The U.K. vote to leave the European Union has sent shock waves around the world and taken both the U.K. and the EU into wholly uncharted territory. This leaves global mobility professionals, especially those of you with employees or business in the U.K. and other European countries, wondering what lies ahead.
Three weeks have passed since the U.K. voted to leave the European Union, and it remains true to say that there are very few certainties at this time. However, there have also been a number of significant developments:
Protracted Volatility with Swift Changes
The expectation that the U.K. has entered a period of lengthy volatility remains, but events surrounding a new Prime Minister moved unexpectedly quickly this week. Long-serving former Home Secretary Theresa May became Prime Minister yesterday on July 13. May, who was mildly pro-remain, kept a low profile during the referendum campaign but has pledged to “make a success of Brexit” and has dismissed the notion of there being a second referendum.
May is also on record as favoring a delay in the triggering of article 50 of the Lisbon Treaty, which will formally start the process of U.K. disengagement from the EU. This delay is expected to last for several months and possibly through the end of the year. Meanwhile, the main opposition Labour Party is in turmoil as it heads for a bitterly fought leadership contest. This highlights a significant rift between grassroots supporters and trade unions on the one hand and its parliamentary party members on the other over the leadership of current party leader Jeremy Corbyn.
Volatility continues on the financial side. The day after the referendum result, Moody’s cut the U.K.’s credit rating from stable to negative. S&P and Fitch both followed with downgrades and expressed negative outlooks for the U.K. economy. Having fallen sharply, the British currency continues to test new lows against major currencies and is highly unlikely to return to pre-referendum levels any time soon. Currently, sterling is trading around 11-12% lower against the U.S. dollar than just prior to the referendum.
Rights to Live and Work Remain in Place for Now
While we wait for the political process of engagement to begin formally, it is important to note that until the U.K.’s disengagement has been negotiated, EU citizens already residing in the U.K. prior to the referendum will not lose the right to live and work in the U.K. There are roughly 3 million EU nationals currently living in the U.K., and they make up around 6.6% of the British workforce.
Similarly, U.K. citizens living and working in EU countries prior to the referendum will not lose their right to live or work there. There are currently around 1.3 million Britons living in the EU.
Free movement of EU nationals to and from the U.K. may be maintained as a result of U.K. exit negotiations in return for U.K. access to the single EU market. However, given the influence of the issue of immigration in contributing to the "leave" campaign winning the referendum, this is far from certain.
Lengthy Trade Negotiations
Negotiations on new trading arrangements between the U.K. and EU can be conducted in parallel with the disengagement negotiations, but it is quite possible that these negotiations could drag on for years to come. There are several alternative approaches the U.K. could follow in negotiations: seek membership of the EEA (European Economic Area) or the EFTA (European Free Trade Area), or seek to negotiate separate free trade agreements outside membership of either of these. The EU represents 47% of U.K. exports today. While 80% of this export volume to the EU is to eight countries, the remaining 20% is spread across a further 18 countries. It is safe to say that it is very likely going to take several years put in place any alternative agreements.
Focus for Mobility Professionals
Opportunities to Play a Vital Role
The many uncertainties now involved with the future relationship between the U.K. and the EU represent an opportunity for global mobility professionals. You can support your company by proactively modelling possible scenarios and their likely impacts on both current assignees and employees who may be affected. In addition, focus on the future recruitment and talent needs of your organization and the implications for compliance and newly applicable costs to the business.
It is also essential that you communicate regularly with your assignees and employees who may be affected by the Brexit, specifically reinforcing what is known and avoiding unhelpful speculation. Do not overlook the fact that any uncertainty felt by your employees will extend to all accompanying family members as well.
The most immediate practical challenge in assignee management that has resulted following the referendum is the sharp decline in the value of sterling against all major currencies. Assignees in the U.K. who are on compensation packages where components of salary, allowances and/or bonuses were calculated partly or entirely on host country (sterling) basis are adversely affected in terms of any portion of these being repatriated to their home countries.
For assignees in the U.K. who are on compensation packages where components of salary, allowances and/or bonuses were calculated partly or entirely on home country basis, then most likely they will be better off, at least for the short-term since they are receiving more pounds sterling. However, as ECA International notes:
“… they are likely to start feeling the effects of higher inflation in Britain as import prices rise because of the pound's depreciation…Furthermore, employees from the U.K. working in foreign countries who are paid entirely in pounds may require more immediate attention. Their spendable income will be instantly affected by sterling's depreciation because it can be converted for less host currency. An interim pay review could well be needed.”
Companies generally have annual, bi-annual or quarterly reviews of exchange rate fluctuations in place for their assignees, depending on the volatility of the destination. In the past, the U.K. would have counted as a very stable location, and annual or bi-annual review would have sufficed. With the degree of market volatility unleashed by Brexit, it is advisable that companies immediately commence reviews for possible adjustment and continue to conduct such reviews on at least a quarterly basis going forward.
