ICAS Brexit answers: Business and trade
ICAS posed 20 Questions for the UK Government immediately after the Referendum vote which will see the UK leave the EU. In a series of articles, the ICAS Technical Team now seeks to provide some of the answers to those questions, and additional context and background.
Given the fluid nature of this new political reality and rapidly unfolding developments, we are updating this page and related pages with new information as it becomes available.
In the first of these articles, we examine business and trade issues.
1. What immediate measures will the UK Government take to attempt to minimise the impact of Brexit on the UK economy, British jobs and the efforts to restore the public finances?
The Governor of the Bank of England (BOE) outlined on 24 June the steps which have already been taken. He advised in his statement that:
- The Treasury and the BOE have engaged in extensive contingency planning and former Chancellor George Osborne said this would be acted upon where necessary.
- The BOE will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward.
- The BOE has stress tested UK banks against scenarios more severe than the country currently faces. As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets. This substantial capital and huge liquidity gives banks the flexibility they need to continue to lend to UK businesses and households, even during challenging times.
- Moreover, as a backstop, and to support the functioning of markets, the BOE stands ready to provide more than £250bn of additional funds through its normal facilities. It is also able to provide substantial liquidity in foreign currency, if required.
- The BOE expects institutions to draw on this funding if and when appropriate, just as they would be expected to draw on their own resources as needed in order to provide credit, to support markets and to supply other financial services to the real economy.
- On 14 July 2016 the BOE’s Monetary Policy Committee (MPC) decided to hold the main interest rate at 0.5% despite considerable speculation beforehand about a rate cut. However, it would appear that a rate cut is likely to happen in August.
This is obviously a fluid situation that will be kept under review.
2. When will the emergency budget promised by the Chancellor take place?
The new Prime Minister Theresa May was appointed on 13 July, 2016. The PM immediately appointed Philip Hammond as the new Chancellor. He has reaffirmed the statement by former Chancellor George Osborne that there will be no emergency budget. Therefore, the focus will now be on the Chancellor’s first Autumn Statement later in the year. It has already been highlighted that a change in direction in terms of economic policy is likely with the envisaged time period over which the UK is likely to remove the annual funding deficit being extended.
3. How can we continue to attract foreign direct investment, given the uncertainties which now prevail?
The new prime minister has appointed David Davis as Secretary of State for Exiting the European Union and Liam Fox as International Trade Secretary.
Speaking shortly after his appointment as 'Brexit Secretary', Mr Davis said the UK should be in a position to trigger the exit from the EU in late 2016 or early in 2017. He said the "first order of business" would be to strike trade deals with non-EU countries and Mr Fox's role will be to secure foreign trade deals as the UK leaves the EU.
New Chancellor Philip Hammond said one of his primary concerns has been the pause in investment and spending decisions following the result. He said Prime Minister Theresa May’s new Cabinet would move with speed and certainty to allay concerns, preserve the economy and protect the flow of investment.
This is very much a fluid situation and greater clarity may be forthcoming in the coming days and weeks ahead.
4. What trading arrangements and tariffs will the UK be able to negotiate with the EU and with other countries across the world, and how long will these take to agree?
The UK Government will need to decide what their vision for a UK out of the EU will look like. It has to be borne in mind that the EU exports more to the UK than vice versa.
Therefore, it is in both party’s interests, specifically with regards to key nations such as Germany, for a trade deal to be struck.
If, however, a deal is not struck, then the UK would most likely apply the World Trade Organisation (WTO) agreements that the EU has in place with its other trading partners. The time taken to negotiate deals with non EU countries will vary on a jurisdiction by jurisdiction basis.
5. What arrangements will the UK Government put in place to support companies who may find themselves in financial difficulties as a result of Brexit and how will they support these companies and their workers?
Please refer to the response to question 1 above.
6. How will the UK Government change its policies on immigration and what will that mean for UK businesses and their access to skills and manpower, and for multinational companies and international organisations based in the UK with multinational teams? What rules will apply to UK citizens who are currently working and/or living in other parts of the EU?
Firstly, the rules that will apply to the free movement of people will depend on the result of the negotiations which take place between the UK and the remaining EU member states. There appears to be growing evidence that the UK does not intend to involve Article 50 until early 2017, and the negotiations would then commence. If the UK ultimately ends up with a deal which sees it get access to the single market then, this may require for the UK to accept that the freedom of movement of people principle will still apply. However, this is a matter that is contingent on the terms of the deal negotiated.
If the negotiations result in a deal that does not involve the free movement of labour, then the rights of existing EU citizens who have exercised their right to either leave the UK and work/live in another EU member state or vice versa will depend on the terms of the agreement (assuming that there is one). At this moment the most likely outcome in such a scenario and from political comment is that persons who relocated before a set date (to be determined) would continue to be able to remain where they are located (if they wish to do so). At this stage one can only speculate on which date such a cut-off would apply.
7. Will the UK Government need to change workers’ rights and environmental protection?
In the period until the UK actually leaves the EU, the UK Government will not be able to make any changes to workers’ rights and environmental legislation that emanate from EU legislation.
On exit the UK Government will need to decide whether it wants to make any changes in these areas. The extent to which it will be able to do so will also depend to some extent on the terms of any agreement that it agrees with the EU. It will also need to take account of the views of the electorate, business and NGOs.
8. Might the UK Government now selectively support UK companies which EU state aid rules have hitherto prevented? Would our trading partners see this as unfair competition and seek to retaliate in some way?
Again, the UK will need to abide by the EU State Aid Rules until it leaves the EU. The extent to which it will be able to offer support post exit will also be subject to the rules of the World Trade Organisation (WTO) and to some degree depend on the terms of the agreement that the UK negotiates with the EU.
There is, however, the possibility that there may be some scope to offer more selective support particularly in relation to smaller entities. However, it should be noted that UK Governments have generally been supportive of strong state aid rules to ensure aid is well targeted to address market failures and avoid negative effects on competition.
Brexit Insights: Share your views
We are looking for CAs to contribute their views and analysis on Brexit as part of our new Brexit Insights series, to help shape the future of business and accountancy in the UK.
Get in touch with the ICAS Brexit team if you would like to be involved.