Steve Lavelle, Managing Partner, London, UK
State of the Relation: Doing Business with a Post-Brexit UK
A deal between the UK and the EU was reached on Christmas Eve last year. What does this mean for organizations that do business with the country?
Just like every other country around the world, the UK had a traumatic 2020 due to the Coronavirus pandemic and the severe economic disruption caused by multiple lockdowns and other measures adopted to address the crisis. Two other economic factors also had massive impacts on the UK economy last year: Brexit (which finally happened in January) and the associated European Union trade deal (which came into effect in December).
As we move into 2021, with the likelihood of COVID- related social and economic restrictions easing by mid-year, this may be a good time to assess the state of the UK, from the perspective of international companies outside of the country who have UK operations there, or are planning at some future point to do business in the sixth largest global economy. This piece does not aim to promote UK plc, but to provide a balanced illustration of the “state of the nation”, informed by the views of people who are currently conducting business or enabling trade with the UK.
Brexit is the New Reality
So after 47 years as part of the European Union, the UK is no longer officially a member. However, that does not mean that the UK is not still integrated at multiple levels with the remaining 27 member states. While there are areas where a clean cut has been made, for example membership of some significant scientific/research bodies and the supremacy of the European Court of Justice over the UK judicial system, there are many more areas where nothing significant has changed (yet). A major example is most EU legislation, which has simply been “copied and pasted” into UK legislation, with some important changes in areas such as immigration.
There is also the huge cultural, social and economic legacy of European unification, built up over decades since the end of the Second World War of which the formation of the EU was a major, but by far not the only, manifestation.
Hence it is not accurate to now think of the UK as an isolated nation state with no far-reaching interactions with mainland Europe across multiple dimensions; economic, commercial, legal, social, environmental, political and cultural.
Ramifications for Companies
So what does this mean for companies around the world, from SMEs to multinational enterprises, in how they do business with the UK going forward? What has changed? What are the risks and opportunities? Is the UK still a good hub for European/EMEA (Europe, the Middle East and Africa) headquarters, or should companies expanding into EMEA base themselves on mainland Europe? Do the new rules on immigration mean international companies can’t base their people in the UK or hire there from around the world? And how is the UK economy performing, and what are the mid to long-term expectations?
While the UK was an EU member, companies could freely buy and sell goods and services across borders with minimum friction and no taxes or volume limits. While the regulations around services remain mostly unchanged (though not in some sectors, such as financial services), there are now many rules, standards and some different taxes in place for the physical movement of goods. Another key principle of the EU is the free, unrestricted movement of labor, but UK nationals now need a visa to stay in EU countries more than 90 days in 180. EU nationals planning to work in the UK will also need to apply for a visa, the model for which appears to be based on the Australian points system (that’s a high-level summary - in reality the rules are complex).
UK vs EU Law
Mark Webber is US Managing Partner at Fieldfisher, a European law firm headquartered in the UK. “The majority of the European law was effectively just grafted into United Kingdom law when the UK Parliament passed what is known as the European Union (Withdrawal Agreement) Act 2020. Something that was law because it was European law on the 30th December 2020 was UK law on the 1st of January 2021 because of this Withdrawal Act. They haven’t had time to change it. That will take time and that divergence will become clear, and I’m sure a lot of the time it will become slightly more permissive and slightly more business friendly. If anything, we might be growing into a position where the UK is more attractive for multinational companies expanding into Europe through a UK base.”
Jeff Loebbaka is Chief Commercial Officer of AMP Robotics, a Silicon Valley funded venture capital backed company which is expanding rapidly, just having used NGS Global’s services to hire its first executive outside of the US, the General Manager EMEA. From a shortlist of candidates based in several European locations, he hired a UK national, not only because the best candidate was in the UK, but also considering a number of other functions.
For a company like AMP Robotics, there are clearly still implications of Brexit that are not yet apparent - hardware, software and service elements of the company’s offering involve complexity about how they will do business in the UK and Europe, as well as the commercial issues of legal entities, employment contracts, taxable entities and other financial structures.
