23 June: Britain decides
Markets hit as firms ask what happens next
The US markets opened sharply down, following the plunge in London and Europe. London staged a recovery bargain hunters moved in to recover a large part of the early morning loss (see below).
Companies, particularly those which export or employ overseas workers, no want to know how the end of EU control will impact on such things as the hiring of labour, taxes, regulations and the supply chain.
Here is a selection of comments and observations from the experts:
David Davidson, Chairman of Cushman & Wakefield in Scotland, said: “The uncertainty leading up to the EU Referendum has resulted in a drop of 39% in commercial property investment transactions so far this year. In addition many decisions on property re-locations and expansion plans have been delayed. It is difficult therefore to see how this vote for the UK to leave the European Union and the uncertainties this will create will turn the fortunes of the Scottish Property market around for the remainder of 2016.
“However, now the vote is out the way some projects will move forward. The best we can hope for is that the fall in value for sterling against the euro and the dollar will attract more inward investment and that Scottish entrepreneurialism will come to the fore and look for ways to take advantage of the opportunities and challenges ahead.”
Paul Hilton, CEO of ESPC, said: “There may be more caution around the property market due to the uncertainties, particularly if the pound remains weakened. However, we are confident that the Bank of England will act swiftly to calm the markets over the next couple of weeks and months.
“History is showing the property market in east central Scotland is remarkably resilient and property values were not as effected by the housing market crash during the global recession as other areas of the UK, so it will likely stabilise once the effects of leaving the EU are determined.”
Mark Weedon, Head of Research at Property Partner, said: “In the short run, housing transactions in the mainstream market are likely to remain low, but the ‘stickiness’ of residential property may prevent house prices from actually falling, with the probable exception of London’s most expensive areas.
“Unlike other asset classes, far fewer people are willing to sell residential property in uncertain times, which in turn further reduces supply and eventually provides upwards pressure on prices.
“Now more than ever, investments that bring in a reliable income will be highly prized. The net yields on our platform, for example, are up to ten times the Bank of England Base Rate. And of course, Brexit could lead to rates being cut.
“Looking further ahead, the fundamentals of the mainstream UK housing market should reassert themselves. With demand still far outstripping supply, house prices should trend upwards, albeit perhaps at a slower pace.
“And massive infrastructure projects will still go ahead.”
Stock market / equities
- Housebuilders took the biggest hit when the market opened as investors fretted about a slump in the property market. Taylor Wimpey fell 40.3%, Berkeley35.9%, Crest Nicholson 34.8% and Barratt Developments 28.6%.
- UK-focused banks were hit particularly hard. Lloyds Banking and Royal Bank of Scotland lead the fallers, Lloyds down 26.1% while RBS fell 19.4%. Barclays did not escape the sell-off due to its large presence on the UK high street, falling 27.9%.
- Concerns about a slump in consumer confidence and the knock-on effect to spending patterns put a dent in leisure and retail stocks. Restaurant Group fell 29.8%, WH Smith retreated by 27.4% and Halfords droped 21.9%. In a double whammy of property and consumer spending fears, kitchens seller Howden Joinery dropped 23%.
- However, the FTSE 100 has rallied from its lows. After plunging by almost 500 points at the open it was down 163 points (- 2.58%) by mid-afternoon and some buyers have been snapping up bargains. The index is no lower now than it was ten days ago. All the market has done therefore is give up the ground it made in the week ahead of the vote.
- The Dow Jones in New York opened 460 points or 2.6% lower
Small business Ed Molyneux of Edinburgh-based FreeAgent, said: “UK’s micro-business sector and a lot of people will be very concerned about what the future will hold.
“The ramifications of leaving the EU are going to be huge. The UK government must give every business owner clear, up-to-date information about what the effects of Brexit will be on important issues such as trade and tax. The last thing the business sector needs is to be kept in the dark.”
Oil and gas
Derek Leith, EY Partner and head of Oil and Gas Tax, said: “The impact on the sector as a result from the UK leaving the EU, will not become visible overnight and will primarily stem from the regulatory side. The industry has so far been following European wide regulation on health and safety and recruitment issues, which will now have to be reviewed.”
Laura Mair, tax partner at EY Scotland, said: “On the corporate tax side, a vote to Leave the EU opens up the option for the UK government to offer more state aid, which could support large infrastructure projects.
“In addition, the anti-tax avoidance directive, which passed through the EU parliament earlier this week, will no longer apply to the UK once the UK has exited. Although this will allow UK lawmakers more freedom, it is unlikely that the UK would choose to deviate far from it, given the country’s active role developing similar proposals within the OECD.”
