The lead up to the UK's referendum on EU membership was characterised by contradictory claims and resulted in widespread confusion amongst businesses. This has continued post-vote, with even more political indecision, which is frustrating for clients trying to process the results of the referendum and to formulate strategies to move forward in the midst of political and economic uncertainty.
It is essential to remember that, until such time as the UK leaves the EU by invoking Article 50 of the Lisbon Treaty and thereby starting a two year negotiation process, it will remain an EU member and all EU laws will remain in full force in the UK.
At the time of writing, there has been no meaningful discussion between the UK and the EU on the type of trade deal that may be agreed, nor how quickly it will emerge. Many suspect it will be 'Brexit-lite' which, like Norway, will enable the UK to access Europe's 'single' market in return for the freedom of movement of people from the EU and a contribution to the EU budget.
There is simply no precedent for this situation and we cannot claim to know what will happen in the weeks and months ahead. However, we can offer clear guidance on some of the most unhelpful misconceptions that are circulating about Brexit. With a firmer grasp of the facts in the current environment, we hope that you will be able to do business with more confidence. As with any market volatility, we believe that every crisis creates risks and opportunities and we aim to provide pragmatic advice to navigate such situations.
We will update this page as events unfold, so please check back for further myth-busting facts and commentary. If you have any questions or comments on Brexit or doing business in the UK or beyond, please do not hesitate to contact us.
Corporate operations and M&A
- The UK will remain a top place to do business for UK and European companies who wish to invest in the US, Asia, the Middle East and Russia.
- Bilateral treaties between the UK and each of the members of the EU will remain in place and are likely to be reinforced.
- A number of countries have stated that they will seek to conclude trade treaties with the UK, especially in the agricultural sector where the UK's existing EU treaty commitments currently restrict trading opportunities for non-EU countries. Some clients will be preparing to take advantage of the increased opportunities for trade on offer.
- People will continue to send their children to be educated in the UK's private schools and higher education institutions, and they will want to stay on to work in the UK and to buy property for their children.
- Companies are expected to push ahead with M&A activity if there is a good investment or strategic rationale, especially if the transaction is largely UK focused.
- Some foreign businesses will consider whether to invest (including on large cap-ex projects) in the UK until the terms of Brexit become clearer.
- There will also be opportunities. For example, the short term fall in sterling may see some foreign clients take advantage of what might be a brief investment window to acquire or establish businesses in the UK.
- The current uncertainty may help clients negotiate more favourable terms with their counter-parts, especially if the relevant transaction has not yet completed. Clients should review their contracts and consider whether Brexit might trigger a material adverse change or force majeure and the contract's continued effectiveness.
- Freedom of movement within the UK and EU remains the same until the former leaves, and further border controls will not be imposed until this time.
- We expect that transitional provisions will be introduced for European Economic Area (EEA) nationals and their family members already in the UK who have not yet been here long enough to have acquired the right of permanent residence. These transitional provisions will be for two years after the UK gives formal notice to the EU or longer by mutual agreement.
- There has been much talk about the introduction of a points based system for all non-British citizens, valuing certain skills and qualifications. If this is introduced, it would most likely be achieved by adjusting the existing points based system for non-EU nationals and by launching the so-far unused Tier 3 for unskilled labour.
Banking and finance
- The Bank of England has confirmed it will take appropriate measures to underpin market confidence and demand in the real economy and provide cheap funding to banks.
- Banks will need to lend despite the uncertainty and will continue to do so, albeit loan to cost ratios may be lower in the short term.
- Market volatility could affect the value of collateral supporting margin loans and other similar facilities. Consideration should be given to hedging arrangements to mitigate volatility.
- International banks currently see no change in their lending profiles.
Financial services regulatory
- Until Article 50 is triggered and the two-year negotiation period expires, it is business as usual for compliance. Firms will continue to be subject to Single Market regulations and should continue to work on MiFID II implementation at the beginning of 2018.
- The Alternative Investment Fund Managers Directive (AIFMD) creates a Single Market for the management and marketing of hedge, private equity, venture capital and other unregulated funds. This is one piece of EU legislation that extends the availability of the 'passport' to managers established in non-EEA countries. The granting of this passport depends largely on equivalence, and, as the UK has fully implemented AIFMD, there is no reason to think that the UK would not be granted prompt access to the EU market for unregulated funds.
- From 2018, MiFID II will expressly permit non-EEA, third country firms to provide investment services or perform investment activities on behalf of EEA professional and institutional customers on a branch or cross-border services basis.
- While it is business as usual for now, it may be prudent to consider the timing of any prospectus, public offering of debt or equity securities to take advantage of the favourable passporting arrangements that currently apply within the EU.
- Public companies may need to consider whether to make additional risk factor or other disclosures as to the likely impact of Brexit on their operations and financial statements.
- Given the globalisation of the capital markets, if the centre of influence shifts from London as a key financial centre to Germany, for instance, it may give European companies trying to access public capital further cause to look to their local stock exchanges.
