What does leaving the EU mean for businesses?

This briefing is largely based on the briefing by the House of Commons Library ‘EU referendum: impact of an EU exit in key UK policy areas’. The opinions and judgements it contains are theirs. We expect to review and add to these articles periodically as events develop.

The impact on business is one of four areas where the economic impact of leaving the EU will be most obvious, according to the House of Commons Library.

The EU legislates in a number of areas that impact directly on businesses. These include:

• Product specifications
• Competition
• Employment terms
• Health and safety
• Consumer protection

Regulation

If the UK withdraws completely from the EU and the European Economic Area, and opts out of negotiations on access to the single market, we will be free to regulate businesses largely as we see fit. This wouldn’t mean the end of EU regulations though. The government will undoubtedly decide to retain the substance of some EU laws. Businesses that export to the EU would still have to comply with many EU product standards too.

If the UK negotiates a relationship similar to that of Norway and Switzerland where their access to the single market is tied to their acceptance of many EU laws, the UK may not have the freedom to regulate as we sees fit.

The House of Commons Library has said that the overall impact of leaving the EU on businesses isn’t really about the impact it will have on the size of the ‘burden’ regulations create. It is about whether the benefits of having a more tailored and flexible national system of regulations outweigh the loss of access to the single market that may come with whatever relationship we negotiate with the EU.

We’ve written about estimates of the costs and benefits of EU regulations to UK businesses here.

Restructuring and insolvency

EU laws on insolvency are designed to coordinate cases across EU member countries, and to stop those involved from ‘shopping’ around within the EU for the most beneficial insolvency rules.

Once the UK has left the EU, the EU’s insolvency rules will no longer automatically apply to the UK. What this will mean for UK insolvency cases in the courts of the remaining EU member countries, and of EU cases in the UK, will depend on the results of negotiations.

One option may be for the UK to adopt a similar system to the EU’s current rules on insolvency. But to do this the government would have to reach an agreement with the EU. A second option may be to rely on other laws already in place in the UK for cases outside the EU. The ‘UNCITRAL Model Law on Cross-Border Insolvency’ has been adopted in national law in the UK as well as in other jurisdictions such as Australia, the US, and some EU Member States.

Public procurement

Much UK public procurement is regulated by EU rules. These are set out in the core European treaty, in EU directives and in UK regulations that result from the directives.

These rules are controversial because they are often seen as overly bureaucratic and because they limit the ability of public bodies to ‘buy British’. That said, they do offer UK firms the opportunities to supply the public sectors of other countries. They also make it easier for the UK public sector to reach a wider range of potential suppliers, potentially increasing value for money in its purchases.

In practice, direct cross-border public procurement is limited, the Commons Library says. An estimated 1.3% of the value of larger UK public sector contracts was awarded directly abroad in 2009-2011 and 0.8% of the value of larger public contracts secured by UK companies was directly from abroad.

EU public procurement rules also apply to other European Economic Area countries. Switzerland is subject to a separate arrangement.

The UK now needs to decide whether we want agreements with other countries to mutually open up their public procurement markets. One way of doing this would be to participate as an individual country in the World Trade Organisation’s General Procurement Agreement (GPA) for certain goods and services.

But this would mean that the UK had to allow suppliers in other countries to bid for UK public procurement opportunities and we would have to follow certain procedures in our procurement processes—potentially doing away with some of the reduction of burden that could follow from no longer having to apply EU rules.

Financial services

A huge amount of existing financial services regulation is derived from the EU.

Because of its size and influence, the UK has frequently led reform of financial services, checking retrospectively that it is aligned with EU rules. This has been particularly true since the financial crisis. It is likely therefore that a significant amount of this legislation will remain after withdrawal from the EU, though not necessarily in the same form or to the same extent.

There are various different models of interaction between non-EU Member States and the EU on financial services and it is not obvious which of these models, if any, will apply to the UK.

A possibly informative comparator is the relationship between Switzerland and the EU. Financial services trade is an area that could be particularly affected by a ‘Swiss’ approach.

Currently, financial services providers based outside the European Economic Area must generally establish a subsidiary or branch in the EU in order to provide cross-border services. The exact rules are currently a matter for national regulators in individual member states, but developments in EU-level financial regulation make the provision of financial services to the EU from outside the EEA increasingly difficult.

One study says that, to date, the Swiss have largely avoided any disadvantages caused by not being an EU member, by establishing subsidiaries within the EU. These subsidiaries are largely in London. Where they have not been able to avoid these disadvantages, they have benefited from a degree of EU ‘goodwill’.

The study agrees that new EU financial regulation could put the sector under pressure.

The UK might be in the position of participating in setting the new rules and negotiating a position to operate outside them. This would give the UK a different perspective from the Swiss, and given London’s position as a financial centre we might have more sway. The study above notes “Swiss relationships with the EU are not a formal model and the Swiss approach does not lend itself to being readily replicated”.

Taxation

Leaving the EU won’t make a huge difference to UK tax policy, aside from the major exception of VAT. There is a substantive body of EU law establishing common rules for VAT across member countries—and, to a lesser extent, excise duties (taxes on specific products, such as alcohol).

The EU sets a standardised system for VAT across all EU member countries. This includes a standard VAT rate of no less than 15% and a reduced rate for certain goods or services of no less than 5%.

VAT featured during the campaign as an area where it was argued that, if the UK voted to leave, the government could remove VAT on energy bills to make them more affordable for consumers. The UK can choose to do this once it has left the EU.

The fact that VAT accounts for around 17% of all taxes paid suggests that future governments will be unlikely to change UK VAT rules much, even though they will gain this power. So in practice VAT on energy bills may not be removed.

While in the EU, the UK’s tax laws have also had to comply with the freedoms of the EU in relation to the free movement of goods, people, services and capital. There have been a number of cases where the European Court of Justice has ruled that a member country’s tax code has gone against these freedoms.

Member countries’ tax rules also have to abide by the EU’s state aid rules. These rules, or similar ones, may well continue once the UK leaves the EU if we negotiate an agreement similar to countries in the European Economic Area.

The other area where the EU affects tax policy is in the measures it has introduced to tackle tax evasion, such as by improving the way in which member countries exchange information about businesses’ tax arrangements. It may well be that the UK will want to continue having some kind of EU-wide agreement similar to this once we have left the EU.