The UK's vote to leave the European Union is set to herald major changes in business, economic and political life in this country.
Whilst the nature of these changes remains difficult to predict, our team of experts here at Ward Hadaway have created a guide to the potential impacts on you and your business in a range of different areas.
This is, of course, subject to change as events unfold but we hope this provides you with some useful guidance.
The guide includes an exclusive series of articles from professional advisers in Europe and across the world giving their perspective on Brexit.
We also have a weekly round-up of the latest developments on Brexit:
For more detailed guidance on specific topics or an answer to any particular questions you may have, please do get in touch with your regular Ward Hadaway contact.
(Page last updated 6/10/17)
Brexit: the big picture
When will the UK leave the EU?
As a result of the Supreme Court’s decision, which found that parliamentary approval was required to invoke Article 50, Parliament passed the European Union (Notification of Withdrawal) Act 2017.
On 29 March 2017, the Government formally invoked Article 50 of the Treaty on the European Union by delivering a letter signifying the UK’s intentions to leave the EU to the President of the European Council, Donald Tusk. In doing so, the UK began the formal process of the UK leaving the EU.
This letter of 29th March has effectively ‘lit the blue touch paper’ on withdrawal and committed the UK to leaving the EU within two years – an extension to this time period can only happen if agreed to by all EU countries. If no such deal can be agreed, and the two-year time period expires without an extension, the UK will depart Europe with no settlement.
Negotiations formally began on 19 June 2017 and since then there have been four rounds of discussions, with the fifth beginning on 9 October 2017.
However, despite the talks resulting in useful clarification in many areas, and whilst useful progress seems to be being made in relation to free movement and the Irish border, there has been little progress regarding certain issues including the nature of the UK’s financial exit settlement with the EU.
Consequently, the EU’s chief Brexit negotiator, Michel Barnier has suggested that should the talks continue at their current rate he would be unable to recommend that the European Council are able to begin discussions on the future relationship of the parties for some time.
Nonetheless, Theresa May has been forthright in proposing a two-year transition period aimed at allowing for the best working relationship between the EU and UK going forward. Under the proposal, within this time-frame:
- Mutual access to markets would remain on current terms;
- European citizens would continue to be able to live and work in the UK, but there would be a registration system; and
- Britain could begin negotiating trade deals.
Do EU laws still apply in the UK?
Some EU law is directly enacted into UK law through UK legislation. These laws will not be affected by Brexit unless they are repealed.
Until the UK formally leaves the EU, all EU laws and directives which are not enacted through UK legislation having direct effect – including those on freedom of movement – remain in force in the UK.
The extent to which EU laws will continue to apply once the UK leaves the EU will be one of the main points which the UK government and the EU will have to negotiate.
Until the formal withdrawal, it is very much ‘business as usual’, whilst preparing for change.
Will the UK still be able to trade with EU countries after leaving the EU?
The basis on which the UK will trade with Europe post-Brexit is at the heart of the negotiations and the outcome will be of crucial importance to businesses and the UK economy.
So far, the Government has indicated that the UK will adopt a sector-by-sector approach when conducting its Brexit talks, it has stated that the UK will not remain as part of the single market following its departure from the EU. However, further to this it is apparent that:
- A supervisory body of some sort may be required to determine whether the UK is complying with the trading rules negotiated with the EU;
- UK ministers cannot provide direct compensation to industries that may be subject to tariffs imposed as a result of Brexit; and
- Despite the Prime Minister’s assurances that Brexit will end the Court of Justice of the European Union’s (CJEU) influence over UK law, the CJEU may have jurisdiction over the terms of any exit deal.
Michel Barnier has stated that he wants the EU to agree to a “special” relationship with the UK post-Brexit.
The purpose of such a relationship would be to allow the remaining 27 member states easy access to the UK’s financial sector, so not to hinder their efforts to raise capital.
