This article summarises some possible effects of Brexit on UK equipment lessors. It mainly focuses on:
- leasing law;
- the possible (or possibly mythical) bonfire of EU leasing regulation;
- regulatory obstacles to leasing into the EU; and
- the possible end or replacement of VAT.
As the final form of Brexit is impossible to predict, this article is a preliminary and summary guide only. Among other things, it does not deal with consumer leasing. Given the brief, high-level nature of this article, it ends by linking to other Dentons Brexit articles of potential interest to equipment lessors.
After Brexit we would expect English law to remain a favoured choice for many cross-border leases. This is because English leasing law is mainly English contract law. And Brexit is unlikely to change any features of English contract law that make it attractive to UK and overseas lessors in cross-border deals.These features include freedom of contract (especially in commercial contracts), certainty in contractual interpretation and flexibility in dealing with changing markets and practicalities.
If there is a "hard" Brexit, the UK may be free (in principle) to repeal many EU regulations affecting UK lessors. And if negotiations with the EU were to take an unfortunate turn, with the parties competing over how to "punish" each other, we may hear more of one early UK Brexit position. This was the idea that the UK might become a low-regulation, low-tax jurisdiction offshore to the EU – or a North Western European Singapore (without the world class public transport).
Under many Brexit scenarios, however, the regulatory bonfire some dream of seems more likely to be a selective pruning. A not insignificant proportion of EU financial regulation has been UK inspired or supported. And many EU measures affecting lessors that were pioneering when introduced (e.g. the Waste Electrical and Electronic Equipment Directive and related measures) are now routine best practice in many developed countries. It seems unlikely that those best-practice regulations will fuel any flames without strong evidence of serious harm to the UK economy.
A twist on this situation is that, even if there were a UK regulatory bonfire, individual lessors may choose to comply voluntarily with EU regulations affecting lessors to secure their own access to EU member state leasing markets – more on such access below.
Regulatory obstacles to leasing from the UK into the EU
Many UK lessors may find Brexit will have little or no effect in this area. But for UK lessors:
- who are currently authorised credit institutions; and
- who currently enter into finance leases with EU lessees under the "passporting" regime referred to below (Passported Lessors),
there may be some changes.
Equipment leasing is lightly regulated in the UK by comparison with most of the financial services industry; less so in some EU member states. Despite this, if all UK lessors were (like Passported Lessors) regulated and authorised by the UK financial regulators, they would be entitled:
- via "passporting", to offer the financial services they provide throughout the EU; and
- to do so without local regulator approval.
However, this might not be as advantageous to those UK lessors following Brexit as it sounds.
This is because, under most likely Brexit scenarios, passporting for UK financial service providers throughout the single market is under threat. For Passported Lessors, this means their current rights to offer finance leasing to mainland EU lessees is under that same threat.
If Passported Lessors lose their current passporting rights under Brexit, then for all UK lessors, whether they can lease to EU-based lessees will depend on local financial regulation in individual EU states.
Unless the UK agrees otherwise with the EU, it will be free to end VAT post-Brexit. However, VAT raises significant sums for the Treasury. So, if Brexit brings the end of VAT, it will surely also bring its replacement. Lessors may therefore wish to monitor how that replacement treats UK sales, supplies and leases of equipment and related services.