“I discussed Brexit with my legal, finance and HR teams, and there are clearly areas we still need to learn about,” explained Mr Loebbaka. “But the key thing is that while we know Brexit will affect us, the UK remains important - we know we are going to have people and business there, and some kind of entity. In my experience, getting started and doing business there is relatively straightforward. The other thing that is always in the back of my mind that I don’t think Brexit changes is the relative friendliness in terms of UK labor laws. I have experience in that, and I have a little bit of scar tissue from what I’ve done previously in France and Italy versus the UK.”
Are MNC’s Still Investing in the UK?
Based in California, Jo Bates, Director in the Corporate Team at Fieldfisher, says that multi-national corporations (MNC’s) are still investing in the UK. “I think prior to Brexit it was the obvious answer as a European headquarters for many companies, but now they’re a little bit more cautious. They’re asking more questions, but ultimately there are a lot of companies still choosing the UK. And that’s for obvious things like the language, the culture and the common-law legal system, the ease of doing business there.”
Ms Bates added that “Brexit is just causing a little bit of uncertainty, and we still don’t understand its full impact. The UK government itself has said that it’s going to take up to ten years to fully understand the impact of Brexit. So companies aren’t going to wait ten years for investment decisions. Life is continuing and companies still like the look of the UK, but they’re asking more questions before they make their decision.“
Mike Sables is Office Managing Partner at RSM, the sixth largest business advisory and accountancy firm globally, which supports many international businesses scaling in the UK. "Obtaining visas and setting up ex-pat packages in the UK can be a costly and time-consuming exercise without the right approach. There are multiple types of visa, depending on whether the individual is the sole or first employee in the UK, length of stay and whether he/she will move before the legal entity is set up. Plus, if the individual will be doing a pan-European role, you need to be mindful of visa requirements in other European countries. There are accounting, tax and social security implications for different types of visa, and you need to pay attention to how long this will all take. Overall, the process is far from frictionless."
UK Economic Expectations
So how is the UK economy performing? Simon Hart is International and Knowledge Management Partner at RSM. “We are expecting something like 4% Gross Domestic Product (GDP) growth in the UK in 2021, with strong second half growth moving into 2022, bolstered significantly by pent-up consumer demand. Understandably, the average UK consumer has been deferring purchasing and investment decisions during 2020 and at some point that pent-up demand is going to have to be released, so we think a consumer-led recovery is likely.
“The UK government has done a pretty robust job in terms of monetary and fiscal stimulation to support the economy. Particularly with regards to the job protection scheme, the furloughing, the bounce-back loans - something like 20% of our GDP has been directed to fiscal support. And then you’ve got monetary aid from the Bank of England with interest rate cuts and asset purchasing. I think that’s been in the region of something like £450 billion (US$628 billion) a month in asset purchases.”
Mr. Hart says that different sectors within the economy are facing different challenges. “We are all well aware of the challenges that the high street retail sector is facing at the moment. Those that have got a supply chain and an IT ecosystem that can align itself with a logistics arm to online transformation, next-day delivery, etc., are probably the ones that are reimagining themselves effectively for the future, unlike those heavily committed to ‘bricks and mortar’. The tech industry is less affected.”
Mr. Sables added that some of the new Budget measures recently announced were a throwback to the past. “Rewind the clock ten years and we had a Corporation Tax rate in the mid-20s, a 3-year loss carry back regime, and a small companies rate of tax. The Chancellor resurrected all these policy areas in his March 2021 budget. He also added additional relief for corporate investment, and signaled a consultation on R&D which is likely to be focused on keeping the UK at the forefront of global innovation.”
Characteristics of the UK as an Investment Destination
Matthew Hurn OBE is a 30-year finance veteran who’s lived in the Middle East for the last 13 years. He’s currently the Chief Financial Officer of the Disruptive Investment Platform of Mubadala Investment Company, the Abu Dhabi sovereign wealth fund with total assets under management of over £165 billion (US$230 billion), and a major global investor. “I think the UK actually presents a very interesting market now - a lot of the uncertainty is gone. We now know the outcome of Brexit and we are through that prolonged period of uncertainty from an investor perspective. I also think you now have stability in the government - you have confidence that the majority that the current government has is likely to be there for a period.