There is no precedent for what has happened: the U.K. is the first country ever to exit the Union. So how will the U.K. withdrawal from the EU play out, and what will come next? And what will it mean for your global mobility program and employees?
While much analysis and speculation about the implications of a leave vote was generated prior to the vote, the truth is there are very few certainties at this time. Fortunately, we’re accustomed to handling constant change in this industry, and you likely are as well. So let’s look at what we do know and then address the remaining areas of concern.
What We Know
The U.K. is entering a period of political, economic and quite possibly social volatility that won’t be short-lived. The prime minister has resigned, and a new leader is unlikely to be in place before October – this effectively leaves the ruling Conservative party leaderless. The main opposition Labour party leadership is also under siege. The day after the referendum result, Moody’s cut the U.K.’s credit rating from stable to negative.
It will take at least two years for the U.K. to negotiate its disengagement fully from the EU. The disengagement will be negotiated with the remaining 27 EU members and ultimately approved by a majority of them as well as both the U.K. and European Parliaments. Until these negotiations are completed, the U.K. is required to abide by all existing EU treaties and laws.
The process will require working through approximately 80,000 pages of current laws that bind the U.K. to the EU. Both must agree on how to resolve EU budget issues, the division of assets and set out the future rights of EU nationals in the U.K. and vice versa.
Tax Law Shift
In the area of tax law, many U.K. laws are bound to EU laws and specifically incorporate what is known as EU fundamental freedom principles. Once EU directives relating to corporate taxation no longer apply in the U.K., a U.K. company with subsidiaries in EU member states would need to rely on the U.K.’s extensive network of double tax treaties to prevent effective double-taxation on intra-group dividend, interest and royalties.
Some Rights to Live and Work Remain
Until the U.K.’s disengagement has been negotiated, EU citizens already residing in the U.K. prior to the referendum will not lose the right to live and work in the U.K. Similarly, U.K. citizens living and working in EU countries prior to the referendum will not lose their right to live or work there. This is especially important to note for any of your employees currently in this situation.
Lengthy Trade Negotiations
Negotiations on new trading arrangements between the U.K. and EU can be conducted in parallel with the disengagement negotiations, but it is quite possible that these negotiations could drag on for years to come.
What Remains Uncertain
Beyond the key certainties listed above, everything else is speculation at this time. Much depends on the coming negotiations between the U.K. and the EU. These are some of the major areas of concern to those of us in global mobility, plus informed opinion of what is to come:
The Right to Live and Work for Those Going Forward
We’ve already noted that EU citizens already living and working in the U.K. prior to the referendum date (June 23, 2016) will not be affected and will be allowed to stay in the U.K. after full U.K. disengagement from the EU is completed.
However, it is possible (but not certain) that EU citizens who commence work in the U.K. between now and the completion of disengagement will also acquire similar rights to remain in the U.K. after disengagement in completed. According to immigration experts BAL, it is also possible that those who have lived and worked in the U.K. for less than five years by the time disengagement is completed will need to apply for permits to continue living and working in the U.K.
Economic Impact on the U.K.
The economic changes ahead will certainly affect the U.K., but it will also have more widespread ramifications. Businesses with locations or employees currently located in the U.K. or other European countries must pay particular attention to how these areas develop:
- It is likely (but not certain) that the U.K. will cease to be part of the EU’s customs union. This will mean that U.K. exports to the EU will be subject to EU customs processes, and in turn, that customs duties will apply. This will bring an added administrative and financial burden which will affect British business relative to their duty-free former EU partners.
- If there is no new deal on trade after the U.K. withdrawal from the EU is complete, World Trade Organization (WTO) rules will govern the U.K.-EU trading relationship until such time as there is one.
- One of the biggest areas of concern for U.K. business (especially the U.K. services sector) is the loss of preferential access to the EU market. The U.K. services sector accounts for 80% of the U.K. economy, and in 2015, nearly 40% of U.K. services exports went to the EU.
- A detailed analysis by the Economist suggests that it will take until 2019 for any new U.K.-EU relationship to take shape. By this time, the Economist expects domestic demand to be in recovery from the downturn caused by the referendum result - but from a new and lower base. It further anticipates the combined effects of restrictions on migration and the likely relocation of business (especially those in the services sector) will mean a decline in the U.K.’s labor force. This means a negative effect on already weakened productivity. The Economist forecasts that by 2020, the U.K. economy will probably have stabilized, but with real GDP at 6% lower than if the U.K. had voted to remain in the EU.
Potential Migration of European Headquarters and Impact on Jobs
This area is of special interest to those in our industry, and we will pay close attention to developments and changes as companies make decisions about their futures in the U.K. and EU. The U.K. is home to around 50% of all headquarters of multinational corporations operating in the EU, so there is much potential for upheaval.
