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To leave or not to leave? That is one of the questions

by
01 May 2016, at 1:00am

Adam Bernstein looks at the various issues surrounding the Brexit campaign and how businesses may be affected by the decision and the subsequent negotiations.

IT IS EXTREMELY DIFFICULT TO PREDICT WHAT THE TRUE OUTCOME will be if the UK votes to leave the EU on 23rd June. If the “no vote” wins, it will not simply be a case of walking away from Europe – instead a lengthy and complex process of negotiation will begin.

Under Article 50 of the Lisbon Treaty the UK will have up to two years to negotiate an exit settlement and a number of commentators anticipate that it could take this long for any deal to be reached. It is the terms of the settlement and any new trade agreement between the UK and the remaining EU that will truly shape what the future holds.

It is generally agreed that there are five possible models for Brexit based upon four different existing relationships between Norway, Switzerland, Turkey and South Korea and the EU. The fifth model is the World Trade Organisation model. Whatever the deal, it will affect business. 

Employment

Lee Ashwood, an employment law solicitor at law rm Eversheds, says that European law has had quite an impact on employers who now have to give their workers paid holidays and time off to look after their sick children, cannot have their staff work unlimited hours or go without rest breaks, and cannot treat their workers or job applicants less favourably because of their sexual orientation, religious beliefs or age.

He notes: “Whether those restrictions on employers will disappear in the event of a Brexit will depend on the UK’s ongoing relationship with the EU and the political will of the UK’s government at the time.”

It is impossible to predict with any certainty what changes there would be if the UK were able to completely free itself of being subject to any EU influence on its employment laws.

Ashwood points out that, for example, it would require a very brave government to remove the right to paid holiday that is currently enshrined in UK law and to make it lawful to discriminate against some because they are, say, gay or a Muslim.

On the other hand, we could see changes to some laws that may follow Brexit. Here Ashwood looks to the current confusion over how to calculate holiday pay when someone earns commission or works overtime – “these issues could be eradicated by the UK deciding itself upon the calculation formula free of EU influence”.

And of course, there is also the issue of whether or not the UK would have to agree to continue to provide the unconditional right to work in the UK that Europeans have at the moment, but again this would be subject to the terms of the exit agreement.

Ashwood warns on this though: “Should the terms of Brexit prevent free movement of people, it could cause businesses who have previously looked to the wider EU to fill skills gaps in the UK difficulty in terms of recruitment due to requirements to overcome immigration restrictions.”

But overall, in the event of a Brexit, it seems highly unlikely that there will be any sudden radical change to UK employment law and certainly not in the near future.

Regulation

Moving on, there are clearly some areas of UK domestic legislation that will worry some in relation to Brexit. But David Roberts, a principal associate at Eversheds, says that in the short term there are unlikely to be any discernible changes to many of the areas of corporate regulation which have originated from Europe – “many EU directives will have already been implemented into domestic legislation such as those setting out requirements in respect of health and safety, for example”.

He also says that the legislation will not automatically fall away on Brexit, and it is questionable whether there is likely to be any appetite to repeal such laws which clearly set out high standards of practice.

“Further,” says Roberts, “even where EU legislation has a direct effect there is domestic legislation which creates a domestic enforcement framework.” Therefore, he suggests the UK may continue to rely upon existing EU legislation or its principles even if technically the directive’s effect falls away. 

But while we have existing laws based on past EU legislation, what of the future? Andy Bagnall, the CBI’s Director of Campaigns, says the UK has one of the most competitive regulatory environments in the developed world, “and currently has significant influence over standards, helping to design them instead of just accepting them. It is not clear how that would be affected outside of the European Union but we would certainly reduce our influence inside the EU by giving up our seats in the European Council and Parliament”.

Taxation and accounting

And what of tax? Paul Gilleran, a tax accountant at Roslyns, sees Brexit as possibly changing the way UK tax is administered. Take VAT for example: it’s an EU tax and a significant part of treasury annual tax income. Gilleran says there are speci c conditions on the rates that a member state must charge under EU law.

But for Gilleran, Brexit could help sales: “If the UK leaves the EU then the government could decide to abolish VAT. However, given the large revenue generated it would be replaced with a similar tax on the sale of goods and services.” He adds that taking the EU out of the equation may give the opportunity to have lower sales tax rates. 

Gilleran sees little change to corporation tax and income tax as they are not controlled by the EU. However, as the UK has many overseas investors it would need to remain competitive with the rate of corporation tax charged.

Overseas trading relationship

Trade is the bedrock of the EU and the terms of any trade agreements which the UK is able to negotiate with the remaining member states could be significant to all rms.

Any agreement would apply to all EU states and it would not be a case of separate deals being struck with individual members. Indeed, Bagnall reckons that if the UK’s relationship with the EU changed from full membership to something like that of Norway or Switzerland, UK businesses would face paperwork and costs they don’t currently have, through reporting of rules of origin and VAT.

“If the UK failed to secure a deal with the EU, relying on trade under World Trade Organisation rules, tariffs could be applied to imports and exports between the EU and UK.” 

Bagnall adds: “If the UK were to leave the EU, it may have to negotiate the trade agreements it has with over 50 countries again from scratch which is likely to be time-consuming and unlikely to yield better terms than what we currently have through the EU.”

All of this means that firms could in theory see the price of goods increase. In contrast UK exporters may struggle to export their products to the EU marketplace.

It’s entirely possible that depending on the trade agreements we enter into with other countries around the world it may then be the case that the UK finds itself importing products from other nations outside of the EU on more favourable trading terms.

But while trade agreements are one part of the story, so the effect of Brexit on currency is another. David Johnson, director of Halo Financial, thinks there is a real risk to currency: “If you were a hedge fund or investment manager and you had the option over the next three months to push funds into the uncertainty of the pound or elsewhere, my guess is that you would seek more certainty and less risk.”

Further uncertainty and sterling may well slip to the bottom of its long term range against the euro. That, says Johnson, would take it to somewhere between €1.15 and €1.20. Against the US dollar, sterling is caught in a range between $1.40 and $1.45.

In summary

Ultimately, the sterling-euro rate isn’t a one-way bet even if the polls move towards Brexit and there will follow volatile trading conditions in the pre- and post-referendum periods.

For businesses, however, the cost of imported products could change wildly, making razor-thin margins more problematic. One thing is clear: a separation will not be an easy process of negotiation and will take a considerable period of time to resolve.