40.This chapter focuses on the terms that will underpin future access to the EU market for UK professional and business services firms: in particular, the ability to provide services to the EU as a UK entity on a cross-border basis (known in WTO terms as ‘mode one’).
41.The ability to sell services on a cross-border basis is of significant importance to UK professional and business service companies. In their joint submission, Professor Jun Du, Dr Oleksandr Shepotylo, Dr Mustapha Douch and Uzoamaka Nduka noted that all UK trade in professional and business services involves an element of cross-border supply. This seems to be particularly true of smaller operators. REC noted that, of all the SMEs that constitute the “overwhelming majority” of UK recruitment firms, “most have been conducting business within the EU without establishing an office [in the EU]”. According to RIBA, the same applies to smaller architectural practices and, according to the Bar Council, to members of the independent Bar.
42.The Minister, Nadhim Zahawi MP, told us on 16 July 2020 that barriers to UK-EU services trade would largely affect regulated industries:
“Any additional EU restrictions on cross-border supply of services from third countries are likely to be limited to highly regulated industries. What does that mean? It means that not heavily regulated sectors, such as management consultancy and computing services, are unlikely to face such barriers.”
43.Sam Lowe agreed that regulated sectors were affected more than non-regulated activities, but qualified this by saying that “as a rule of thumb” the EU “makes cross-border trade” from outside the Single Market “quite difficult”. Other evidence also suggested a nuanced picture, with barriers to cross-border supply also being a risk to non-regulated industries.
44.As we have noted, some barriers to cross-border supply at the Member State level are entrenched through national reservations for existing and future measures, and we heard general concern that a future UK-EU agreement might contain such reservations, which Sally Jones described as “pretty catastrophic” for professional and business services. The following paragraphs provide more detail on such barriers to cross-border supply.
45.National reservations that place requirements on local presence generally tie market access to residency or the existence of a commercial presence in a Member State’s territory.
46.Sam Lowe told us, for example, that most EU Member States—including Austria, France, Germany and Ireland—”make commercial presence or establishment a condition of access” for third country lawyers. Simon Davis warned against any reservations to a future UK-EU agreement that might allow Member States to require the “physical presence of foreign lawyers on a temporary or permanent basis”, as well as “nationality requirements” and “some residency qualifications”.
47.Helen Brennan, Director, KPMG UK, told us that some Member States “have a reservation requiring an establishment to provide accountancy and bookkeeping services”. While this may not affect large entities such as KPMG, it could be “more of an issue for small and medium-sized firms that are not part” of a network of professional firms.
48.The potential for local presence requirements also appears to be a concern for some non-regulated industries. The Advertising Association feared that, after the transition period, advertising production professionals could become subject to residency requirements in some Member States. The Scottish Government drew attention to the reservations on real estate services under CETA, which allow Denmark, Portugal, Slovenia and Cyprus to require “EU Member State/[European Economic Area] residency approval … to practice as a real estate agent”. Universities UK shared a telling example of how loss of EU/European Economic Area (EEA) residency was already affecting UK providers of transnational education services:
“The University of Roehampton and University of Derby accredit degrees taught at the EU Business School in Munich, Bavaria. In a letter dated 30 November 2019, the Bavarian State Ministry for Education, Science, Culture and Arts (Germany) stated that … when EU legislation no longer applies, the Bavarian State Ministry intends to revoke the decision declaring that the British universities are entitled to carry out study programmes in Bavaria as one of the requirements of the decision is no longer met (in this case: the place of business of the university in question is not in an EU or EEA member state).”
49.Similar provisions apply to the Audio Visual sector under the Audio Visual Media Services Directive (2010/13/EU), which sets residency requirements for audio-visual material. Such material includes traditional television services (referred to as ‘linear’) and on-demand (‘non-linear’) TV services. We wrote to the Secretary of State for Culture, Media and Sport on 3 August 2020 to highlight the impact that these residency requirements could have on the UK’s leading audio-visual sector (see paragraph 112 for further information).
50.Economic needs tests place requirements limiting the use of third country service providers (or personnel) to situations where the specific demand cannot be met domestically. They are not defined in the WTO GATS.
51.Economic needs tests can create significant barriers to trade, and witnesses were clear that they were among the barriers that a future UK-EU agreement should seek to avoid. The Chartered Institute of Public Relations (CIPR) explained that such tests were not easily satisfied: “It may be hard for a German client to show that, for example, a UK-based PR firm is best placed to handle a particular business for them, rather than a German one.” The Advertising Association added that “SMEs may find dealing with economic needs tests … more difficult than larger firms”.
