Shockwaves from this morning’s announcement are still rippling through the media, the markets and foreign and UK government. The “leave” scenario that many business owners and public figures dismissed at first as fantasy has now been voted by a majority of the British public. As the dust settles, the impact of Brexit will become clearer, but for the moment we can begin to piece through what this decision may mean for business in Luxembourg and abroad. We’d like to offer some of our initial thoughts and suggestions, as tax advisers with strong knowledge of both markets and just how intertwined they have become.
What are the immediate repercussions for my business?
Barring any knee-jerk reactions (such as the closing of the border to immigrants), there are no immediate repercussions for businesses aside from any macroeconomic considerations (market instability) which may accompany the Brexit announcement. It is important to keep in mind that the referendum is not a legal instrument and a vote by the people to leave the European Union does not translate into automatic change. After the European Council is officially notified of Britain’s intention to leave, a two year countdown begins, after which (barring any extensions), the EU treaties cease to apply to the UK. However, one can imagine that negotiations may take far longer than that. During this transition period, when negotiations take place on the terms of exit and nature of future relationships, nothing will change, legally speaking. European directives and regulations, including those on tax matters continue to apply until further notice. Beyond this legal analysis, “business as usual” is an unlikely scenario during this 2-year negotiation period. Businesses will have to plan for an end game without knowing its rules. For individuals, a similar hiatus will exist.
What long-term tax and regulatory effects can be expected?
Although we can only speculate on this matter, some changes are due to occur. The UK will need to negotiate trade agreements with the European Union and “find their place” on the global stage. We don’t know how much Europe will be willing to cede to an independent Britain or how friendly the relationship will be after the split. However, we think that for UK businesses, the process to invest in Europe will become more costly, lengthy and complex. Management companies for EU domiciled funds may need to migrate from the UK into Europe, or find a European partner triggering a change in the business and remuneration model for financial services. UK legislation implementing EU directives on tax matters (parent-subsidiary directive, VAT, M&A) will cease to be effective overtime. As the EU freedoms (movement of goods, services, capital, labour) will no longer be guaranteed in and out of the UK, the alternatives need to be understood and a transition plan put into place.
How can my business prepare for when the laws do change?
The silver lining to this decision is the fact that we do have time to prepare. At the moment, most companies have no detailed contingency plan for dealing with Brexit. We can help identify and solve tax and regulatory issues which have arisen. Now is the right time to begin planning for the new relationship between the UK and the EU. Start by taking stock of the existing and envisaged relationships that your business maintains with the UK. We’ve provided a list of questions to guide your first, high-level analysis:
- What are your key connection points in and out of the UK? Perform a high-level audit of your flows of goods, services and capital.
- Does your business have any existing contracts which may become void due to changes in legislation? Determine which contracts will need to be modified to reflect new legal and regulatory criteria.
- Where do your employees sit, and in which country do they hold citizenship? Even if existing employees may benefit from some level of grandfathering, recruitment of future employees or the need to obtain additional paperwork for expatriates should be considered.
As a final note, we think it’s important for businesses to make their voices heard to government. The negotiation process is set to be long and arduous, politicians may stall, parties may be gridlocked. Firms have the time to identify the areas which will impact their economic activities negatively and make this known. While the UK voters have spoken, we cannot forget the complexity hiding behind the simple choice of “yes” or “no”. Careful and level-headed handling of this complexity may afford businesses some relief from a catastrophic scenario.
For EU institutions, and those of us who believe in the European project, this event should serve as a wake-up call. It has shown that the layman’s understanding of the ultimate goals of the EU is dangerously low. For voters to make informed decisions, they need correct, accessible and objective information, a responsibility which is ultimately in the hands of these same institutions.
Beyond the data, however, we need to reflect on the values that unite us and realise, that they are more important than the differences that separate us. This may be the real challenge of the next 2 years.