Brexit: The Impact on U.K. Businesses

by Admin Business

On June 23rd, a monumental event in world politics unfolded as U.K. citizens voted to leave the European Union (EU). The pro-Brexit campaign secured victory, making the U.K. the first country, after Greenland, to withdraw from the EU. This decision triggered widespread economic and political upheaval, with the British Pound suffering a sharp decline and uncertainty casting a shadow over the business environment. As the situation evolves, let’s explore what the EU represents and consider the potential effects of Brexit on businesses.

Understanding the U.K.’s 43-Year Relationship with the EU

The U.K.’s journey with the EU began with an unsuccessful attempt to join in 1963. A decade later, in 1973, the U.K. officially became a member, along with Denmark and Ireland. The primary appeal was the access to Europe’s single market, which includes 500 million consumers and promotes the free movement of goods, services, capital, and people.

While EU membership brought numerous economic benefits, it also posed challenges such as complex regulations, membership fees, and financial support for struggling EU economies. Additionally, the unregulated influx of foreign nationals became a concern for many, fueling the pro-Brexit movement.

Brexit’s Potential Impact on Business Policies

Imagine visiting an amusement park where you can either buy tickets for individual rides or pay a higher price for unlimited access to all rides. Brexit essentially shifts the U.K. from the latter option to the former. Although the U.K. loses access to the tariff-free single market, it gains flexibility to create its own trade agreements and business-friendly policies. However, until the terms of the exit are finalized, businesses face uncertainty.

Here are a few possible changes post-Brexit:

1. Lower Corporate Taxes To mitigate concerns about the U.K. losing its business-friendly reputation, former Chancellor George Osborne proposed reducing corporation tax from 20% to below 15%. This reduction could provide additional funds for businesses to reinvest in their growth.

2. Increased Indirect Taxes Value Added Tax (VAT), a significant revenue source for the U.K., may see changes post-Brexit. The government could expand the range of goods and services subject to VAT, potentially raising the tax burden on businesses, which may be passed on to consumers. Companies offering digital services must still comply with VAT regulations in the EU or register through the Mini One Stop Shop (MOSS) scheme.

3. Uncertain Labor Laws Brexit ends the free movement of labor between the U.K. and EU member states, which could create challenges for businesses relying on skilled workers from the EU. While an immigration system based on skills, similar to those in Australia or the U.S., may be implemented, the loss of access to the EU labor market could make it harder to recruit top talent.

The government has clarified some aspects of the rights of EU nationals residing in the U.K.:

  • EU nationals living in the U.K. for at least five years can stay permanently.
  • Those residing for six years can apply for British citizenship.
  • Nationals who have lived in the U.K. for less than five years can stay, but their families may need to register.
  • Irish nationals will be treated the same as British citizens, while Croatian nationals may still need to apply for work permits.

4. Decreased Funding London has long been a hub for financial services in the EU. Many international banks operate in the EU through subsidiaries in the U.K., thanks to the “passporting” system. With Brexit, financial institutions may relocate, reducing available funding and financial service jobs in the U.K.

5. Higher Administrative and Compliance Costs The U.K. has consistently supported anti-tax evasion policies, but Brexit could lead to stricter regulations, especially for businesses operating across borders. This will likely increase the administrative burden and compliance costs for many companies.

Will Brexit Cause a Loss of Access to 500 Million Customers?

Although Brexit may affect access to the EU’s single market, it doesn’t necessarily mean complete isolation. The U.K. could pursue alternative trade agreements similar to those held by other non-EU nations. For example, it could join the European Economic Area (EEA) and the European Free Trade Association (EFTA), like Norway, or negotiate bilateral agreements similar to Switzerland’s arrangement with the EU. Alternatively, it could follow Turkey’s model and enter into a customs union with the EU.

While these options may preserve some trade relations, they don’t offer the same benefits, particularly in financial services.

In the short term, Brexit’s economic costs appear to outweigh the advantages. However, as the U.K. negotiates new agreements with the EU, the U.S., China, India, and other major economies, the uncertainty should lessen. Businesses can remain calm, as significant changes aren’t expected until after June 2018, when the full impact of Brexit becomes clearer.