Brexit throws up a raft of questions for tech companies about how Britain’s departure from the EU will change how they do business. Find out how it’ll affect you.
The decision of the United Kingdom to leave the European Union has been described as the biggest change facing the country since World War II.
For every firm in the UK, Brexit throws up a raft of questions for tech companies and tech workers about how the country’s departure from the EU will change the way they do business.
Any particular negative impact on the UK’s £180bn-a-year tech industry will be felt by the country as a whole, due to tech being one of the fastest-growing sectors of the economy and supporting a raft of related jobs.
SEE: Cheat sheet: Brexit’s impact on tech jobs and companies (free PDF) (TechRepublic)
What is Brexit?
Brexit refers to the UK leaving the European Union, and is a portmanteau of the words Britain and Exit.
The Brexit process was triggered by a referendum on the United Kingdom’s continued EU membership in June 2016, in which 51.9% of those who voted backed leaving the EU.
In the wake of the vote, Theresa May took over from David Cameron as Prime Minister, and set up a government to oversee the process of exiting the EU. At the end of March 2017, the new Prime Minister triggered Article 50 of the Treaty on European Union, starting a two-year countdown to the UK leaving the EU. The government thus effectively enshrined the date of Brexit in law, setting it as 29 March 2019.
SEE: The Brexit dilemma: Will London’s start-ups stay or go? (TechRepublic cover story)
Negotiations between the UK and the EU over the terms of departure began in earnest on 19 June 2017, about one year after the referendum. This focused on three basic issues: what will happen to EU foreign nationals already living in the UK, how much the UK should pay the EU to settle prior financial commitments, and how to avoid putting a hard border in place between Northern Ireland and Ireland.
How did Brexit happen?
An agreement on these issues was reached in December 2017, and was followed up by a Withdrawal Agreement that was negotiated between the EU and UK. That deal, which has become known as Theresa May’s deal, was voted down by 230 votes and was subsequently defeated a further two times.
Due to the lack of firm agreement in the UK Parliament over what form Brexit should take, the date that the UK would leave the EU was pushed back to 31st October 2019. Theresa May, in an effort to rescue her deal, announced that she would resign after a new vote on her amended Brexit bill.
The Conservative race to replace the Prime Minister started, and was won in the summer of 2019 by Boris Johnson – the leader of the original campaign to leave the EU who insisted the UK would leave the EU on 31st October 2019, “deal or no-deal”.
With a deal, however, still being preferable to crashing out of the EU, Johnson started working on revising his predecessor’s Withdrawal Agreement. The new version – which was actually found to be pretty similar to Theresa May’s – successfully passed Parliament and became law in September 2019. With one month left until Brexit, Johnson’s new bill still had to win over the House of Commons.
It didn’t; and so, despite Boris Johnson’s confidence, the October deadline passed, and the UK remained in the EU. The Brexit date instead was pushed again to three months later, on 31 January 2020.
Almost immediately, the Prime Minister announced an early general election to be held in December 2019. The goal? To recover a Conservative majority in favour of Johnson’s deal, and in his words, “get Brexit done”. In that, he was successful: the Conservative party won a historical number of seats, and Johnson’s Withdrawal Agreement finally got the green light from the House of Lords in January 2020 after some small amends.
On 23 January 2020, the European Union Withdrawal Agreement Act received Royal Assent, and eight days later the UK effectively left the EU.
What happens now?
Nothing much: at least, not immediately. On the eve of Brexit, and as outlined in the Withdrawal Agreement, the UK entered a so-called “implementation” period, due to end in less than a year, on 31 December 2020, and during which the government is hoping to negotiate a new partnership with the European bloc.
The interim status means that the UK is no longer a member state of the EU, and as a third country, it will no longer participate in the EU’s decision-making processes. But to avoid total disruption, some EU policies will still apply in the next year, including access to the customs union and to the single market. The UK will also still apply key programmes, such as the Common Foreign and Security Policy or the European Arrest Warrant, and will continue to be subject to the jurisdiction of bodies like the Court of Justice.
Crucially, the rights of the 3.7 million EU citizens living in the UK will be protected during the implementation period; and equally, the 1.3 million UK nationals living in EU member states will still be able to live, study, work, and travel freely between Europe and the UK.
The UK government has also said EU citizens and their families resident in the UK by 29 March 2019 will be able to stay and carry on working or studying and enjoy the same protections as currently available. To enjoy these same rights, EU citizens will need to apply for “settled status”, which will be open to EU citizens who have lived in the UK for five years without a break.
During the months of implementation, the government is likely to have a lot on its plate, to say the least. Boris Johnson’s cabinet will be negotiating the future relationship between the UK and the EU in a wide range of areas, from trade deals to security and defense cooperation, through to law enforcement and participation in EU programmes.
Johnson has already mentioned the possibility of a trade deal similar to the one currently in place between the EU and Canada, dubbed Ceta, which gets rid of most, but not all, tariffs on goods – but doesn’t include any concessions on services. Ceta came into force in 2017, eight years after negotiations started with the EU.
