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Everything Businesses Need to Know About Brexit

By February 28, 2020September 30th, 2020No Comments
Flags from the United Kingdom and the European Union

On January 31st, 2020, the United Kingdom officially left the European Union (EU). Although this move was over three-and-a-half years in the making, many questions and an uncertain future remain. Companies considering global expansion question how Brexit impacts doing business in the UK (and Europe as a whole).

The move also raises questions about whether or not companies should expand into the UK or look to an EU-member country that still allows them to take advantage of free trade across Europe and employ EU nationals with fewer restrictions.

This complete guide to Brexit provides businesses the tools they need to answer these questions and more. Keep reading to learn everything your company needs to know about Brexit before expanding into the UK—from its beginnings to what the future holds for UK-based companies and those looking to break into the market.

Table of Contents:

  • Breaking Down the Basics of Brexit
    • What is Brexit?
    • What is the EU?
    • Arguments for and Against the UK’s EU Membership
    • Brexit Aftermath: Arguments for and Against Leaving
    • Creating the Current Brexit Deal
  • The Current Brexit Deal and How the UK Plans to Move Forward
  • What Does Brexit Mean for The Future of Doing Business in the UK?
  • International PEO – The Key to Expanding into Volatile Markets

Breaking Down the Basics of Brexit

Before discussing how Brexit impacts global business, it is essential to understand the history of Brexit and how the current deal came to be. Many Americans only heard about Brexit after the 2016 referendum, but Britons have been debating whether or not to leave the EU for decades.

What is Brexit?

The term “Brexit” is a nickname that caught on with the public combining “Britain” and “Exit.” Brexit refers to the United Kingdom leaving the EU. The UK held a public vote, or referendum, in June of 2016, where British citizens voted to leave the EU. Over 17 million people voted to leave, which gave the “leave” side a 52% majority.

The roots of the Brexit debate and the arguments for and against EU membership are complex, but the critical issues that fueled years of deliberations include:

  • Financial Burden – The UK paid billions of pounds to the EU each year. While the EU funneled a lot of this money back into Britain, leaving the EU allows the UK Parliament to spend the money without EU oversight.
  • Freedom for UK Politics — Many members of Parliament who supported Brexit argued that the EU had too much influence over UK politics and wanted the country to operate with fewer European restrictions.
  • Immigration Challenges — The EU allows open immigration across the borders of member countries, which led to a surge in immigration to the UK. Some members of Parliament worried that this threatened jobs for UK citizens.

What is the EU?

The EU is a political and economic partnership between 27 European countries. Citizens of EU countries are allowed to live and work in any member country that they choose. The union also allows free trade, which means there are no extra fees or taxes to bring goods across borders. The UK joined the EU in 1973 when it was known as the European Economic Community, and is  the first country to leave the EU since its creation.

History of Tensions Between the UK and the EU

Britain started debating the pros and cons of membership in the EU almost as soon as it joined. Brexit was not the first referendum the UK held on the subject; in 1975, it held a vote over the matter where 67% of voters supported remaining. Despite voting to remain, the debate continued for decades among British people.

By 2012, members of Parliament put the pressure on Prime Minister David Cameron to revisit the issue of EU membership and hold a new referendum. Cameron initially rejected this pressure but announced in 2013 that the government promised to hold a vote if the public re-elected his Conservative party in 2015.

Shortly after David Cameron won his second term, he delivered on his promise and introduced the European Union Referendum Act 2015 to Parliament and announced the government planned to hold a new vote on June 23rd, 2016.

Arguments For and Against the UK’s EU Membership 

The subject of EU membership divided the UK for decades, but why was leaving so crucial to over half of British citizens? Immigration was a pain point, but there are plenty of other arguments.

1. Control immigration: As a member of the EU, the UK could not prevent a citizen of another member country from coming to live and work in the country. This rule led to a massive wave of immigration, particularly from eastern and southern Europe. Brexit supporters said they wanted to regain control of Britain’s borders and ensure British citizens filled working-class jobs.

2. Strengthen the UK economy with fewer regulations: Many Conservatives, the main political party in favor of leaving the EU, argued that EU restrictions often crippled the UK economy. Without these restrictions, the UK is free to make its own trade deals.

3. Save money: While the EU doesn’t directly collect taxes, it does require each country to pay a yearly fee that goes into a central budget for the organization. In 2018, for example, the UK contributed around £15 billion directly to the EU. The EU spends a large amount of this money on services in the UK, but Brexit supporters argued it would be better for the country to keep the money and allow Parliament to decide how to spend it.

On the other side, many anti-Brexit arguments also emerged, and they often directly contradicted what supporters thought freedom from the EU would bring the UK. Main arguments for remaining the EU include:

1. Immigration benefits UK citizens: Many anti-Brexiters support the freedom of workers to come and live in the UK, but the issues go beyond a surge in migrants—a lack of open borders creates problems for UK citizens wanting to live and work in Europe freely. This issue is worrying for students who are UK citizens but want to study in Europe and take advantage of lower tuition rates.

2. The economy will suffer: “Remain” supporters argued that Brexit would cause concern and uncertainty, making markets unstable and giving businesses reason to reconsider investing in the UK economy. This worry is already coming true, as some major companies announced that they are leaving Britain because of Brexit or threatened to do so. The list of companies considering a relocation includes Airbus, which employs 14,000 people and supports more than 100,000 other jobs. The government projected that in 15 years, the country’s economy could be 4% to 9% smallerif Britain left the EU than if it remained.

