The implications of a ‘Brexit’ are hotly contested. We are also unsure what form of trading settlement the UK would adopt if it did vote to leave the EU. Would it remain within the European Economic Area, European Free Trade Area and/or seek specific bilateral agreements or a customs union?
With the opinion polls still looking inconclusive, Richard Hughes considers some tricky questions facing the retail sector before the UK makes its decision on June 23rd.
How would tariffs impact retailers?
Retailers and suppliers benefit from a tariff-free trading zone within the EU. Following a pro-Brexit vote, there would initially be a two-year period in which existing arrangements would continue in place.
Ratings agency Moody's has warned that the UK food and drink sector in particular could face significant EU tariffs following a Brexit and potential supply chain disruptions - the average import tariff into the EU is 21% for beverages and tobacco and 45% for dairy products. If the UK were to join the European Economic Area, like Norway, it might avoid tariffs.
Britain represents 19.4% of EU exports to the rest of the world, and runs a multi-billion deficit in goods and service with other member states.
Some argue that a Brexit vote would be good for non-EU retailers and suppliers and trade with them. For instance, the United Kingdom is Australia’s number one export destination for wines by volume. In instances such as these, there perhaps would be the possibility for the UK, Australia and other trading partners to reach their own free trade agreements.
What would happen to retail prices?
On a vote for Brexit, price levels and the rate of inflation could rise as businesses respond to increased uncertainty by increasing their profit margins.
New tariffs could also increase prices until the UK reaches new agreements on tariffs.
It is also possible that the UK instead be able to import goods from the cheapest markets, and so mitigate any immediate price rises.
What about exchange rates and the value of sterling?
Some commentators have warned of a further 15-20% slide in the sterling-to-dollar exchange rate in the event of a Brexit, reaching near parity with the Euro.
Whilst this would be bad news for those looking to spend or invest abroad, UK exporters could enjoy a boost as the price of their goods hit record lows on the European market.
Would VAT be repealed?
If the UK leaves the EU, it will no longer be required to give effect to the VAT Directive and so will no longer have to require UK businesses to charge, and pay, VAT on domestic supplies of goods and services.
However, because VAT constitutes a large proportion of the UK government’s tax revenue, it is perhaps unlikely that the government would repeal it without replacing it with a new UK sales tax.
A UK government that is unconstrained by the VAT Directive could use this flexibility to introduce a new UK sales tax, with new rates for different types of goods and services for each of them.
What about consumer protection?
Much of UK consumer rights e.g. the Sale of Goods Act is enshrined in UK law but new European product standards would not apply in the UK unless we specifically provided for them through new legislation.
In reality UK retailers and manufacturers supplying EU countries would still need to comply with any new EU standards so the eventual result would be that goods sold in the UK would still be compliant with them.
What about property costs and the property sector?
Some argue that fears about Britain’s potential departure from the EU are putting off purchasers from investing in UK offices and shops – with other centres such as Paris, Frankfurt and Dublin likely to benefit. However, lower rents could encourage retailers to be more expansionary and overseas brands to make their UK debut.
A Brexit vote would mean venturing into unchartered territory both for the EU and the UK and there are many unanswered questions - all we can do is wait and see what happens on 23 June.