Finding the new normal after the Brexit referendum will take time and observation.

September 5, 2016

By: Bobby Casey, Managing Director GWP

Despite the Brexit referendum passing, nothing has actually changed yet. It’s like declaring and agreeing upon getting a divorce: there’s still the business of moving out, splitting of the assets, and various other agreements moving forward.

In terms of the UK and EU divorce, no one’s packed a single box yet. This is government we’re talking about here. While any normal human being wanting to get out of a bad marriage would have their stuff packed and out in a matter of minutes, governments are a not nearly as efficient in getting their affairs in order.

Part of the problem is just that: banks and markets are getting anxious because they know something is going to happen, but they don’t know what, when, or in what order. The uncertainty has everyone holding their breath or panicking a little.

It would be silly to think that the rest of the world will forsake the UK, but there are businesses who set up in the UK for the sole purpose of having access to the single EU market. If the trade agreements are thrown out the window, then the UK might see some corporate flight. One such example could be Vodafone:

In a statement, the company pointed out that its European businesses produce 55% of the group’s annual profit, the UK 11%. Britain’s membership of the EU had been an important factor in Vodafone’s growth, it said. “Freedom of movement of people, capital and goods are integral to the operation of any pan-European business, as are single legal frameworks spanning all member states.

The headlines are all over the place. On the one hand you have the nay-sayers who insist bullets have been dodged… for now! Some companies are in holding patterns, such as Seimens’. There are others, such as China’s biggest private conglomerate, Fosun Group, is saying things are business as usual and they are still seeking UK opportunities.

Both sides need to stop trying to sell it one way or another. The referendum passed. Panicking and getting the blame finger ready is irresponsible. It’s time to establish a new normal. That will very likely take several years.

Finger-crossing isn’t a sound business plan: neither before or after the vote.

For example, the business leadership of Legal & General understood changes were afoot and prepared in advance for a possible Brexit by removing risks from their portfolio. It isn’t to say they were totally unaffected. But the hit wasn’t nearly bad enough to consider relocation.

For Rolls Royce, while they didn’t want to leave the EU, they are committed to their over 20,000 employees in the UK and are saying they will stay.

One thing is for sure, the UK should not be expected to live under the EU’s political control just to appease businesses. Norway and Iceland aren’t EU members, but have access to the single market. Iceland even rescinded its bid to join the EU recently. Cleary, trade is possible without EU membership.

If the UK wants free trade, they will need to give a little on the free movement of people. Putting my own ideals aside, they should be looking at perhaps a special visa for EU residents. If they have employment, they can get a work visa, provided they pass a basic background check.

Right now, however, the big ticket on the table from the British right is tax cuts. First secession, now tax cuts? It’s like they are the United States of 235 years ago without all the blood shed! Everything from dropping their corporate taxes to 17% to eliminating them altogether has been seriously suggested.

Cutting corporate taxes altogether has to be one of the most brilliant ideas ever. If they were to do that, it wouldn’t matter what the tariffs were to trade with the EU. Not having to file, prepare, or pay taxes would be a HUGE boost to any corporate bottom line. I highly doubt the cost benefit analysis favors relocation to another member country of the EU, paying their taxes, but not paying for trade tariffs. Even if it made sense for some businesses, it certainly would have plenty of corporations thinking twice about leaving, and get OTHER corporations to strongly consider moving TO the UK out of places like… oooooh I don’t know… the US?

Let me temper that excitement with what happened with the “Double Irish”. Remember that little gem out of the Emerald Isle? Brussels put the kibosh on it because it was considered unfair tax competition between member nations. Of course, the UK, no longer being a member nation, no longer would answer to that… technically anyway. One concern, that isn’t entirely illegitimate, was brought up by Chas Roy-Chowdhury, Head of Taxation at ACCA (the professional body for accountants):

If the UK did try to offer tax rulings or introduce tax incentives that were contrary to the EU’s rules against unfair tax competition between members, it could actually put companies off due to worries about retaliation.

Perhaps this is possible. But I look at American companies that invert part or all of their business out of the US, and that hasn’t stopped consumers from buying the cheaper products that result from those decisions. I don’t see the United States telling large pharmaceutical companies to buzz off for inverting to Europe. I don’t see European countries refusing to transfer holdings to their country either.

The truth is, there are several economically struggling members of the EU who would either benefit from cheaper goods or suffer if denied access. That each member country can’t decide for itself whether to allow goods in from any non-member country is one of the reasons the UK left in the first place! The bureaucratic nonsense involved in getting “permission” to trade was absurd.

“The EU deal with Australia is being held up because some Italian tomato-growers are challenging it. The EU deal with Canada is being held up due to an unrelated dispute about Romanian visa,” Daniel Hannan, SE England EU MEP.

The uncertainty is thick. I understand it is difficult to make decisions based on the unknown, but the one decision companies, large and small, need to make is whether they in fact still want to be in business at all. Perhaps businesses who make up their minds first, could very well help shape the decisions made between the EU and UK? If enough corporations openly decide to firmly keep to where they are in the UK, the EU would have to think twice about cutting them all off from their union.

I have my eyes fixed on two things: trade agreements and corporate taxes. If the UK can push through an aggressive tax cut – even over the course of a few years – that would be big news for the rest of the world.

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