3. Avoid alienating the UK: Many supporters of the EU stated that leaving would divide the UK from critical allies and weaken Europe as a whole.

Creating the Current Brexit Deal

After the 2016 referendum, the UK government started debating a deal to officially cut ties with the EU. Then-UK Prime Minister David Cameron resigned from Parliament only a couple months after the vote, because he was a strong supporter of remaining in the EU and claimed that Brexit is an act of “economic self-harm.” Theresa May, another member of the Conservative Party, replaced him.

With May leading the new government, the original Brexit date was March 29th, 2019. This date would be the official day that the UK left the EU, so it gave May’s Parliament over two years to reach a deal. However, there was a long battle ahead of them.

Members of Parliament (MPs) voted down multiple deals May created, and the EU extended the deadline twice. After MPs voted down the third deal, May also resigned as Prime Minister. May’s replacement, Boris Johnson, asked for another extension, which was January 31st, 2020. Although a deal looked unlikely at the time, a general election on December 12th, 2019, gave Johnson a conservative majority, which allowed Parliament to pass a Brexit deal.

With a deal over three years in the making, many around the world remain curious about what it means for the future of living and working in the UK.

The Current Brexit Deal and How the UK Plans to Move Forward

On January 31st, 2020, the UK officially left the EU and entered a transition period that expires on December 31st, 2020. During the next 11 months, the UK follows all of the EU’s political and economic regulations, such as allowing open immigration, and its trading relationship remains the same.

Although this deal was in the works for over three years, the questions and uncertainty around Brexit remain, and the next 11 months could prove to be the most volatile in the UK’s Brexit story yet. The deadline to smooth over any cracks that Brexit creates is a short time away, and the UK government must request to extend the deadline no later than the end of June 2020.

If the UK and EU cannot reach an agreement by December (and do not file for an extension), Britain would crash out of the EU with no deal at all, raising the prospect of tariffs and border disruption that would mirror a “no-deal” Brexit that many lawmakers fear.

Navigating Brexit: What Does It Mean for The Future of Doing Business in the UK?

For businesses currently operating in the UK, not much immediately changes until the transition period ends. However, there are signs that Brexit’s uncertainty has already stalled the UK economy.

Since the UK is the first nation to break ties with the EU, experts have no precedent on which to make predictions, and many questions remain about what the UK economy will look like, and how businesses can prepare. Some critical considerations companies in the UK (or those looking to expand into the country) include:

1. Immigration troubles for EU nationals

As of August 2019, over two million EU nationals live and work in the UK. Once the government finalizes Brexit, these nationals may not be permitted to stay. Companies that hire EU nationals need to be prepared to lose workers or fight for their rights to remain in the UK legally.

2. Breaking from European restrictions hurts British exports and raises prices

While defending British jobs was the main talking point for those who favored leaving the EU, the truth is that many British jobs depend on European customers. Prime Minister Boris Johnson wishes to break away from the EU’s high standards on labor, the environment, and product safety. Firms in the UK economy that export more goods and services to the EU, import more materials from the EU, and employ more labor from the EU, need to be cautious; altering these standards bars UK companies from exporting their goods to Europe.

According to a survey by Harvard Business Review, businesses expected Brexit to eventually reduce their sales by around 3%. Experts anticipate the impact on exports to be negative, while unit costs, labor costs, and financing costs will increase.

3. Economic uncertainty reduces investment and employment growth

As another deadline for a trade deal between the UK and the EU looms, there is still the potential to miss that deadline and face a “no-deal” Brexit. Right after the Brexit referendum, this uncertainty caused an immediate reduction in investments in the UK economy and stalled employment growth.

Harvard Business Review estimates that Brexit uncertainty caused a 6% lower investment in the first year after the Brexit referendum (between July 2016 and June 2017). It also estimates that the employment rate dipped 1.5%, with a larger effect in the second year after Brexit (July 2017 and June 2018) than in the first.

The uncertainty around the future of doing business in the UK is stalling the economy, and things will likely remain unclear until the government reaches a final Brexit deal with the EU in December 2020.

International PEO – The Key to Expanding into Volatile Markets

Brexit comes with a lot of uncertainty, most of which is not going away anytime soon. However, businesses with plans to expand into the region can manage these cross-border challenges with an agile global expansion plan that prepares businesses to quickly adapt to changes that come out of the UK’s Brexit negotiations.

Partnering with an International Professional Employer Organization (PEO) like Velocity Global helps companies achieve their global expansion goals, no matter the uncertainties that surrounded them. Some benefits of utilizing International PEO include:

1. Flexible, agile solution

To navigate through Brexit-created volatility, you need a flexible global expansion solution that enables fast entry and a quick exit, if needed. When thinking about opening foreign offices, many companies believe establishing an entity is the only viable option. But the process of setting up an entity is long and expensive, and the teardown process is two to three times more expensive than setup.

International PEO makes the process smoother. This solution enables businesses with employees in the UK to leave and establish an EU base, with no lingering costs or time obligations.

2. Mitigate noncompliance risk without burden on internal teams

Brexit details change quickly, and it is challenging to keep up. Future immigration, trade, and economic policy in the UK will change, so you need experts who are ready to keep your UK-based employees compliant. With International PEO, our experts keep up with the changing labor laws and regulations, so you stay compliant, but the burden isn’t on you and your internal legal, HR, or finance teams.

If your company is expanding globally but is uncertain of the best approach to meet your business goals, reach out to Velocity Global. Whether your expansion leads you to the UK, an EU member market, or any of the more than 185 countries we operate in, our full suite of services and global expansion experts are here to help you succeed.