52.We asked witnesses about the importance of retained access to EU public procurement markets on a cross-border basis. Paul Bainsfair, Director General, Institute of Practitioners in Advertising, told us that public procurement contracts in areas such as “tourism, inward investment, education, promotion of government” represented “a lot of business” for the UK advertising industry. Simon Conington, Managing Director, BPS World, agreed that “any barriers on public procurement with the EU” would be a concern for larger and more international players in the UK recruitment sector.
53.A different picture emerged for other professional and business services sectors. Andrew Forth explained that, while there was “significant investment” by UK architectural practices in big EU projects such as art galleries, museums, rail stations and airports, many procurement contracts were “not big enough to merit cross border if you are not already in that country”. Martin Darbyshire, Chief Executive Officer of design firm tangerine, added that one of the reasons why most UK designers do not bid for “large publicly pitched projects” was that “doing so is incredibly complex and the cost of sale way outweighs the benefits that we get from working on them”.
54.In the absence of a bespoke UK-EU agreement, access by UK service providers to EU public procurement contracts will come under the terms of the WTO Agreement on Government Procurement (GPA). After the end of the transition period, the Government intends to join the GPA as an independent signatory, with its own schedules of commitments.
55.Views differed on whether the GPA would meet the requirements of the UK’s professional and business services sectors. Andrew Forth felt that the GPA would provide adequate coverage for UK architectural firms, but was concerned that it would have less bite than a bespoke “agreement that commits both the UK and the EU to playing fairly on procurement”.
56.The draft future relationship legal texts published by the Government and Commission both contain provisions on the cross-border supply of services. They set out commitments on market access, including an undertaking not to impose limitations on the number of service suppliers or service operations, for example through economic needs tests. They also include an article on national treatment that would commit both Parties to treat service providers from the other Party no less favourably than local providers.
57.Unlike the Commission, the Government is also proposing that the Parties should explicitly commit to prohibiting any arrangements which make market access by the other Party’s service providers conditional upon residency or the establishment of a commercial presence. The Minister told us that this proposal was intended “to mitigate any pull towards establishment in the EU generally”.
58.On the face of it, the Government’s draft provisions appear to address our witnesses’ concerns regarding national reservations. We are, though, mindful of Sally Jones’ warning that, until the Parties’ reservations on cross-border supply and other modes of supply are disclosed, it is “very difficult to understand exactly where in the detail the devil might reside”. The Minister told us on 16 July 2020 that there had been “initial discussions” between UK and EU negotiators “on respective levels of ambition on schedules with the EU”. Chris Hobley, Director for Trade and Investment Services at BEIS, added that the Government and Commission would have to “conclude [negotiations across chapters] in short order to move into negotiations on the schedule and the reservation”.
59.We note that, in line with the Council’s negotiating directives of 25 February 2020, the Commission is proposing the exclusion of audio-visual services from the scope of any future UK-EU agreement—which could leave the sector particularly vulnerable. Professor Sarah Hall, Senior Fellow, UK in a Changing Europe, told us that this was a common feature of EU trade agreements.
60.While the EU’s negotiating directives of 25 February 2020 propose that any future UK-EU agreement should build on the Parties’ commitments under the GPA, neither the Government’s Command Paper The Future Relationship with the EU: The UK’s Approach to Negotiations nor its draft legal text make reference to public procurement. The Minister said that the Government had “decided against negotiating a chapter on public procurement for the future UK-EU relationship”, arguing that the UK’s accession to the GPA would “provide UK and the EU suppliers with that certainty required to continue to bid for public contracts in key areas of procurement”.
61.Future UK-EU arrangements for the cross-border supply of services will significantly affect the UK’s professional and business service sector, particularly smaller operators, who may not to have a commercial presence in the EU.
62.Through national reservations, EU Member States can impose various regulatory barriers to cross-border imports of professional and business services from non-EU/EEA countries at a national level. These include economic needs tests requiring some proof that demand cannot be met by existing local providers, and requirements making market access conditional upon local presence.
63.We are concerned that barriers to the provision of services on a cross-border basis could lead to a drift of economic activity away from the UK. Given that it is possible to move the delivery of services overseas, this drift of activity could have a detrimental effect on the UK’s professional and business services sectors in the long term. While this will apply to firms both large and small, we are particularly concerned that requirements of this type could place a disproportionate burden on UK SMEs.
