Brexit Countdown

BREXIT, THE COUNTDOWN IS ON…

Brexit and Immigration If the referendum result came as a bombshell for much of the UK, spare a thought for the EU nationals living here. Protests from all corners of society led to the Government reassuring those nationals and agreeing the EU Settlement Scheme.

With less than six months to go until we leave the EU we believe Brexit isn’t all about black and white outcomes. Come rain or shine, the world will keep turning when the UK leaves.

In this feature we get commentary from the Head of Economics for HSBC UK Commercial Banking, a business owner and from Interleges members, our alliance of international law firms. We also run through what we think are the main issues facing some of the sectors the media haven’t really highlighted yet.

The EU Settlement Scheme allows for those nationals and their family members who have resided in the UK for a continuous period of at least five years to be granted Settled Status. This gives them indefinite leave to live and work in the UK. Those nationals who have resided in the UK for a period of less than five years but would otherwise be eligible for Settled Status can apply for Pre Settled Status, allowing them to complete the five year continuous residence period and apply for Settled Status.

During the transition period between 29th March 2019 and 31st December 2020, EU nationals and their family retain free movements and can apply under the Settlement Scheme.

What we do know is that investors and companies don’t like uncertainty. As news flow comes and goes, there could be big shifts in sentiment and swings in market confidence. As things keep changing, it makes it even more difficult to invest based on any particular outcome.

The outcome should become clearer as we approach the deadline though and markets are generally quick to factor things into share prices. So unpredictability could ease as we get closer to the final curtain call. Whatever Brexit entails, don’t let it derail your plans. There will undoubtedly be factors you can’t control, but we think its important to focus on what you can. This will give you the best opportunity to grow in the future.

Helen Murphie, Immigration Partner Royds Withy King

Brief overview of the facts 3.8 million nationals from the EU live in the UK (approximately 6% of the population) 2.3 million of those are in UK employment The EU population in the UK has gone up by 240,000 in the last 12 months

Ultimately both businesses and individuals need to keep reviewing their circumstances to minimise their risks and maximise the opportunities Brexit may present for them.

There has not been a feared Brexodus - although slightly more EU migrants left the UK after the referendum than in previous years

Claus Andersen, Head of Brexit Royds Withy King

EU Settlement Scheme Advantages

Disadvantages

Individuals can apply online for Settled Status at a cost of £65 Continuous qualifying residence during the five year period is defined as “no absences for more than six months in any 12 month period” Children aged under 21 of EU nationals who either have Settled Status or are applying at the same time will be eligible regardless of the five year criteria Parents of EU nationals no longer have to show that they are dependent on the EU national The Home Office will assist people who make mistakes on their application forms

The simple The simplest scenario for business would be that the UK retains all its access to the Single Market with some restriction on the free movement of labour.

Negligible change to the way business is conducted.

No present clarity for either EU nationals or businesses regarding EU nationals who want to come to UK after December 2020 EU nationals with Permanent Residence must obtain Settled Status Those with Indefinite Leave to Remain will most likely have to obtain Settled Status to benefit from the new rules if they wish to live abroad for any length of time and not lose status in the UK The Home Office is currently under resourced to deal with applications

The complex

The moderate A new free trade agreement is negotiated between the UK and the EU, restricting free movement of labour and access to the Single Market.

No tariffs but border-controlled movement of goods with EU.

The UK enters into extended negotiations resulting in the UK reverting to the WTO standard tariffs applicable to any other nation trading with the EU.

Tariffs, customs, border complexity and everything in between.

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The final stage of the Brexit negotiations got underway in April.

But a successful outcome is not guaranteed. Even if the UK government can agree terms with the EU it’s still possible that the House of Commons might take a different view on the postBrexit relationship.

Any commentary on the process or mechanics of Brexit is therefore likely to be quickly overtaken by events. So this piece seeks instead to take a longer-term perspective on the prospects for the UK economy once the Brexit process is complete – whenever that may be.

The economic challenge posed by the UK’s departure from the EU is that doing business with the remaining 27 members is bound to become more costly. Meanwhile, building new relationships with other countries will take time and may never offset the reduced access to the EU’s Single Market.

Yet the process of leaving the EU isn’t suddenly going to turn what has been a relatively strong economy into a weak one.

Membership of the EU has brought undoubted advantages to many businesses by allowing them to take advantage of the economies of scale that are made possible by access to the Single Market. But the wide range of economic performance between EU members at a similar stage of economic development (e.g. Germany and Spain vs. France and Italy) suggests that other factors are at least as important in determining growth and prosperity. Among these are demographics (including migration), labour market flexibility, the burden of regulation and corporate tax regimes.

In this respect the UK is starting out from a position of relative strength. Over the past 25 years it has been a consistent outperformer among its peer group of western European EU members, with GDP growth averaging 2.2% a year against 1.6%.