Whilst the UK is looking at its own unique deal, trade models that could be followed (assuming the UK’s exit from the single market) these include:
1. The ‘Norway’ model
This would see the UK continue to be a member of the European Economic Area (EEA) after Brexit, allowing trading access to all EU member states and free movement of goods, services and people.
However, it would also mean complying with the single market including social and employment law, competition law, state aid rules and consumer and environmental protection measures but it would not give the UK a say on how these laws are made.
The Norwegian model would also involve a payment to the EU, per capita, similar to that which the UK currently pays.
There are still trade barriers under the Norwegian model because UK products may be subject to “Rules of Origin” which means that they would face EU tariffs if components or supply chains do not meet single market requirements.
However, given the Prime Minister’s assertions that the UK will seek to cut all ties with Europe after its departure from the European Union, it appears unlikely that the UK will adopt this model.
2. The ‘Switzerland’ model
Switzerland is part of the European Free Trade Association (EFTA), it has separate bilateral agreements with the EU for manufactured goods and processed food but does not benefit from free movement of services.
Swiss companies do not have an automatic right to set up places of business in EU countries and commonly set up subsidiaries based within the EU to trade within the Single Market.
Swiss nationals can travel on business in the EU for a maximum of 90 days a year and movement of people is free only on the basis of employment and that once that employment ends, the right to stay finishes.
A free trade agreement, such as would be the case if the UK entered into a ‘Swiss-like model’, would be likely to mean less access to the single market but also fewer obligations in terms of accepting people and making a contribution to the EU budget.
3. The ‘Turkey’ model
Turkey is not part of the EFTA but it does have a partial customs union with the EU. This means it faces no tariffs or quotas on industrial goods it sends to EU countries, but the customs union doesn’t apply to agricultural goods or to services.
The arrangement also means that Turkey has to apply the EU’s external tariff on goods it imports from non-EU countries.
4. The ‘Canada’ model
Canada has been negotiating the Comprehensive Economic and Trade Agreement (Ceta) with the EU for seven years.
Although approved by the European Parliament, Ceta is not yet in force. Once this takes place, it will give Canada preferential access to the EU single market without all the obligations faced by Norway and Switzerland. It eliminates most trade tariffs, although some ‘sensitive’ food items, including eggs and chicken, are not covered by it.
Importantly, if the UK were to follow the same lines as the Ceta deal, it would not give the UK financial services sector the current EU access it has and UK-based banks would need to secure ‘passporting’ rights for their services in the EU.
5. The ‘WTO’ model
Following Mrs May’s announcement, a trade model negotiated around this model appears most likely. Named after the World Trade Organisation, this is seen variously as the minimum option for the UK or the default position if negotiations prove intractable.
The WTO model would secure certain minimum standards for the UK’s relationship with the EU as well as its relationship with other countries.
The WTO option would impose the fewest obligations on the UK. There is no requirement to implement EU legislation, although businesses would still have to comply with many EU rules (without having a say in setting those requirements) in order to export to the EU.
Under the WTO option, however, there would be no obligation to accept free movement of people or make a contribution to the EU budget. Any deal is likely to include a series of enhancements on the basic WTO structure since both sides are keen to minimize the negative effects of Brexit on their own industries.
What about trading with non-EU countries?
Under the “Swiss” model, the UK would benefit from free trade agreements negotiated by EFTA with other countries but would not have the benefit of current EU free trade agreements.
The Treasury Committee has issued guidance stating that: “It is very uncertain whether [the UK will] be able to continue to participate in these agreements. The extent to which the UK would have to enter into negotiations to ensure its continued participation would probably depend on the attitude of the contracting parties, about which little is known.”
Whilst this will affect companies who currently do business with non-EU countries under the umbrella of EU agreements, the UK would be free to conclude its own free trade agreements with any other country.
Under the WTO option, the UK would be free to negotiate its own free trade agreements with the EU, the European Free Trade Association (EFTA) and with any other countries as it sees fit with the WTO model being a fall-back until an agreement has been reached.
Find out what professionals in other countries think of Brexit and its consequences with our exclusive series of articles.
