Having sat up through the night to watch the counts come in, it is clear that there is a relatively even split throughout the United Kingdom and the vote has been won by a relatively narrow margin. But looking at each region individually, there are huge differences in specific areas. Turnout has been higher than expected though (72% on average), so the voting public have engaged in the referendum process, with almost 20% using postal votes where they weren’t able to reach the polling stations.
This is a shock result though and one that we know many of our clients were not expecting. We have heard a lot of political and economic arguments, but we have asked our team of professionals to explain how we anticipate this will impact on our clients: Employers, Landlords, Individuals and Businesses.
1. Impact on UK Law
It is very important to remember 2 key facts:
i) The United Kingdom has a 2 year window to put in place the exit mechanism, and
ii) All of our laws are put in place by legislation in the United Kingdom, not directly by EU Law.
Therefore from a legal perspective today is business as usual. Nothing has changed as of this moment in respect of UK legislation – it is all still valid and in place.
So how does EU Law impact?
There is some impact in that those in the European Union are protected by its “fundamental freedoms” and if the UK legislation is considered to breach those freedoms then the European courts can rule that certain aspects of the UK law are invalid and fail. These cases tend to be related to business or taxes. The freedoms are to move goods or capital, free movement of workers, and freedom to provide services in the EU. This means that if the UK has a law that would restrict the ability of an EU member state to benefit from any of the fundamental freedoms, that aspect of the law fails. For example, the UK cannot have tax rules whereby a trust with an EU trustee is worse off than it would be with a UK trustee.
These laws are still written in UK legislation, but the right to challenge these on EU principles will be withdrawn. In practice it was large businesses who would use these rights of challenge to test UK law, but the principles established then applied to everyone.
2. Impact on Small Business
Many of our clients deal entirely within the UK market; we manufacture, run shops and cafes, have local printing businesses and, in the main, deal with UK suppliers and customers.
We anticipate the following changes:
i) The Ripple Effect: further up supply chains or down customer chains there may be a reliance on the EU free trade protections, which may disrupt otherwise very steady businesses.
ii) Finance: Overnight the economists have been suggesting that inflation will increase as the pound weakens in the short term, in light of the short term uncertainty. As the strength of the pound depends on confidence in the currency, is it reasonable to think that it would be impacted until the 2 year exit plan had been finalised?
iii) Employment: see below
iv) Funding: there are grants and funding available for training, recruitment, research and development work available under EU initiatives, which are likely to be withdrawn quickly. Any business that had been planning to make claims should review whether that funding remains available.
v) VAT: This is a European tax, and so may be withdrawn, replaced or, possibly, increase as it becomes a tax on movement of goods and services over the new EU border. See the section below for the early information by the Chancellor on the expected Emergency Budget and tax impacts.
Businesses with cross border transactions will find their costs, particularly outside of the EU, have increased in the short term whilst the currencies even out. Within the EU it may be that the euro also weakens and so, ironically, trade with the Eurozone may increase in the short term.
Employers will need to keep a close eye on the impact on their specific market, as the volatility in currency strength, exports, anticipated changes to VAT and their employees.
It has been warned that there will be increased taxes to plug the shortfall with public funding, which may well be applied as increased business tax, council tax and employer NIC. At the same time, many small employers are just introducing the pension requirements through auto enrolment. With the 3% tax increase being mentioned in the press, and a pension cost starting at 2% of wages, UK costs will be increasing.
Depending on how the exit is negotiated, there may no longer be a right to work in the UK for EU nationals. Employers with EU nationals should continue as normal today, unless or until the law is changed. It may be that they will require visas or permits, or that only skilled workers will be permitted.
It should also be noted that if interest costs increase, then mortgage costs will increase, and employees will be facing increasing costs in their home life.
- Individuals, savings and investments
Overnight the stock markets have reacted to this news, as forecasts had predicted that the UK would remain and this has gone against expectations. It is being commented that the voting public have not trusted the economic information that has been presented to them, and this early warning is that the movement on some of the overseas markets is down 15% (as at time of writing – 4am). If the LSE were to open at 4am, it would be 8% down overnight… we wait to see what happens as it opens.
Travellers and holiday makers are likely to find that their currency exchange rates will take a hit, not only in the EU and the Eurozone, but also against global currencies. Booking all-inclusive holidays would be a sensible decision to provide some degree of protection against fluctuating costs until the markets settle down.
Savings and pension funds holding share portfolios will be impacted in the short term, and those who have annuities based on the stock markets (which includes many annuity backed pension funds) may find that their pension annuity reduces, or that their fund is depleted as the capital is used to top up the income needed.
Expats and EU nationals living in the UK
It is not clear how this relationship would continue, as there are thought to be almost 3m EU nationals living in the UK, and a large number of UK nationals living throughout the EU. In theory, there will no longer be any entitlement to do so, as the fundamental freedom of movement allows EU nationals to live in different countries.
Many of the EU nationals in the UK are in lower paid employment and are a key part of manufacturing and care services, as well as providing seasonal work for agriculture. This will be a key aspect of the 2 year exit strategy.
Property traditionally holds value on long terms trends, but the UK has had recent tax changes that have impacted on the property market already, and so this is likely to create volatility. Until last year, overseas investors were not subject to UK capital gains tax on UK property; with this tax now introduced, and with the freedom for the UK to increase these taxes now, will be see overseas owners choosing to sell their UK properties?
Landlords with EU nationals as tenants will need to keep an eye on the exit strategy to see whether those nationals will be permitted to remain.
Inflationary impacts on mortgage interest need to be factored in when looking at forecasts, particularly as tax relief for that interest is being withdrawn. It may no longer be commercially viable for some landlords to retain all of their properties.
- Expected Emergency Budget
The Chancellor had warned that tax costs would have to increase in the short term, and that there is likely to be an austerity budget, with further cuts to public services. It has been widely commented that this was announced as a tactical move, as it would break with election pledges not to increase tax.
We expect to hear in the coming days as to how the UK Government intends to seek to restore calm to the UK economy.
This is a shock result and will create short term volatility, but based on what we have seen happen before it is reasonable to expect the marketplace to settle down in the near future. In the short term it is a matter of weathering the storm and preparing for the opportunities that may be presented by lifting of any restrictions placed by the EU on trade.
The UK is a nation that has proven adept at adapting – whilst the result may be a shock, now is the time to reflect and ensure that everyone is looking to their own businesses and investments to ensure that our country continues to thrive.
It is perhaps telling that we have come full circle, and the best advice we can give, as at 5am, is to Keep Calm and Carry On!
How we can help
If you need to speak with one of our team of professionals then we can assist with a wide range of legal and business issues, including:
i) Property Matters: Buying or Selling properties, quick sales or purchases, incorporating property portfolios into company structures, transferring between family members
ii) Business Matters: Buying or selling businesses, incorporating from a sole trader or partnership to a company, renewing your terms of business, restructuring
iii) Private Client Matters: Wills, Inheritance Tax Planning, wealth management and pensions
iv) Employment Matters: Ongoing Employment Law & HR support, employment contracts, support through restructuring your workforce, recruitment opportunities to redundancy
There will be a huge ripple effect, and we provide a range of other services ranging from debt collection and credit control services through to cashflow forecasting to help secure bank finance.
If you need to speak with us, give us a call and we would be happy to speak with you – no charge for an enquiry. We are a business and employer ourselves, and we are in this together!