“So you can start making some longer-term investment initiatives. The UK has one of the leading global Life Sciences industries in the corridor between Cambridge, Oxford and London. Incredibly strong. We also think some of the infrastructure ideas given the levelling-up agenda that has been announced as part of the UK also presents some fascinating opportunities. You have the HS2 high speed rail network going through the Midlands. You have the Northern Powerhouse and what that means in attracting a different sort of investment - the UK is not just London.”
Mr. Hurn believes that the UK’s commitment to net zero emissions by 2050 is a key decision that will encourage considerable additional investment in renewables and green energy. He also predicts the UK to remain strong in such areas as software as a service, artificial intelligence, future mobility and for London to maintain its leadership as the Fintech capital of the world.
Added to this is recent research showing London is still the most desirable city in the world to work in, despite Brexit and COVID. The Boston Consulting Group study, which gathered the views of 209,000 participants in 190 countries in early 2021, found that London has retained its title as the place where people would most like to work, a position it has held for the past eight years.
And the impact of the EU Trade Deal? This is the post-Brexit trade agreement that allows free trade between the UK and the EU in goods and limited mutual market access in services, as well as a number of cooperation mechanisms in a variety of areas. Its high-level principles are no tariffs or quotas on trade (but customs duties and taxes may still apply) and equality of services providers (but not free market access). For the detail, see the 1,246 page document…
What about COVID?
Within the context of COVID, Mr. Hurn believes every country will need to press a recovery reset button for their economies, and this could provide new opportunities for the UK. “A lot of countries are now assessing what they need to do to kick start growth, and I think there’s going to be competitive demand for capital.
“Post-COVID, the UK’s sweet spot of opportunity could be inward investment, despite this likely being a very competitive landscape globally. It could be in the form of expansion capital to bring intellectual property, patents or technology to parts of the world that desperately need it. Now the UK has created the Office of Investment inside No.10 Downing Street, and that unified front is really going to help boost international trade.”
Simon Hart of RSM agrees. “The pandemic is actually giving an opportunity for businesses to bed down any changes they need to make as a result of the trade agreement and what is in or out of the trade deal. So it’s kind of happening behind the scenes. I don’t think the pandemic will end and therefore trade issues take over. I think solutions will happen in parallel.
“The biggest opportunity is to get a trade deal with the US sorted out as quickly as possible. The US is re-engaging with the world, focusing on China and Japan for the TransPacific Partnership, the EU, as well as the UK and others. So the UK is in a queue. I think the fastest the US has ever completed a trade deal from start to finish was with Australia and it took something like 22 months. The sticking points are going to be access for US food and agricultural goods and services, as well as sanitary and phytosanitary elements, such as the animal and food regime, healthcare and pharmaceuticals.”
“As many will have experienced, clarity of the impact of Brexit, particularly within the backdrop of a global pandemic, has only become really apparent at the last hour,” explained Tim Paddison, UK Managing Director of Hoffmann Group, which sells German-manufactured machine tools and parts. “Those businesses that developed ‘worst case’ scenario planning probably found themselves in the best position coming into 2021. The big unknown for us was the impact at borders and how logistics providers would fare post-Brexit. While the situation is now improving, the unpreparedness of carriers has been the pain point, along with the impact of the pandemic in mainland Europe. More clarity earlier on would have really helped us.”
Three major and inter-twined factors have had a significant impact on the UK economy in the last year: the impact of COVID and the lockdowns, Brexit and the EU trade deal.
There are plenty of pain-points, areas where the UK could have done things better and learning points for the future. There are many challenges ahead, including some not expanded on in this article, such as high levels of government debt and the risk to the economy of future interest rate rises. But even the most skeptical observer would have to acknowledge the resilience of the UK as a great place for international business and its continued competitiveness in the global economy.
Disclaimer: The opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of NGS Global, LLC.