Brexit: the details
To jump to information on specific areas, please click on the links below:
Agriculture and rural businesses
The EU is an important market for the UK’s agriculture sector. In 2013 63% of our food exports went to the EU, whilst 70% of the UK’s food imports came from the EU.
As a result, the future shape and obligations of any trading agreement will be crucial to the agriculture sector and the wider rural economy.
Outside the EU, UK farmers will no longer be bound by the Common Agricultural Policy (CAP). However, many farming businesses are reliant on support payments, with EU farm subsidies currently making up around 50% to 60% of farm income.
The Government has announced that farmers will continue to receive the same payments for the current CAP period, which expires in 2020. In addition to this, the UK will continue to receive all CAP benefits until it formally exits the EU.
After that date, the Government says it will work closely with stakeholders to ensure that funding in the period immediately after exit is used “to help the agricultural sector transition effectively to a new domestic policy framework”.
George Eustice, the Minister of State for Agriculture, Fisheries and Food, has stated that: “Defra is currently working on a range of proposals to inform discussions about the shape of a future agricultural policy to replace the CAP and we will be involving stakeholders in those decisions.”
These funds will be allocated using the principles of CAP Pillar 1, although the Government says that once formal exit has completed, it will consider opportunities for making any short-term improvements to the way the system operates.
Further to this, the Treasury has given assurances that all structural and investment fund projects (including agri-environment schemes) signed before the Autumn statement will be fully funded, even in cases where the projects continue beyond the UK’s departure from the EU.
Company acquisitions and disposals
One immediate effect of the Brexit vote was a slowdown in corporate activity as companies took stock of the implications of the UK’s withdrawal from the EU. There has been an upturn since then.
However, continuing uncertainty is unlikely to encourage investors and it may take longer to persuade purchasers to commit to buying businesses in the light of the changing picture on trade and the UK economy.
Whilst there is nothing specific to prevent corporate activity taking place, the laws have not changed and the situation could also present opportunities for acquirers, deals may be structured differently for example making consideration more dependent on future performance.
Transaction documents will need to take account of the situation with ‘Brexit-proofing’ of key areas likely to be affected by the UK’s withdrawal from the EU.
Competition and State aid
Whilst much of the current legislation governing competition issues derives from the EU, it is largely incorporated into UK law under s.60 Competition Act 1998. As a result, the UK’s exit from the EU is unlikely to create material change competition law in the short term following Brexit.
However, as the former Competition and Markets Authority (CMA) chairman, Lord Currie, recently noted: “Brexit is likely to guarantee a big increase in the CMA’s workload and its role in the world” – particularly in the case of large scale mergers.
At the moment, under the “one stop shop” principle, if companies receive EU merger clearance they do not have to seek UK merger clearance. With the UK no longer a member of the EU, such mergers would need separate approval from the EU and UK competition authorities.
Further to this, the European Commission will no longer have jurisdiction to carry out on-site raids in the UK, nor to ask the CMA to do so on its behalf.
UK companies doing business with companies from EU countries will still have to abide by EU rules when their activities have effects within the EU.
Also, EU competition law will apply after Brexit to the activities of UK companies trading within the Single Market.
Upon leaving the EU, the current State aid prohibitions may cease to apply as they are implemented through European Treaties. Accordingly, outside the EU, the UK may put in place its own State aid rules, potentially enforced by the CMA, which would need to be re-designed if it is to regulate UK government subsidies.
Even under the looser WTO model for future trade, the UK would need to commit to the minimum standards on subsidies set out by the WTO, or potentially face trade sanctions.
The formal exit process is unlikely to have an immediate impact on the legal aspects of most commercial contracts, except so far as they already provided for the impact of the referendum vote.
The most pressing problems for contracts will be commercial factors such as the potential imposition of customs duties, tariffs and clearance requirements.
Post-Brexit, some contracts may be affected by force majeure or frustration where Brexit makes contract performance much harder or impossible.
The content, rights and obligations and enforcement of many commercial contracts are linked to provisions of EU legislation which the UK has enacted as its own law and some which have direct effect.
