We woke up this morning to the realisation that the UK electorate have decided the UK should leave the EU, sending shock waves across global financial markets, with Sterling falling to its lowest level against the dollar since 1985. Whilst the referendum is a declaration of the will of the electorate rather than a binding direction it seems we are now moving towards the exit in terms of the EU project as it stands today.Quite how we will achieve this exit is not clear at the moment.
Boris Johnson is arguing for the UK to take its time to assess the position and negotiate its exit and Brexit is being described as a process, not a single moment of departure. Some will argue that an arrangement such as that enjoyed by Norway (if achievable) might be an interim solution before the final deal is agreed some years in the future.
In the legal context, the EU leadership has demanded that Article 50 of the Treaty on the European Union, which sets out procedural requirements for a Member State seeking to withdraw from the European Union, be triggered immediately. However, there is no right for Member States to trigger Article 50 against another member state, and as David Cameron has announced that he will resign as Prime Minister this autumn and suggested that the next Prime Minster should proceed with the exit process, it is unlikely it will be triggered for some time, if at all. According to Article 50, unless an agreement is reached sooner, the earliest that the United Kingdom could cease to be a member is in two years' time. As Britain is the first member state to leave the EU, the process and time line is unclear. It could take much longer, due to the legal, social and political complexities.
Given the uncertainty it is a little tricky to say the least to be clear on what the future will hold. As I sit here gazing into my crystal ball, my expectation is that London’s appeal as a safe haven for the world’s wealthy is unlikely to change substantially. The UK is a stable democracy, supported by a strong legal and financial community and an attractive tax regime. Prime residential property (possibly at lower prices), a world class cultural and retail environment, together with good schooling all add to London’s attractions and these do not change as a result of this vote. But what will the post-Brexit economic and legal landscape look like and what will the inevitable short-term uncertainty mean for our clients who include landed estates, business owners/investors and internationally mobile families?
As a tax lawyer, it will be interesting to see whether we will use this as a way to adopt and maintain a more competitive tax regime than our European neighbours. We will likely cease in due course to be a part of the customs union although I think we all expect VAT to remain part of our lives for the foreseeable future. It remains to be seen though whether the UK will decide to change how VAT is charged, possibly introducing a wider entitlement to zero rating or even having a greater number of differential bands for the charge. Over time there will surely be divergence between EU VAT and a new UK VAT. Burdens for business could also increase in terms of cross border compliance.
Brexit will also mean that EU subsidiaries of UK companies will no longer be able to rely on various EU directives such as the Parent-Subsidiary Directive and the Interest and Royalty Directive to make dividend, interest and royalty payments to their UK holding companies free from withholding tax. Relief under double tax treaties will be an alternative to manage this exposure in some cases. Many group structures will need to be reviewed to ensure they remain effective following Brexit and it remains to be seen if the UK will remain an attractive gateway into the EU.
Moving away from tax issues, the Brexit vote will cause some short-term uncertainty in both the commercial and residential property markets whilst both markets and currencies adjust. In the commercial property market we know already today of transactions being put on hold to give people time to assess their next steps. Buyers and sellers may take time to reflect and to let things settle down. However, in the medium to long term we do not believe the Out vote will have a major effect on the UK and in particular London’s status as a hub for investment. Predictions at a time like this are always difficult, but a weakened pound and a short-term loss of confidence in some quarters will provide opportunities for brave investors with access to equity, similar to the position following the 2008 financial crisis. If the past has shown us anything, it is that the commercial and residential property market has eventually bounced back and then performed well as an asset class.
The long-term impact on rural estates may be more notable with rural and farming estates deeply tied into the EU through the subsidies received from forestry, farming and food production. The extent to which the government will step in to fill the breach left by the current generous subsidies remains to be seen.
Another area many of our clients have been discussing with us today has been the role of English law and the English courts in cross-border commercial agreements post-Brexit. Our courts will undoubtedly maintain their attraction and most of the reasons why our clients choose English law to govern their commercial agreements (stability, certainty, commerciality) are not related to our membership of the EU. However, many commercial contracts will need to be reviewed particularly those referring to particular EU legislation or EU territoriality and there are undoubtedly some areas which will be more widely affected. A key concern of our financial services clients is how existing market access arrangements will change. It is likely that the UK will seek to be recognised as an equivalent regulatory regime to the third country firms, which are recognised in a number of EU directives. The UK should be in a strong position to argue for this as it is currently legally in line with EU financial services legislation. If this is not achieved, UK firms may seek to establish subsidiaries within the EU, whilst still retaining financial centres in London and elsewhere.
Finally, art law is a key part of the Boodle Hatfield practice. We believe that the immediate economic aftermath of the vote will have a significant impact on all aspects of the art market for some time, including both current auction sales and consignments to future sales in the next few months. EU funding for the arts runs into millions of pounds a year, and has contributed to many important projects. Whilst the UK government will continue to support the arts, it is not unreasonable to expect a complete reassessment of how the arts in the UK are to be funded in the longer term. Our Arts team specialists will be monitoring closely what happens to museum and arts funding, the future of the Artist’s Resale Rights, possible changes to export licenses, and to import VAT.
Just thinking about all the above issues makes me realise we are heading into some quite complex territory in any number of areas. I am sure it will take some time to iron out the precise detail and mechanics of the UK’s exit from the EU and nobody knows if we will adopt the Norwegian model, a customs union, a free trade agreement or a “Swiss model”. Whatever happens ultimately, my hope is for an “amicable” divorce with continued membership of the single market.