VAT and other indirect taxes
Stewart Matheson, EY Partner, VAT and Indirect Tax, said: “The potential impact of the vote to Leave on businesses in relation to VAT and indirect taxes such as customs and excise duties should not be underestimated. However, with the UK unlikely to initiate Article 50 until after we have a new Prime Minister in place, followed by a two-year negotiation period, the outcome will take time to filter through while there is a period of reflection on all sides.
“European VAT Directives provide for a harmonised VAT framework across the member states. These provide a uniform tax system with the aim of promoting competition and trade. The VAT free movement of goods and services cross border and the use of simplifications to minimise reporting obligations between EU member states are all likely to be impacted.
“Established supply chains may need to be reviewed and compliance obligations reassessed. Financial systems will also need to be evaluated to recognise the amended VAT and indirect tax reporting obligations to ensure compliance. The UK will not be bound by EU legislation in relation to upper and lower rates of VAT and no longer bound by precedents created in the ECJ.
“The extent of change will only become known once the plans for exit are firmed up and negotiations over treaties with the EU are concluded. Companies should use this period to consider what will make the transition as easy as possible for them.”
James Stanton, deVere Group’s Head of Foreign Exchange, said: “The Brexit victory has dragged the pound down, as was expected. But the scale of the drop has been a shock – it plummeted to its lowest level since 1985.
“However, moving forward as the dust settles, it can be expected that GBP/USD resistance could be found at 1.35 with support levels found above 1.38. Similarly, I believe that GBP/EUR will soon test levels at 1.20.
“In the longer term, I think that the Euro will be fundamentally weakened by Brexit, as it could serve as catalyst for full EU break up as other member countries calling for referendums.
“This news was always going to create a huge panic sell-off and bearing in mind the wider impact this will have on the Euro, many sensible investors will be seeking to look to cash in on a Brexit-battered pound.
“UK banks are stress-tested to deal with this kind of news, as Mark Carney, the Governor of the Bank of England has said this morning, and will offer a lot of support during these testing times.
“We can expect the pound to begin to stabilise over the next week, thereby creating better selling opportunities for investors and, indeed, the wider public.
“I strongly believe GBP/EUR will recover back nearer to the 1.30 mark and GBP/USD to 1.45 by the year’s end. Investors will be using the plummeting pound to their long term financial advantage.”
Martin Bell, tax partner at BDO, says: “The UK’s exit from the EU and the announcement from Nicola Sturgeon that preparation for a second independence referendum will begin immediately means that other taxes such as corporation tax and now possibly VAT could come under Holyrood control in the medium to long term. This further increases the likelihood of tax competition and arbitrage within what is currently the UK and further challenges for UK businesses operating both north and south of the current border.
“The UK will no longer be part of EU’s Customs Union. As a result, EU’s customs duties could apply to imports from the UK, making it less attractive for EU companies and consumers to source goods from UK companies.
“Similarly, the UK Government may extend the current UK customs duty tariff to imports from the EU, adding costs for UK companies reliant on raw material and finished goods from EU suppliers.
“Practical barriers would also arise as all goods would need to be customs cleared (first exported, then imported, in both directions), adding time, complexity and cost to value chains.
“After a Brexit, sales of goods to and from the UK may no longer be able to use the EU’s acquisition and dispatch system (accounted for on VAT returns). Instead they would become imports and exports which would need to clear customs and incur import charges – triggering a cash flow disadvantage (the delay between paying customs charges and entitlement to recover the input VAT). This can be mitigated by using deferment and customs warehousing arrangements.
“UK businesses that are required to register for VAT in some EU member states – for reasons such as they hold stock there – will have to appoint a fiscal representative locally to deal with their returns.”
Guy Lougher, partner at Pinsent Masons, says: “There will be changes in the free movement of workers from EU countries into the UK. What that means is going to vary, so in the construction sector which relies on a lot of EU skilled labour that could have quite a significant impact.
“It will be the same for high tech sectors such as research which rely on a lot of very skilled EU labour. Other areas it might have a particular impact are those which rely on a regulatory passport which is obtained in the UK to operate in other EU states, for example financial services and airlines.
Also affected will be those companies that have a lot of IP rights, they may need to think differently in the future about how they try to protect their IP rights.
Jo Hennessy, partner at Pinsent Masons, says: “Business can take some comfort in the fact that any changes to the free movement of labour rules will not be immediate. Freedom of movement may ultimately be negotiated in exchange for free movement of goods.
“Employers that have not already done so should now be reviewing their workforce to establish the extent to which they rely on EU workers for their UK activities, and the extent to which they require UK nationals to move between offices and facilities within the EU. The worst case scenario is that a proportion of your workforce will have to leave the UK. If free movement is removed or restricted, it would become more difficult for employers to recruit from the EU and, potentially, retain the employment of existing EU nationals.