Until it is established to what extent these laws will be maintained, amended, repealed or replaced, the full measure of the impact of Brexit on contracts will not be known.
Review of contracts and the preparation for and management of risks is an advisable step for businesses to take now. In doing this, businesses should in particular consider adding or amending Material Adverse Change, Frustration, Force Majeure, Currency Exchange, Export Controls, Tariffs and Duties, and Change of Law clauses and, if adopting Incoterms, which of those will be appropriate in the future, recognizing the potential greater costs of selecting certain Incoterms going forward.
In addition to these, it may prove useful to review the use of territorial provisions in contracts – e.g. “exclusive right to operate in the EU”.
Many businesses are now looking to add ‘Brexit clauses’ to new contracts to deal with the uncertainties that exist and cannot be specifically provided for at this stage.
The negotiation of a Brexit and a new trade deal with the EU will take several years, allowing businesses the time to take such precautionary steps.
For access to more detailed consideration of the commercial factors affecting your business, please see Brexit and contracts: a practical guide
The Government has confirmed that it will implement the new General Data Protection Regulation (GDPR) in May 2018. That is because the UK will still be a member of the EU.
The Information Commissioner welcomed this news, confirming in turn that the ICO is committed to assisting businesses and public bodies to prepare to meet the requirements of the GDPR ahead of May 2018 and beyond.
She stated: “I acknowledge that there may still be questions about how the GDPR would work on the UK leaving the EU but this should not distract from the important task of compliance with GDPR by 2018. We’ll be working with the Government to stay at the centre of these conversations about the long term future of UK data protection law and to provide our advice and counsel where appropriate.”
However, since then, the Government has published its Data Protection Bill which provides further information into the practical application of the GDPR, and should be “read side by side” with the GDPR.
If you would like to receive our GDPR updates in the run up to the 25 May 2018 deadline, please get in touch.
Employment and Immigration
Many of the laws which currently govern employment in the UK – such as discrimination rights, TUPE, holiday and working time directive, agency workers, parental, maternity and paternity leave – are derived from EU law, but they have been enacted as part of UK national law.
As a result, these laws would not automatically cease to apply on Brexit. Additionally, the UK led the way on many employment laws (for example discrimination and unfair dismissal) and so we would not expect these to change significantly.
However, there are a number of EU-derived employment laws that were unpopular in the UK when they were introduced – and it may be that the UK will seek to change these over time, in particular it may seek to set a cap on discrimination compensation, abolish the 48 hour working week, make it easier to harmonise terms on a TUPE transfer and abolish the Agency Workers Regulations.
The UK already only participates selectively in EU immigration law and has chosen not to adopt many directives. However, the UK does participate in the free movement of people and/or labour and this will be a key point in the UK’s negotiations with the EU.
In relation to free movement of people, Theresa May has been keen to rule out the implementation of an Australia- style points-based system and has instead proposed a scheme that will focus directly on controlling the number of people coming to Britain from the EU possibly by an employment and education-focused visa scheme.
Our tips for employers in dealing with the aftermath of the ‘Brexit’ vote are:
Keep up to date regarding all changes as they arise and how they will affect your particular workforce both in the UK and EU.
Monitor your workforce in terms of where they work, their immigration status and regularly review their employment contracts and your policies. In line with this, businesses should take action to identify which groups of workers are most likely to be affected by Brexit.
Further to this, you should ensure that any changes that do materialise are communicated and addressed centrally, in order to avoid confusion and encourage an atmosphere of calm in order to reduce possible stress and anxiety among the workforce.
Be proactive and, for example, consider advising employees who are EEA residents and have been residing in the UK for 5 years that they can apply for permanent residence. The Government has confirmed as part of its Brexit negotiations that permanent residence holders will be able to use a streamlined process post-Brexit to achieve ‘settled status’ in the UK. Where appropriate, you may want to consider offering financial assistance for such applications through a loan agreement – making it expressly clear that if the employee leaves pre-Brexit, you have the legal right to deduct the value of the loan from their salary.
