsible EU operator.” He adds: “These are all solid, practical measures that can be looked at now. Food and drink producers should also reflect on the potential for new market opportunities.

“Some of the real success stories in Scottish food and drink are already outside the EU. Producers must first take practical steps to understand the nuanced regulatory, legal and commercial opportunities (and pitfalls) that may exist in these new markets. “Nevertheless, maximising export opportunities is a vital ingredient in ensuring the continued success of the food and drink sector and it is vital that market incentives are created that will enable UK producers to benefit from opportunities

Scottish companies may face major changes to legislation.

LIKE many sectors, the food and drink industry is heavily shaped by EU law. Much of the legislation applying to food and drink comes from the EU, either in the form of directly-effective EU regulations or via directives that have been given effect by ‘domestic’ UK legislation.

This includes rules on labelling, country of origin, food safety and additives and the making of health and nutrition claims. Labelling laws are intended to protect consumers and form a critical component of the regulatory framework in the food and drink sector.

At present, food law is shaped by the EU, which governs the provision of information on all the products sold within the 28 member states.

In the event of a no-deal Brexit, the UK would immediately become a ‘third country’ sitting outside the harmonised EU regulatory framework. Consequently, UK companies who were seeking to obtain (or maintain) EU market access would face new compliance obligations in order to demonstrate alignment with the EU regulatory framework.

The responsible Whitehall department, DEFRA, has published updated guidance outlining a proposed 21-month transition period for certain food products sold in the UK after Brexit date. Currently, the DEFRA proposals are not legally binding and they still have to be approved by the UK’s devolved administrations, which retain competence in this area.

At present, the European Commission has not committed to reciprocal arrangements for UK products, so following Brexit UK exporters to the EU would need to make certain labelling changes and demonstrate compliance with EU law in order to continue to sell their products in the EU.

Under EU law, the Food Business Organisation (“FBO”) – is the person responsible for providing the necessary food information and under whose name a product is marketed.

In order to ensure continued EU market access in the event of a no-deal Brexit, a UK FBO will have to either be linked to a responsible operator based in an EU member state or have access to an EU-based importer.

A UK address alone will no longer be valid for access to the European single market. So UK companies displaying a UK and an EU address on their labels will be able to access both markets.

However, UK businesses without an established operation in the EU will have to either: (i) set up an EU hub; (ii) engage an existing EU distributor to also act as the EU importer; or (iii) appoint a standalone EU importer.  Deploying options (ii) or (iii) would mean that the EU distributor or importer will take on responsibility for labelling compliance within the single market, so they would be likely to seek contractual protection such as warranties and indemnification, which ultimately may increase costs for UK FBOs.

As such, implementation of an appropriate contractual framework and a clear delineation of roles and responsibilities between the UK FBO and the appointed distributor / importer will be critical.

The EU regulatory framework is complex and the position is, of course, liable to change if the UK strikes a Brexit deal with the EU.

New approaches to immigration.

UK food and drink businesses have benefitted from the ability to access the EU labour market easily without any restrictions. In the event of the UK leaving the EU with a deal, the UK’s Settlement Scheme would apply to EU, EEA and Swiss nationals coming to the UK during the implementation period (currently expected to end on 31 December 2020).

The food and drink industry would continue to have free access to the European labour market until at least that date and new workers coming to the UK would have the opportunity to make the UK their home.

However, in a ‘no-deal’ scenario the Settlement Scheme would not apply to anyone entering the UK after Brexit.

Currently, it is anticipated that EU, EEA and Swiss citizens would still be able to arrive at the UK border without prior authorisation until 31 December 2020 (although the UK Government has recently indicated that a new ‘criminality threshold’ will apply).

EU citizens who wish to stay beyond 2020 would have to apply under the European Temporary Leave to Remain Scheme (Euro TLR). Leave granted under this scheme would be for a maximum of 36 months, meaning workers could stay beyond 31 December 2020 but they would need to leave the UK at the end of that period unless they were eligible for some other visa.

The food and drink industry would therefore continue to have access to the EU labour market, but on a more restrictive and potentially more shortterm basis.

The future immigration system intended to apply from 1 January 2021 is currently subject to consultation, but it is not anticipated that lower skilled roles will be eligible for sponsorship when it comes into force. The food and drink sector may therefore have to rely on temporary leave schemes to fill lower skilled roles in the future.

The recent UK Government announcement that some international students will be able to apply for a two year post study work visa in the future is likely to be welcomed by businesses as an additional source of labour.

However, this new route will be introduced for the 2020/2021 intake of students to universities so is not an immediate solution to any labour shortages.

Even if there is a Brexit deal, the new ‘single skills system’ would formally bring an end to EU migration as we know it. While the new system is expected to cover both medium and high skilled roles, it is likely to work in a broadly similar way to the current points-based system.

The Government has also announced that it intends to open a low-skilled visa category. This will provide visas for low-skilled work for a maximum of 12 months only – after which the worker will have to leave the UK and will be unable to return for another 12 months.

Brodies can offer further guidance and advice if required. For more information you can visit www.brodies.com