This content is part of the Essential Guide: Brexit and the UK technology sector - read our analysis of the implications

To Brexit or not to Brexit: That is the question

From taxation to trading, Adam Bernstein takes a look at what a Brexit really means for the IT industry

It is extremely difficult to predict what the true outcome will be if the UK votes to leave the EU on 23 June 2016. If the “no vote” wins, it will not simply be the 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. In return for preserving a free trade arrangement for example we may have to continue to be bound by certain elements of EU legislation.

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.


Lee Ashwood, an employment law solicitor at law firm Eversheds, can see 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 workers 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.”

If the UK were able to completely free itself of being subject to any EU influence on its employment laws, it is impossible to predict with any certainty what changes there would be. 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 upon the calculation formula, free of EU influence and caps on the amount an employee can be awarded in compensation if they are found to have been discriminated against.”

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 firms 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.


Moving on, there are clearly some areas of UK domestic legislation that will worry some in relation to a 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 law which clearly set out high standards of practice.

“Further,” says Roberts, “even where EU legislation has 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? How would matters such as product safety be affected by the loss of EU membership? Andy Bagnall, the CBI’s Director of Campaigns, says that the UK has one of the most competitive regulatory environments in the developed world, “and currently has significant influence over product 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 specific conditions on the rates that a member states 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 which for firms would be positive as they could pass on savings which may generate increased revenue.

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 firms. 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 reporting. “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 stock increase. In contrast UK exporters may struggle to export their products to the EU market place. 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 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 trade story, so the effect of Brexit on currency is another. David Johnson, director of Halo Financial, thinks that two questions need answering - what will happen before the referendum to currency movements, and what will happen after the referendum if we vote to stay in or are starting plans to exit. He knows that much of any response is guesswork but says: “no country has ever left the EU, let alone the second largest member, so the stages of exit and the depth and breadth of the negotiations to allow it are all uncertain at this stage.”

However, Johnson says there is a real risk to currency. “If you were a hedge fund or investment manager and you had the option over the next two months to push funds into the uncertainty of the pound or elsewhere, my guess is that you would seek more certainty and less risk. That will be the overriding theme of the run up to this referendum.”

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.

Bagnall also sees a currency risk and also notes that sterling could feel the first effects of a vote to leave. “The ultimate impact would depend – in part – on how the Bank of England reacts. But our members tell us one of the hardest things to deal with is volatility. It is very hard to plan and invest when exchange rates and asset prices are moving up and down.”

Britain’s trade will be affected but views on this differ. “On average,” says Johnson, “the balance of trade gain that Europe makes from its business with the UK is roughly £8 to 9bn per month. That trade and contribution advantage of £105bn a year is far too lucrative for the EU to want to lock Britain out of the club, even if the UK votes to leave the EU.” Bagnall sees it differently. His figures indicate that in trading terms, the EU would hold the balance of power in any negotiations following a Brexit: “45% of the UK’s exports go to the EU - it’s our biggest export market by far - compared to just 7% of total EU exports which come here. We could no doubt secure a deal, but it may take many years and it is hard to see the UK securing market access on the terms we currently have without accepting any of the costs.”

Ultimately, the sterling – euro rate isn't a one-way bet even if the polls move towards Brexit and there follow volatile trading conditions in the pre and post referendum periods. For firms, however, the cost of imported products could change wildly making razor thin margins more problematic.

In summary

It is not possible to predict the true impact of the UK leaving the European Union. But one thing is clear - a separation will not be an easy process of negotiation and will take a considerable period of time to resolve. There are many elements of UK law which have derived from the EU but it is unlikely that there will be any real drive, or time, for parliament to reform every piece of European generated legislation. In any event, if the UK were to enter into agreement with the EU based on the model adopted by Norway, the UK may actually find itself having to agree to continue with a number of the EU’s existing regulatory requirements.

One thing is certain, while consumers are slowly starting to spend additional disposable income, a potential Brexit could make consumers more cautious when spending on non-essential goods.

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