So even if the pace of growth slows in the years after Brexit – and that is not a forgone conclusion – it’s still quite possible that the UK will be still be outpacing most of its close neighbours. Much will depend not just on how successful British governments are in concluding trade agreements with non-EU countries, but whether the UK is able to retain its relative strength in other areas.

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Of particular importance will be the availability of labour. In any economy which is operating at full capacity (as the UK now is), the key determinants of economic performance are growth of productivity and the expansion of the supply of labour. In recent years, the UK has been able to offset its poor productivity record thanks to a birth rate that is high by European standards and its ability to attract migrant workers.

The level of net migration has already fallen since the EU referendum, with the figure being around 240,000 in 2017 compared with over 320,000 in 2015. This may be a temporary phenomenon, and in any case could be offset by higher productivity. But, if productivity growth doesn’t pick up, and if the UK is less attractive to migrant labour after Brexit, then the pace of economic growth would inevitably slow.

Were net migration to fall to zero, for instance, then GDP annual growth would be around 0.3 percentage points lower compared with the immediate pre-referendum period.

The process of leaving the EU could well be difficult, and possibly disruptive. But once the dust has settled the key concern for businesses will be the availability of labour. If workers are harder to come by, whether from domestic or overseas sources, then firms will have to grapple with the dilemma of whether to pay more, or whether to replace people with machines, a process that is easier in some sectors than in others. Meanwhile, the challenge for the government is not only to fashion a new trade policy, but also to ensure that the UK’s long-standing sources of economic strength are not sacrificed.

Mark Berrisford Smith Head of Economics for HSBC UK Commercial Banking

Life sciences •

Uncertainty about R&D funding

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Clinical trials may become more costly

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Slower authorisation of new medication

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Uncertainty regarding IP rights will result in increased administration burden

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Mainland Europe could become more attractive for new market entrants

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Highly educated foreign employees may turn to companies based outside the UK

Retail

Health and social care •

Slowdown in the housing market making risk-averse elderly sellers delay selling to move to a care home

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As a result, could lead to lower fees for care providers and higher demand for domiciliary care

Stopping freedom of movement for people limits access to EU staff

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Leaving Euratom means hospitals may run short of supplies to treat cancer patients

Possibility of tariffs, changes to customs regulations and a shortage of labour all threaten to raise costs for retailers driving prices up

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Staff shortages driving up wages in the sector

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The shape of the supply chain will change and logistics contracts may need reviewing

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Measures required to retain both EU and non-EU staff to mitigate the impact of Brexit

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Future rules on the right of EU staff to work in the UK

UK consumer spending down as confidence slips and real wage growth lags behind inflation in an uncertain economic climate (esp ‘big ticket’ items)

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Potential disruption to supply of medicines

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Loss of EU funding for medical R&D

Consumers will become increasingly price-sensitive which will be a boost for online price comparison services and e-commerce

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New arrangements required for reciproal healthcare between UK and EU

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Warehousing in demand as food retailers look to stockpile food (frozen warehousing is at 90% capacity already)

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Weaker pound driving EU consumers’ spending with UK online retailers

Leisure and hospitality

Start-ups •

Divergence from EU IP and copyright rules making enforcement of IP rights more difficult

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Future rules on the right of EU staff to work in the UK

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Payroll costs, on average, account for 32% of total hotel revenues in the UK – any increase in this cost resulting from an induced shortage of skills and tighter labour market would directly impact hotel profitability and investor returns

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Provider/supplier relationships may need revision due to restriction on movement of goods and services

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Brexit will close the doors for talented engineers and scientists the key asset for tech companies

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Decline in outbound travel

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Funding: the European Investment Bank has slashed deals with UK VCs and private equity groups by more than two-thirds, with no equivalent funding from the UK government in sight

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Weaker pound could lead to an increase in the cost of imported items, potentially leading to higher production costs for businesses and tighter profit margins

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Leaving the EU’s Digital Single Market will drive up start-up costs

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UK companies could face pressure to move EU data to European datacentres

Weaker pound making UK a more attractive destination for EU holidaymakers

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UK start-ups will be more expensive after Brexit

Property

Charities and not for profit

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Supply chain: access to materials and products for construction projects

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Loss of EU funding could lead to consolidation to best utilise available funding after Brexit

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Access to people (currently 9% of construction sector workforce are EU nationals)

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Uncertainty leading to subdued investment with the sector unwilling to commit to long-term projects or contracts

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Cheaper pound making UK attractive as it becomes cheap compared to other European markets

The Charity Finance Group has said that a ‘clean’ Brexit, which sees the UK leave the Single Market and the customs union, poses less risk for charities than other options because it gives the Government the flexibility to reform tax rules that have been holding back the sector

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Brexit – The Point of View of an Irish Lawyer Paul Keane

“Brexit represents the single greatest economic and foreign policy challenge to the Irish state since the Second World War. There is hardly any area of Irish life that will not be affected.”1 Since gaining our independence in the 1920s, we remained tied economically to the UK market and currency. We joined the EU, with the UK, in 1972.