Consider advising employees who have resided in the UK for less than 5 years that they can register their residence. A registration certificate will evidence that the individual is exercising their ‘acquired right’ and if the UK were to uphold that residents already in the UK could retain their permanent residence right then this is likely to be a manner in which someone could qualify for this right.
Please see here for Five immigration changes to watch out for in 2017.
Please see here for Ward Hadaway to advise on visa scheme for tech companies
Health and safety and product regulation
As with a number of other areas of law, legislation governing health and safety in the UK consists substantially of EU Directives transposed into UK law.
As a result, Brexit will not of itself alter the legislative framework for health and safety without a repeal of those laws by Parliament.
The position is different for some areas such as food, cosmetics, medical devices and medicines, product liability, trading standards and environmental regulation.
This is because some regulation in these areas is largely derived from EU Regulations which have not been transposed into UK law. These will therefore need to be considered as part of any Brexit arrangements.
However, companies looking to sell goods made in the UK into the EU will still need to comply with EU Regulations which will apply to such exports.
Ward Hadaway Contact: Stephen Graham
European Union Trade Marks (EUTMs) and Community Design Rights (CDRs) currently provide intellectual property protection across the European Union, including the UK. EUTMs and CDRs remain valid and there will be no immediate loss of protection.
When the UK formally leaves the EU, EUTMs and CDRs may (depending on negotiation) cease to provide protection in respect of the UK.
However, should this be the case, it is also anticipated that transitional arrangements will be enacted to ensure that existing EUTMs and CDRs can continue to be protected in the UK and that priority dates can be preserved.
This may involve some form of automatic or optional process for converting or re-registering EUTMs and CDRs into national UK trade marks or design rights, although there are no proposals at the present time.
Brexit should have no impact on patent applications and patents filed or obtained under the European Patent Convention (EPC) or Patent Cooperation Treaty (PCT) since these systems and rights are independent of the EU.
However, the proposed introduction of a Unified Patent and Unified Patent Court covering the whole EU which was planned for early 2017 will almost certainly be delayed and the UK will not be covered by the system when it is.
The Intellectual Property Office has issued a statement entitled: “IP and Brexit: The facts”, which suggests that in the short-term there will be little substantive change in relation to IP law.
However, in the longer term companies seeking IP protection across the EU and UK will not be able to rely on pan-EU unitary rights and will need to take additional steps to protect their rights in the UK.
Companies would be well advised to review their IP portfolios now to understand which rights will be affected and whether steps should be taken now protect their rights in all relevant territories.
The Court of Justice of the European Union (CJEU) currently acts as the final arbiter on questions regarding the interpretation of EU law.
However, given that the aim of Brexit is to result in the UK breaking free from central European control it seems highly likely that this will no longer continue to be the case.
However, given that there remains a plethora of EU-influenced UK law, it seems probable that the UK courts are likely to continue to attach an importance to the jurisprudence stemming from Europe.
As such, EU case law may be afforded a similar significance to other member state law in that a UK court may consider it highly persuasive although not legally binding.
Another aspect in which the Brexit vote will have implications on litigation is in relation to parties who are currently engaged in or contemplating referring their matter to the CJEU for a preliminary reference.
Prior to Article 50 being invoked, the UK is still a member of the EU and as such the CJEU retains the jurisdiction to provide judgements referred to it.
On the other hand, parties considering referring their matter to the court should seriously consider the associated time frames.
The impact of Brexit on the wider pensions industry and on employers operating pension schemes is yet another hurdle to the provision of a decent level of income to retirees.
In the initial shock of Brexit, defined benefit pension scheme deficits (which traditionally hold large numbers of shares as investments) rocketed as the markets were shaken by instability.
While markets have recovered to a degree, pension scheme deficits in the UK currently top £1trn. Market volatility, the summer cut in interest rates to 0.25% and record low gilt yields have all impacted on deficits. No wonder that defined benefit schemes continue to close at an alarming rate.