“Employers should also consider what contingency plans they have in place to fill roles and address skill shortages in this scenario. Do they have other staff settled in the UK who can fill these roles if needed? They may also be able to encourage workers that are essential to their business to apply for permanent residency or citizenship to try and safeguard their status in the UK as far as they can, although this may be a costly and time-consuming process.
“If free movement is ultimately removed, recruitment of EU nationals could be limited to skilled or highly skilled work only, mirroring the approach taken for non-EEA nationals. This would be a significant shift from the status quo, while any new salary thresholds could particularly impact on industries heavily reliant on EU labour such as construction, retail, hotels and leisure.
“As well as increased salaries, any system requiring visas for EU nationals to work in the UK will significantly add to the cost and red tape involved in employing such people: it’s becoming steadily more expensive to employ non-EEA nationals, and if the same approach was applied to EU nationals that may price some businesses out and exacerbate skills shortages.
“The government would also face pressure to review its shortage occupation list and potentially the salary thresholds, to recognise the impact a restriction on freedom of movement would have on industries already struggling with severe shortages.
Guy Lougher says: “What businesses need to think about now is if they’re relying on external funding then what are the conditions of those funding arrangements? Might they be affected or triggered by Brexit events? They need to be looking at what funding they have at the moment.”
Guy Lougher says: “The possible application of tariffs means companies should look at their commercial agreements. What do they say? Do they allow the tariffs to be passed on? Who’s going to pay for it?
Some supply arrangements will have a definition of a territory which may just be defined as the European Union. Is it clear how Brexit is going to affect that? Is the UK going to be considered to be in the definition or not? They are going to need to go back to basics and look at the core agreements they have and review those to see what the impact might be and it’s going to be a pretty painstaking process.
Alastair Meek, partner at Pinsent Masons, says: “The single most important thing to do is not to panic. Trustees should focus on what might matter straight away (the markets) and not on what will take some time to get going (legislative and regulatory change).
“Markets react quickly. Economists have predicted varying levels of market volatility following a vote for Brexit. Pension scheme trustees would need to review their medium-term investment strategy. In particular, they should consider whether there are any sensible things they could do to mitigate against volatility. They should also seek to understand as an early priority the impact on the employer’s business.
“As far as legislative and regulatory change is concerned, trustees need only adopt a watching brief until government policy becomes clear. The government would need time to decide what elements of EU law are worth retaining, and what can be overhauled. Trustees shouldn’t mistake the interesting for the urgent.”
Tobin Ashby, partner at Pinsent Masons, says: “The vote to leave the EU means some financial firms could now reconsider how they are structured for European operations, as it is uncertain what arrangements might be agreed in place of the current ‘passporting’ arrangements that many London-based firms use to avoid the need for multiple authorisations across Europe.
“It seems likely that the UK will push to negotiate an equivalence regime to replace passporting when the UK’s membership of the EU expires to allow UK-based firms to continue to access other national markets in the EU relatively easily. However, those negotiations are likely to take place within broader talks over the terms of the deal confirming the UK’s EU exit which are likely to take many months, and quite possibly years, to conclude.
“Some UK-centred companies with business across Europe could look to relocate to other European financial centres such as Frankfurt, Paris, or in some cases Dublin, if they view passporting rights as so central to their operations that they are not prepared to endure uncertainty whether an equivalent regime would allow them to continue to use London as a base for Europe-wide activities. Those other financial centres may well view the UK’s exit from the EU as an opportunity to increase their influence and it is conceivable this could complicate agreement on an equivalence regime.
“However, London is not just a major financial centre because it is a gateway to Europe through the UK’s EU membership and associated passporting regime established by EU law. London is also an important centre for markets outside the EU and will continue to be so even with the UK leaving the union and so firms will not necessarily be looking to move their central hub from the City.
From a regulatory perspective, we do not expect UK financial services regulation to suddenly deviate from that which currently applies throughout the EU. Much of the existing regulation is enshrined in UK law so any changes in approach will realistically come about gradually over a period of time.”
Elizabeth Budd, partner at Pinsent Masons, says: “Banks, insurers and wealth management firms will now have to identify the core requirements stemming from EU regulations and directives that they need, and then lobby the government to stick to these requirements as they negotiate the terms of the UK’s exit from the EU.
“The UK will, of course, have equivalence on Day 1. Unpicking 40 years’ worth of regulatory and legal evolution in the form of directly-applicable regulations, and domestic legislation in line with UK directives, is time intensive and laborious and not necessarily in everyone’s best interests overall. What we may see is a subtle divergence in regulatory requirements over time. Given the UK’s position against the bankers’ bonus cap, the assumption is that this will be one of the first EU-led initiatives to change – but it remains to be seen how this would be done, and to what extent this would impact on equivalence negotiations.
“Some major third countries, including the US, do not have equivalence across the board, which has not prevented them from conducting substantial amounts of business with EU-based firms.”