We were at that time one of the poorest countries in Europe.

The Good Friday Agreement in 1998 was created on the basis of the framework of the EU. The fact that vast areas of life were increasingly regulated by the same or similar EU rules facilitated the removal of the physical manifestation of a border.

Our relationship with the UK remains enormously important. A great part of goods exported to the continent from Ireland uses the UK as a land bridge.

Trade with the UK represents 14% (down from 50% in 1972) of our total output.

For certain sectors, the UK market remains extremely important, notably the agri-food industry, where 40% of production is exported to the UK. Brexit, whatever its form, will adversely affect us. However an abrupt Brexit, with no transition arrangements, would cause a severe shock to the Irish economy in the short term and cause a dampening effect on our growth in the medium term.

Minimisation of the impact on trade with Britain is thus a major priority of Irish foreign policy. This means getting a generous deal for the UK. However the overwhelming consensus of Irish public opinion is that our future is in the EU. Thus, Ireland has a long-term strategic interest in preserving the integrity of the EU. Member states of the European Union, including Britain, have deep experience of finding last-minute solutions to apparently irreconcilable positions. But there is deep concern that miscalculations of catastrophic significance could be made by either side.

The re-imposition of customs and regulatory procedures and inspections would impact on every aspect of Irish life. Much of the food in our supermarkets is distributed through the UK. A huge proportion of food products pass back and forth over the border before being finally processed and much of our energy needs come through the UK or are intertwined with the market in Northern Ireland.

Our instinct in legal and policy matters has been to look to the British position.

Our focus of attention now moves away from the UK to other like-minded countries such as the Netherlands or Sweden. We will need new allies and increase the resources we devote to EU and international relations.

Whatever form of Brexit ultimately emerges, our relationship with Britain will be greatly changed.

Views expressed by 6 EU ambassadors to Ireland

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Mark Summers - Managing Director Avon Valley Precision Engineering are a precision manufacturer for use in the Aerospace and Defence industry and a major supplier to AIRBUS (who issued an outspoken warning that the “severe negative consequences” of withdrawal from the EU could force it to leave Britain).

What’s your view on Brexit – positive or negative?

Mark Summers said: “We are still a long way from understanding the type of Brexit business has to plan for and this is a major cause for concern. When the large corporates state they are deferring UK investment or worst still actively looking to exit the UK, it impacts not only on their employees but also the sizeable UK supply chain that helps underpin their UK operations”.

“On a more positive note we are also beginning to see an upturn in enquiries from potential European customers keen to either establish or reinforce a UK supply chain presence.”

Are you making any specific post-Brexit plans?

AVPE is a privately owned SME so there is an obvious limit on our bandwidth to plan for an event that is currently not precisely determined. Our current focus is very much around establishing product rules of origin and creating stock building plans to mitigate any potential custom delays.

What’s your vision for future growth strategy?

Over the coming 12 months AVPE is predicted to increase its turnover in excess of 20%. We therefore need to make investment in both machine capacity and skills to underpin this.

In many respects investment decisions still need to be made off the back of client order book confidence. Brexit uncertainty just adds a further complication to this decision making process.

Future political strategy It is hoped that the politicians on all sides will agree an appropriate orderly transition which gives businesses ample time to provide robust solutions to all the practical business implications that Brexit could present. I guess we will have to wait and see on this but the train is fast leaving the station!

“For me, the European Union is first and foremost an economic union that ensures free trade. I fear that Brexit will limit free trade in Europe. Against this background, I rate the exit of the UK as negative. But I hope that the relationship with the UK will not change and the markets will regulate themselves.”

We have already seen the fruits of uncertainty: Lack of clarity on the future has shaken confidence Sterling has weakened, making property and deals here less attractive for British investors Deals with British financing or trade purchases by UK companies of Irish businesses have been pulled There has been a steady flow of businesses, financial and others, relocating from London to Dublin. Ireland will benefit from this flow of activity, but it is not felt that it will outweigh the damage done to the economy as a result of other impacts of Brexit Irish businesses with significant UK exposure have set up subsidiaries in the UK Practitioners of customs law, long the arcane backwater of tax practice, are now in great demand. Training courses abound The impact on the financial services industry is expected to be particularly severe

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“We are watching the coming exit from the EU with great interest. For us in New York, it raises more questions than it answers. Will the UK now become closer to the Norwegian model of required adherence to all EU laws and regulations if it wishes to trade with the EU, but with a reduced opportunity to shape those laws and regulations?

Will the UK’s trade growth with the Commonwealth countries – growth it was not able to maximise under the EU common policy – compensate for leaving? And, finally, how will we see the interpretation of EU laws and regulations in the UK Courts to businesses and institutions where there is no longer the need for a unified application nor resort to an EU appellate scheme? A fascinating experiment, in any event, and we wish our British cousins the best of luck.”