For those workers who do not have access to a defined benefit scheme, all the investment and volatility risks sit squarely on the shoulders of the individual savers.
The recent introduction of auto-enrolment is unlikely to be effective in giving people the comfortable retirement they expect and deserve after a lifetime in the workforce.
Longer term, the effect on pensions could include the Pension Protection Fund reducing the compensation it pays to scheme members where the sponsoring employer suffers an insolvency event should there be a crisis in confidence and significant job losses.
Property law in the UK remains largely unaffected by EU legislation so from a legal standpoint, the ‘nuts and bolts’ of property ownership are likely to remain largely unchanged.
However, the fortunes of the property sector are closely linked to those of the overall economy so there could be a potential Brexit-related contraction. The housebuilding industry has already made approaches to Government about packages to keep the industry growing to meet the UK’s housing needs and the need for more houses in the UK is likely to remain intact post-Brexit. The Communities Secretary and the Housing Minister have reassured house-builders that the Government’s construction target for a million new homes is still a “top priority”.
Recent updates from key players in the housebuilding sector have indicated that demand for new homes in the UK remains high with visitor numbers and reservation rates rising in many cases since the result of the EU referendum.
In relation to commercial property, some fears have been expressed that overseas investors may find the UK less attractive or more difficult to invest in and that demand for office space may recede if international companies decide to pull out of the UK. A number of property funds have already suspended trading.
We still await the true impact that Brexit may have on values across the sector, which may see a pause in on-going negotiation of deals, a closer examination of existing real estate structures where monitoring values of the investment product is key, and there are even some who, having previously prepared for the referendum outcome by inserting ‘Brexit clauses’, are now using the result to withdraw and/or re-negotiate.
During the two year negotiating period with the EU, the UK remains a member of the EU and the Procurement Directives and the associated implementing UK legislation continue to apply.
Contracting Authorities (CAs) must continue to comply with the EU procurement rules, the case law of the Court of Justice of the European Union should be followed and the oversight of the European Commission remains.
While CAs have the assurance that it is business as usual for the next two years, uncertainty remains regarding the post-Brexit outlook.
However, various papers have been published with the intention of providing clarity, such as the second White Paper on Brexit and the recent European Commission Position Paper on Public Procurement.
Consequently, although it is clear that the potential procurement consequences caused by the UK’s departure from the EU could span:
- Extended coverage of procurement legislation to currently unregulated areas;
- The retention of the current procurement rules; or
- The retention of the current procurement rules with the ability to achieve greater flexibility in the design of transparent award procedures.
Nonetheless, the general consensus remains that when the UK leaves the EU, any ongoing public procurement contracts will still be protected until completion – meaning that interested parties are less likely to be subject to Brexit associated risk.
However, in the absence of further clarification from the Government, it appears that the procurement outcome will depend on whether a deal is ultimately struck between the EU27 and the UK and if so, the nature of that deal.
Research and funding
A wide range of research and innovation projects currently receive funding from the EU to finance their work.
In the immediate aftermath of the EU referendum, fears were expressed that many of these activities could be under threat as a result of the vote for the UK to leave the European Union.
Within the UK, senior academics have raised concern raised regarding whether Brexit will result in a lessening in the numbers of foreign students attending British institutions thus reducing their capabilities to attract talent and funding.
Further afield, other EU countries raised concerns about whether to collaborate with UK institutions on EU funding projects, such as universities and businesses participating in the Horizon 2020 programme for research and innovation, and some UK participants have been worried about longer-term participation.
However, the Government has now said UK businesses and universities should continue to bid for funding from programmes such as Horizon 2020 and the Government will work with the Commission to ensure payment when funds are awarded.
The Treasury has said it will underwrite the payment of such awards, even when specific projects continue beyond the UK’s departure from the EU.
The Government says the end result will be that that the UK “will continue to be a world leader in international research and innovation collaboration”, and it expects to ensure that close collaboration between the UK and the EU in science continues.