As Radius, a global business expansion advisor, points out, the potential for a reintroduction of withholding taxes on the repatriation of dividends out of Europe via a historic U.K. holding structure will be a cause for concern for many multinational companies operating in both the U.K. and the EU. In addition, the elimination of the EU Mergers Directive, which provides for deferred tax in the event of the transfer of assets and liabilities between companies in different EU member states, opens the way for “exit charges” on any cross-border transfer of assets and liabilities between U.K. and EU companies within the same economic group.
The impact of potential European headquarters migration or transfer of operations out of the U.K. is greatest in London and in the global financial services sector. Banks based in London are reported to have already begun looking at shifting some operations outside of the U.K. Frankfurt, Paris, Dublin and Amsterdam have all been mentioned as alternatives as banks consider moving staff from London to locations within the EU.
This potential impact is not confined to financial services. In the immediate aftermath of the referendum result, companies in the technology sector (such as Samsung) are rumored to be considering a move of their European headquarters out of the U.K. Other tech sector companies such as LG Electronics and Acer are also looking at shifting operations. Acer CEO Jason Chen is on record as saying the U.K.'s departure from the EU will weaken demand in the European market due to lower consumer confidence and exchange rate fluctuations.
Finally, the U.K.’s Institute of Directors (IoD) surveyed 1,000 of its members in the immediate aftermath of the vote and found that 25% plan to freeze recruitment, with a further 5% planning to cut jobs. More than 60% of members surveyed said the vote was negative for their business.
The EU focus now is on getting the process of the U.K.'s exit underway and setting a timetable. When the U.K. invokes article 50 of the Lisbon Treaty, this will be triggered. The EU has already signalled that it wishes to move on the U.K.’s withdrawal as soon as possible. This is in part to contain any turmoil within the remaining members of the EU as well as to limit the possible ripple effect to other EU countries with high public discontent with the EU.
On the other hand, the U.K. shows no sign of a similar haste. The earliest likely start date will be after the new Prime Minister has taken office, which probably will be no earlier than October.
A “Disunited Kingdom”
An abiding irony of the U.K. referendum is that the vote was meant to lay to rest a decades-long simmering political issue, yet the result very much projects an image of a “Disunited Kingdom.” Voters in Scotland and London voted overwhelmingly to remain in the EU, and majorities in the metropolitan areas of Birmingham and Manchester as well as in Northern Ireland also voted in favor of staying in the EU.
On the other hand, the rest of England and Wales voted overwhelmingly in favor of leaving the EU. The geographic differences in the vote spell long-term political trouble. Scotland is already pressing for another referendum so that the Scottish people can decide if they want to be in the EU (not a single polling district in Scotland voted to leave the EU). And there are now strong voices in Northern Ireland in favor of uniting with the Republic of Ireland, which is a staunch EU member.
Political leaders in the U.K., especially those who led the Leave campaign, should be equally troubled by the sharp generational divide on the issue of EU membership. Younger U.K. citizens (especially those just under voting age) overwhelmingly support being part of the EU. Most polls of 16- and 17-year olds put support for U.K. membership in the EU at 75% or more. Among 18-24-year-olds who did vote in the referendum, 75% voted to remain. In the immediate aftermath of the referendum, there has been a tidal wave of outrage on social media from this group against the result. It’s safe to say that we can expect further political and social volatility over the next few years in the U.K.
At this time, there are a great many more questions than there are answers about the consequences of the U.K.’s withdrawal from the EU. While it is certain that sweeping changes are coming, it will take time for the details to emerge. With so much open to speculation at this point, it is perhaps inevitable that such speculation runs from mild to wild.
Our role is to provide reasonable advice and guidance to affected companies and clients relocating and assigning employees in the U.K. and Europe. Lexicon will be at the forefront in tracking developments from our on-the-ground presence in the U.K. and will continue to share practical updates, informed analysis and insights in the time ahead.
BAL/ Backgrounder: THE UNITED KINGDOM Brexit Referendum
BBC / City firms may lose 'prized' EU access, say Eurozone leadershipBBC / Brexit: Five challenges for the U.K. when leaving the EUBBC / Many companies plan to impose Brexit hiring freeze
Economist: Out and down: Mapping the impact of Brexit
Fortune / Brexit Worries Are Slowing Down Hiring in the U.K.
International Business Times / Brexit impact: Samsung may move EU headquarters from London
Radius / Now That Brexit Is Official, US Businesses Should Keep Calm and Consider the Implications
Harvard Business Review /A CEO’s Guide to Navigating Brexit
Smith Stone Walters / How Will the Vote to Leave Affect UK Employers?
BBC / Brexit: What does it mean for expats, here and in the EU?
BBC / The Expats Who Became 10% Poorer Overnight