64.To mitigate these risks, a UK-EU agreement should contain robust commitments on cross-border supply, addressing the full range of potential barriers. We welcome the Government’s proposal that the UK and EU should explicitly commit not to tie market access to local establishment or residency, and urge the Government to press for inclusion of such a commitment in an agreement with the EU.
65.Although the UK and EU draft legal texts are broadly aligned on cross-border supply of services, there is little room for complacency until clarity emerges on any national reservations to a UK-EU agreement. The example of the EU’s trade agreement with Canada shows that these reservations can be wide-ranging and affect a number of professional and business services sectors.
66.When we spoke to the Minister on 16 July 2020, there had been little UK-EU discussion on potential national reservations. This is a source of serious concern. The Government should publish comprehensive explanatory material on any national reservations on services attached to the agreement to enable proper parliamentary scrutiny and give professional and business service providers—in particular SMEs—clear guidance on the position across Member States.
67.The Government should continue to engage with the EU and individual Member States to reduce, and if possible, remove any barriers to cross-border supply through national reservations to the agreement.
68.The Government has not sought bespoke UK-EU arrangements on public procurement. The Minister was confident that the EU’s schedules of commitments under the WTO GPA would give UK professional and business service providers sufficient access to Member States’ public procurement markets. However, we received evidence that this might not be the case in all sectors. We urge the Government to work with like-minded signatories to the WTO GPA to broaden the scope of the agreement.
56 Written evidence from Professor Jun Du, Dr Oleksandr Shepotylo, Dr Mustapha Douch and Uzoamaka Nduka, Aston University ()
57 Written evidence from REC ()
58 Written evidence from RIBA ()
59 Written evidence from the Bar Council ()
66 Written evidence from the Advertising Association ()
67 Written evidence from the Scottish Government ()
68 Written evidence from Universities UK ()
69 For further information see European Union Committee, (18th Report, Session 2016–17, HL Paper 135).
70 World Trade Organization, Council for Trade in Services Special Session: Economic Needs Tests, (30 November 2001): [accessed 25 August 2020)
71 Written evidence from the PBSC (the Advertising Association (), the Law Society of England and Wales (), Universities UK (), TheCityUK () and the CIPR ()
72 Written evidence from CIPR ()
73 Written evidence from the Advertising Association ()
78 World Trade Organization, ‘Agreement on Government Procurement 2020’: [accessed 26 August 2020]. The GPA, together with its predecessor 1994 Agreement on Government Procurement, was laid before Parliament on 18 February 2019 for scrutiny under the Constitutional Reform and Governance Act (CRAG) 2010. We considered both agreements on 12 March 2019 and reported them for information: European Union Committee, (33rd Report, Session 2017–19, HL Paper 315).
80 HM Government, Task Force for Relations with the United Kingdom, Draft working text for a comprehensive Free Trade Agreement between the United Kingdom and the European Union, 18 March 2020, Chapter 9: [accessed 26 August 2020] and European Commission, Task Force for Relations with the United Kingdom, Draft text of the Agreement on the New Partnership with the United Kingdom, Chapter 3, Title VI, Part 2 (18 March 2020): [accessed 26 August 2020]
81 HM Government, Task Force for Relations with the United Kingdom, Draft working text for a comprehensive Free Trade Agreement between the United Kingdom and the European Union, Chapter 9, Article 9.5: [accessed 26 August 2020] and European Commission, Task Force for Relations with the United Kingdom, Draft text of the Agreement on the New Partnership with the United Kingdom, Article SERVIN-3.3: (18 March 2020): [accessed 26 August 2020]
86 See para 18 of the Council of the European Union’s negotiating directives, Annex to Council decision authorising the opening of negotiations with the United Kingdom of Great Britain and Northern Ireland for a new partnership agreement, , 25 February 2020.
87 Written evidence from Professor Sarah Hall and Martin Heneghan, University of Nottingham ()
88 Council of the European Union, Annex to Council Decision authorising the opening of negotiations with the United Kingdom of Great Britain and Northern Ireland for a new partnership agreement, , 25 February 2020
89 HM Government, The Future Relationship with the EU: the UK’s Approach to Negotiations, CP 211, February 2020: [accessed 26 August 2020], and HM Government, Task Force for Relations with the United Kingdom, Draft working text for a comprehensive Free Trade Agreement between the United Kingdom and the European Union, (18 March 2020): [accessed 26 August 2020]
91 See paragraph 10 for a definition of SMEs.