BREXIT: AN UNCERTAIN FUTURE AND ITS IMPACT ON BUSINESS?

In a result that surprised many businesses and observers, on 23 June 2016, the UK voted to leave the European Union in a referendum by 52% to 48%, and in doing so becoming the first ever member to leave the ever-expanding European Union of states. The UK has entered unchartered territory. It is impossible to predicate what the future holds, particularly given the UK government has chosen to not yet give the required legal notice under Article 50 of the Europe Treaty to formally begin the exit negotiating process. However, some models have been put forward as alternatives to a UK membership of the EU. This article, the first of several, summarises the main alternatives and addresses some of the key issues which businesses should consider during this period of huge uncertainty. 

BREXIT: AN UNCERTAIN FUTURE AND ITS IMPACT ON BUSINESS?

In a result that surprised many businesses and observers, on 23 June 2016, the UK voted to leave the European Union in a referendum by 52% to 48%, and in doing so becoming the first ever member to leave the ever-expanding European Union of states. The UK has entered unchartered territory. It is impossible to predicate what the future holds, particularly given the UK government has chosen to not yet give the required legal notice under Article 50 of the Europe Treaty to formally begin the exit negotiating process. However, some models have been put forward as alternatives to a UK membership of the EU. This article, the first of several, summarises the main alternatives and addresses some of the key issues which businesses should consider during this period of huge uncertainty. 

The potential implication of Brexit depends on the UK’s relations with the EU post Brexit. Some of the most likely alternative models are listed below:

1.    EEA membership
Under this option the benefit of being a member of the European Economic Area (EEA) means the UK will still have access to the Single Market. However, the UK will still have to contribute a substantial amount to the EU budget and be subject to the free movement of people which are the very reasons many voted to leave.

2.    Swiss Model 
Switzerland’s access to the Single Market is facilitated by a large number of bilateral agreements with the EU. They cover free movement of goods and people but crucially not services. The UK would still have to contribute to the EU budget under the Swiss Model, albeit lower than that of EEA members. The main challenge will be to convince the EU to go down the Swiss route again, as the EU has already made clear it does not intend to agree to a ‘Swiss Model’ relationship with another country.  

3.    Customs Union
This model will allow for tariff-free trade of goods between the EU  while restricting the movement of people from the EU. However, the UK would have to adopt the same import duty tariff as the EU for goods imported from third (non EU) countries which will undoubtedly limit the access ability of the goods to EU wide markets and result in either increased prices of UK exports due to the imposition of EU tariffs and lower sales of EU goods in Europe. It will also limit the UK’s ability to negotiate separate and more favourable trade deals with other trade partners.  

4.    Free Trade Agreements
The UK could also negotiate a standalone trade agreement with the EU as Singapore and Canada have done. This agreement could be tailored to the needs of the UK. However, it is almost certain that the better access the UK wants to the Single Market the more EU rules it will have to comply with.  

5.    WTO
If it cannot reach any other agreement, the UK can trade with the EU relying on rules of the World Trade Organisation (WTO). The UK is already an individual member of the WTO though has been represented by the EU as a bloc of countries at the WTO. If the UK trades with the EU under the WTO framework, it will not be subject to EU law. Nor will free movement of people or contribution to the EU budget be required. However, not all sectors are open to foreign trades under the WTO rules and not all trades are tariff-free. UK exports to the EU will still have to comply with EU product requirements. 

It is of course possible that the UK will either opt for a membership of the Customs Union or choose to negotiate a standalone agreement with the EU. Any exit deal that does not curtail free movement of people will be unlikely to pacify the Brexiteers. Nor is the sole reliance on WTO rules sufficient to promote the UK’ trade interests with the EU. 

No matter which model the UK opts for, the withdrawal process is bound to be lengthy, complex and bring considerable uncertainty to business. Businesses which operate in the UK and across EU member states must take carefully into account some of the following changes: 

Key issues for businesses

1.    Labour
Nationals of EU member states may no longer be able to work in the UK without first obtaining a work permit. Businesses which employ EU nationals will have to factor such additional costs into their operation costs. Even if those who are already in the country were allowed to stay on, new recruits from EU countries would likely still be subject to visa requirements. The cost of labour will most likely increase. Conversely, the nationals working in other EU states are likely to lose the right to work there visa free.   

2.    Trade
If the UK opts out of the Customs Union, businesses which import from or export to the EU will lose the benefit of duty-free trade in goods and may become subject to quantitative restrictions. Tariff barriers and customs checks will be re-established. Goods moving between the UK and the EU are likely to be subject to increased administration and compliance procedures which will lead to increased cost and reduced efficiency for businesses operating in this sector.  

3.    Contracts 
Commercial contracts which contain geographical definitions referring to the European Union or depend on the continuing operation of certain EU legislations will need to be reviewed. Such contracts may become unenforceable post Brexit. Additional provisions should be put in place to protect the positions of the parties post Brexit.

4.    Tax 
The VAT Directive which harmonises the EU VAT framework amongst the member states and sets minimum rates may be abolished by the government post Brexit. The UK would be at liberty to set its own rates. However, the disapplication of other EU laws such as Parent-Subsidiary Directive, Interest and Royalties Directive, Merger Directive and Capital Duties Directive could result in UK companies paying higher taxes on European dividends, interest and royalties and increase costs for cross-border M&A activity and capital raising.    

Where now?

What is clear with the immediate resignation of Prime Minister David Cameron on 24 June and the current leadership battle for the conservative party, no UK leader is at present willing to formally serve the necessary Article 50 Notice to actually trigger the two year fixed period to allow the UK to leave the EU.

The Pro-Brexit result caught the UK government and the majority of large businesses off guard. The road ahead is uncertain and complex. The lack of a specific objective by the UK in what a post Brexit world should look like economically, legally and politically presents huge uncertainty for the legal and economic markets in which businesses active in the UK or through it, will now be. Whatever next businesses cannot go unprepared for the post Brexit landscape.

If you would like to discuss how this could affect your business, please contact Hassan Khan on +44 (0) 20 7612 2530.