- The UK government is keen to demonstrate the UK's continued competitiveness and the UK has a low rate of corporation tax by the standards of G20 countries that applies to most income and capital gains. The current rate of 20% tax rate will be reduced to 19% on 1st April 2017 and to 17% on 1st April 2020. Chancellor George Osborne has suggested reducing it to 15%.
- The UK operates a withholding tax at the rate of 20% for payments of annual interest and certain royalties to non-UK residents under domestic law. In the majority of cases when interest and royalties are paid by a UK company to a non-resident onshore shareholder there will be no withholding tax because of a relieving provision in the interest or royalty article of the relevant double taxation agreement. The UK has the widest network of double taxation agreements of any country in the world.
- The UK does not operate any withholding tax system on dividends, so a UK resident company can automatically pay dividends gross to any shareholder whether resident in the UK or not.
- The UK has a broad (and complex) exemption system for inbound dividends received from both resident and non-resident subsidiaries. Most dividends will, in practice, be exempt from tax, although there will be some circumstances where exemption will not apply – for example where the dividend is a deductible item in the jurisdiction of the company paying the dividend.
- The UK operates a participation exemption system for the taxation of capital gains that arise on a disposal of shares in underlying subsidiaries. There is currently an ongoing consultation underway which is focused on reviewing the conditions of the exemption and it is possible that some of these will be relaxed so that the exemption becomes wider.
- The UK does not tax capital gains made by non-resident individual or corporate shareholders of UK resident companies;
- Stamp duty at the rate of 0.5% of the sale price is payable by the transferee on a sale of the shares in a UK company.
- UK Data Protection Act and Privacy & Electronic Communications Regulations (which implement and reflect the EU Data Protection and ePrivacy Directives) remain fully in place for at least another two to three years.
- It is extremely unlikely that we will see a departure from EU-style data protection laws, as this would be a pre-requisite to any form of trading relationship with the EU/EEA.
- The EU has attempted to harmonize certain IP laws through various Directives and Regulations, but we expect existing English laws regarding copyright, trademarks, designs rights and database laws that implement EU Directives to remain unaffected. However, when the terms of Brexit are finalised, the potential changes to pan-EU IP rights and enforcement need to be considered as part of any IP portfolio strategy.
- Many international conventions that affect IP law are not EU derived (e.g. the Berne Convention; the World Trade Organisation 'TRIPS' agreement; Madrid System in respect of 'international trade marks' and the 'European Patent' and Patent Co-operation Treaty).
- Five key areas that need to be addressed in any Brexit negotiations and monitored by companies and clients are:
- Current EU Registered Rights: The EU Trade Mark and EU Registered Designs system administered by the EU IPO provides a single registration covering all 28 EU member states. If this no longer extends to the UK, then UK national registration and continuing protection for the 'UK rights' element should be considered at the appropriate time. If the UK exits the EU IPO regime, some form of transitional relief for existing EU registrations where the owner wishes to still protect their UK rights would be a reasonable likelihood (e.g. the option to 'grandfather' an EU registration into both an EU and UK registration).
- The new EU Unitary Patent: Brexit will probably not affect the current UK patent system. However, the proposed agreement for an EU Unitary Patent and Unitary Patent Court (UPC) which was due to be ratified by the UK this year to take effect will almost certainly be delayed.
- Unregistered Community Designs (UCDs): UCD rights are a product of EU Regulation creating a right that covers all of the EU. Post-Brexit this may no longer apply in the UK. The UK has an unregistered UK design right, although this is different in scope and length of protection so we are likely to see amendments to the UK designs regime as a response at some point.
- IP Enforcement: depending on the type of Brexit arrangements, the UK may no longer be a party to the Brussels Regulation (as recently recast), which deals with allocation of jurisdiction and the enforcement and reciprocity of judgments across the EU Member States, so may make questions of this nature more complicated. It also remains to be seen how Brexit affects IP enforcement strategy and the use of English governing law or jurisdiction in contracts. Longer term, we could gradually see rulings from the EU courts no longer influencing English court decisions on IP issues. 'Exhaustion of rights' rules may also be impacted.
- Licensing and Other IP Agreements: any licenses or other agreements covering 'EU' rights or that grant rights on an EU wide basis (e.g. taking IP as security) which are intended to include the UK will need to be revisited and amended.
Disputes and contractual relations
- There will be no changes to existing dispute resolution procedures until the UK officially exits the EU. At that point, many procedures that have been applied throughout the EU may need to be replaced with domestic rules.
- Some of the current benefits of cross-border judicial co-operation may be preserved if a position in relation to the EU akin to that of Norway, Switzerland and Iceland can be secured.
- Those trading or dealing with counterparties in the EU should review their existing contracts to ensure that the dispute provisions still continue to be effective.
- Those negotiating contracts over the next few months should consider preferring arbitration to resolve any disputes to ensure a more certain enforcement route. The benefits of international enforcement of arbitration awards under the New York Convention is unaffected by Brexit.
- Parties should assess whether their existing choice of jurisdiction and law to govern their contractual disputes is recognized by EU member states. UK parties may no longer have any protection against parallel court proceedings being started against them elsewhere in the EU.
- The extent of co-operation with other member states in the liquidation of multi-national companies and in cross-border bankruptcies will change.