With the triggering of Article 50, British Prime Minister Theresa May has finally provided a measure of clarity on the Brexit process. While much is yet to be decided, we now know that Britain remaining in the Single Market is decidedly unlikely and that the UK may break off all contact if it can’t barter a fair enough deal.
UK businesses have long since come to terms with Brexit, and seem content to ride things out. But what about companies and investors from outside the UK entering the market? What do these new revelations mean for people wishing to buy a business in Britain, and the people looking to sell to the global market?
The Single Market
The most concrete of the promises made by May is that Brexit means a clean break from the Single Market. Given that Single Market access necessarily means free movement for workers, this was always likely. But some observers had hoped for a partial deal to be struck, similar to that of Norway, which has limited access but no control over EU law. But May has shot this down, with her ‘Brexit means Brexit’ approach taking the view that a complete separation is necessary.
This has many implications, but the biggest one for businesses is the loss of EU trade agreements. This constitutes not just easy trading with other EU countries, but the collective bargaining power of the EU. The clout of other economic powerhouses like Germany has helped to forge deals that benefit the whole, although one of the biggest – the Transatlantic Trade and Investment Partnership (TTIP) – may be off the table thanks to Donald Trump’s election.
For larger businesses, this could mean tariffs on exports, as well as making it more difficult to enforce intellectual property rights and complying with product standards. Issues such as incorporation and tax for foreign companies are generally under the control of national governments, and can be predicted based on current ‘non EU’ laws.
Startups and SMEs may see a trickle-down effect from tariffs, but most should not be directly affected. Business conducted online should remain relatively unchanged, although it remains to be seen how sales tax will be administered without access to the European MOSS VAT system. Businesses with no reliance on imports or exports are unlikely to be affected at all, and will still represent an excellent purchase due to the size of the UK consumer market.
Leaving the Single Market also frees up bargaining power to strike independent deals. May’s ideal vision for the UK involves striking deals with individual nations such as the United States and Australia, fostering strong trade links and talent sharing.
However, it remains to be seen how much bargaining power the UK will have in that regard. A large portion of UK GDP is in financial services, which face an especially uncertain future. Only 18% of the economy at present is in manufacturing. This sector has benefitted from the weak Pound for exports, but loses out when it has to import raw materials. The addition of tariffs throws another spanner into the works.
A big loss for certain companies will be free access to European workers. While this will not expire until Britain formally leaves the EU (at least two years from triggering article 50), assurances for EU migrants currently living in the UK are thin on the ground. It’s possible that people coming to live in the UK before the deadline will be safe, but the uncertainty may make it difficult to hire until then.
This means looking further afield. For some industries, this may not be such a bad thing. Visa stipulations for some categories of worker are tough at present, with a minimum requirement of a £25,000 salary or the industry standard (whichever is higher). This has been criticized in the past for stopping graduates from remaining in the UK after university, losing out on foreign talent.
However, the need for unified visa categories is likely to result in reform, potentially making it easier to hire from the rest of the world than it is presently. This could be a major boon to the tech industry, for example, where much of the top talent resides in Asia and the US.
And while computer science has only recently been introduced to the UK curriculum, this should mean a wealth of technical talent in less than a decade’s time. Combined with the government’s recent push for creative and technical industries, this could turn the UK into a haven for forward-thinking industries.
Contrary to many factors around Brexit, the climate with labour is one of short-term uncertainty. The long-term position is now much clearer. While this may mean losing out on some European talent due to the rigours of the visa process, the benefits of global talent should not be ignored.
One of the most immediate changes in the wake of Brexit has been the fall in the value of Pound Sterling. On the face of it, this reflects the global uncertainty around the UK economy. The Euro famously depreciated in the wake of economic worries, particularly in Greece and Spain, and the Pound has fallen in anticipation of British trouble.
However, the falling Pound also has a positive side for many businesses: exports. Whether it’s physical sales or digital, anyone buying British goods with dollars or other high-flying currencies is getting better value for money.
That, in turn, has prompted a boost in many sales, with Burberry and ASOS reporting significant boosts in the last few months and retail sales up. British people also seem to be spending more, perhaps anticipating price rises in the near future. This has contributed to a rosier economic picture than expected, causing retractions from the Bank of England and others.
Amongst all of this, it should be remembered that the UK is still the world’s 5th largest consumer market. Its emergence as a nation outside the EU is not likely to impact this too deeply. On the contrary, it may become the first port of call for businesses looking to expand outside the EU. It is not only a geographically advantageous market but also healthy and familiar, with long-established conventions and strong service industries.
The big boost here for buying and selling a business is that foreign sales have gotten cheaper. The low value of the Pound has made buying a British business much cheaper, and therefore more enticing. For British manufacturing, retail and other export-focused businesses, there’s also an opportunity to capitalize on foreign sales, doubling-down on this opportunity for profit.
Of course, the Pound is still riding low for a reason, though it has seen a small boost as the EU and UK have appeared more conciliatory. Much is still to be decided, and not all businesses will represent a perfect investment. Those who have to import goods will find their costs have risen. The best opportunities may be businesses with intellectual property, and other ‘soft assets’ that would bolster an international company’s portfolio without as many risks.
This post was written by Russell Lebe, Managing Director of Accountancy In Europe. AIE assists individuals and companies with buying or selling a business and a range of European financial services, with an extensive network of accountancy experts across the continent.