On 23 June 2016, 17,410,742 people in the UK voted to leave the European Union. What happens next and what are the implications for businesses?
It is important to stress that until the UK formally leaves the EU, EU law will continue to apply within the UK and there will be no immediate change in the way that people move or trade.
In order to exit the EU, a notice will need to be served on the European Council in accordance with Article 50 of the Lisbon Treaty. Once the notice is served, there will not be any immediate change, it will simply trigger a two year negotiating period with the remaining EU states on the terms that the UK will exit the EU. Prime Minister David Cameron has made it clear that he will remain in Government for up to three months and that he will not be the one to serve the notice on the European Council. There is likely to be some debate on when the notice to leave the EU is served.
During the negotiating period, the Government will have a significant job to do in negotiating new trade deals, considering its stance on immigration and identifying which of the UK’s laws need redrafting and those which should be repealed.
Below is some high level guidance on what may and may not change for businesses:
- Mergers and acquisitions and shareholder arrangements - the law relating to these areas is unlikely to change significantly as most UK deals are governed by contracts under English law. However, it will be imperative to get due diligence right in considering any deal, and it will be crucial to consider how European legislation affects the target business in question. The topics referred to below may be relevant as part of any due diligence process.
- Commercial contracts – where businesses have entered into contracts that are expressly governed by English law, English law will continue to apply. However, depending on the location in which a commercial contract is performed, that contract may also contain a number of issues that are affected by European law. Advice should be sought if you have any concerns about the terms of contracts. In addition, commercial contracts could contain “material adverse change” clauses that should be looked at carefully now to consider whether leaving the EU could trigger such clauses. Advice should be sought if you are concerned about this.
- Employees – employment law could be substantially affected by Brexit as much of the UK’s employment law derives from EU legislation. Discrimination rights, holiday entitlement, working time regulations, rules relating to paid annual leave and the regulations relating to the transfer of undertakings (TUPE) all derive from EU legislation and the Government will need to determine how they wish to deal with these laws.
- Immigration – immigration will be a key consideration for employers who employ EU citizens. Although an Australian style points based system has been proposed, we will need to see what the final proposals are regarding immigration before further comment can be made on this point.
- Intellectual property – the UK’s intellectual property laws are largely driven by European law. If a company has European Community Trademarks, that trademark is valid in every country in the EU. Following an exit from the EU, companies may need to re-register their marks to ensure that they have protection in the UK (unless the UK introduces laws to enable existing community trademarks to continue to benefit from protection in the UK). Businesses may wish to undertake an intellectual property audit to establish the types of trademarks and design rights held and seek advice on whether further protection will be required in respect of that intellectual property following Brexit.
- Data protection – the EU data protection rules restrict the transfer of personal data to countries outside the EEA. If the UK ceases to be a part of the EEA, the UK would be considered a non-EU destination that would need to be approved as providing adequate protection for personal data by the European Commission. It remains to be seen how this will be dealt with by the European Commission.
- Financial services regulation – most legislation governing financial institutions and regulating funds derives from EU law. When the UK leaves the EU, it will have to determine which laws it will keep and which it will replace. As the finance industry is so heavily regulated, this is likely to have a big impact on financial institutions, funds and other regulated entities.
- Competition law – it is unlikely that much will change in terms of competition law. The UK already has primary legislation that deals with anti-competitive practice (Competition Act 1998). Businesses that trade within the EU (or what remains of it), will still be bound by European law relating to competition if those businesses wish to continue trading within the EU.
- Environmental law – the UK has implemented a number of EU directives on environmental issues from matters relating to water treatment to waste management. Depending on the business, advice should be taken on the relevant environmental issues that could be affected.
- Tax - the most immediate cause for concern with Brexit would be customs duties. Currently goods can be transferred within the EU, and between countries with which the EU has a free trade agreement, without payment of customs duties. The position post-Brexit will have to be negotiated. The UK will have to reach agreement with the EU, and with each of the countries with which the EU has a free trade agreement, on whether, and what, customs duties will apply.
VAT is currently subject to EU law but post-Brexit will not be. Accordingly the UK could introduce new areas of zero-rating, should it see fit, or otherwise amend the rules. It is unlikely, however, that there will be any sudden significant changes. Importers of EU goods may well have to pay VAT at the point of import, rather than via their VAT returns, which would create a cashflow drawback.
Payments of intra-group interest, dividends, and royalties are free of withholding taxes pursuant to EU law. Post-Brexit these payments will only escape withholding tax if there is a double tax treaty between the UK and the EU country removing any withholding tax obligation. Not all such treaties currently remove the withholding tax entirely, although it is possible that the treaties could be renegotiated ahead of Brexit.
The UK is already generally free to set whatever corporation tax rate it wishes. There are proposals to align tax rates within the EU and obviously post-Brexit the UK would not become subject to any such agreement.
Many changes to the tax system have been forced on the UK in order to comply with various EU laws and the UK could seek to reverse these changes. However, the EU may insist that the UK continues to abide by these laws in return for approving a trade agreement.