If things start looking thorny, the government has until 1 July 2020 to ask for an extension to the transition period – although the European Commission has said that a longer implementation time won’t come for free. The UK will likely have to pay a financial contribution in exchange for its on-going participation in the single market.
At the same time, the UK will be looking at bilateral trade deals with partners around the world, since EU agreements won’t apply once the transition period ends. The UK government has previously stressed the opportunities that Brexit will present for Britain to strike new international partnerships, and the government has sent ministers to Sweden, Singapore and Japan, among others, to lay the groundwork for British-based technology firms to work more closely with foreign counterparts after Brexit.
Membership body techUK previously raised concerns about whether a two-year long transition period, as initially scheduled in Theresa May’s bill, would be long enough for businesses to prepare for the new relationship with their EU trading partners. In that light, 11 months doesn’t seem like that much time.
Why does Brexit matter?
Brexit has the potential to impact multiple aspects of how technology firms operating out of the UK do business.
The primary reason is the uncertainty about the UK’s future relationship with the EU, and how that changed dynamic will alter existing regulations governing the day-to-day operation of tech firms in the country.
The big question mark is over how future arrangements between the UK and the EU will differ from the UK’s current status as a member of the European single market and customs union. Being in the single market allows goods and people to move throughout the European bloc as if it were a single country, while the customs union has the effect of removing the overhead of customs checks within the EU.
The sticking points for those opposed to single market membership is that it also includes the requirement that EU citizens should be free to live and work in the UK, and that membership would limit the ability of the UK to make its own trade deals.
The UK government and the EU have published a Political Declaration that builds upon Boris Johnson’s Withdrawal Agreement and sets a framework for the future relationship. The guidelines are not legally binding, but are rather meant to give a preliminary idea of what the future deal may look like, if an agreement is successfully struck before the end of the transition period.
The Declaration calls for an “ambitious” trading relationship based on a free trade agreement for goods, as well as a deal on services going “well beyond WTO” rules. On security, it recommends sustaining the exchange of information on missing persons and criminal records, and cooperation in the EU’s law enforcement agency Europol.
There remains the question of how Brexit will impact the ability of technology firms to handle EU data. The Political Declaration states that cross border data flows shall continue, but there is a caveat: for data to flow freely between the European bloc and the UK, the EU Commission will have to assess whether the UK meets data adequacy standards.
Data adequacy is a ruling by the European Commission that the country being assessed meets the bloc’s data protection and data privacy standards, as defined by the EU’s General Data Protection Regulation (GDPR).
To boost its chances of obtaining data adequacy, the UK has already taken steps to try to ensure its approach to data protection meets European standards. The Data Protection Act was passed in 2018 to enshrine the principles of the GDPR into UK law.
But some analysis says that Britain’s controversial Investigatory Powers Act, with its sanctioning of mass-surveillance, could hamper the UK’s ability to be granted adequacy, and have pointed out that a data-sharing agreement between the US and the EU took two-and-a-half years to negotiate.
For its part, techUK says the UK’s Data Protection Act 2018 will help ensure adequacy between EU and UK data protection standards, but warns that the time needed for UK and EU negotiations on an adequacy agreement is likely insufficient.
The government has also warned that in the event of a no-deal Brexit, “transfers of personal data from the EEA [European Economic Area] to the UK will become restricted once the UK has left the EU“. That could be a problem for a lot of firms, as the definition of personal data is quite broad, including any information that can be used to identify a living individual, such as a customer’s name, their physical or IP address, or employee details such as staff working hours and payroll details.
If the UK reaches the end of the implementation period without a trade deal, then UK firms would trade with the EU under World Trade Organization rules. These rules would see UK exporters paying new EU import tariffs, as well as facing other fresh regulatory barriers to trade, and the possibility of increased checks on goods at the border.
SEE: Electronic data retention policy (TechRepublic Premium)
What about the Irish border?
The Irish border, or rather the imperative to avoid a physical one, has been giving the government headaches ever since Article 50 was triggered. Theresa May had initially ruled out the UK staying in the single market or customs union, but the government quickly u-turned on this stance, as it realised that failing to reach a future trade agreement with the EU could lead to the return of a hard border between Ireland and Northern Ireland.
Since then, much of the government’s focus has been on solving the Irish border equation, and it is proving to be a tough one. Theresa May’s bill agreed to maintain full alignment with the single market and customs union should a trade deal not be reached with the EU – a solution called the “backstop agreement” that did little to please MPs.
Boris Johnson, once he took leadership of the Conservative party, vocally expressed his commitment to the Good Friday Agreement and promised to avoid physical checks and infrastructure on the border between Ireland and Northern Ireland.
So – to single market or not to single market? The Withdrawal Agreement now in place states that it has found a compromise. Northern Ireland, under the bill, will remain aligned to some EU rules that apply to all goods entering the region. This avoids customs checks and controls on the Irish island.
When goods enter Northern Ireland from the UK, there will be checks and controls via Border Inspection Posts, and custom duties will apply to the goods then headed for the EU’s single market.
The protocol on Ireland and Northern Ireland will come into force at the end of the transition period, and it is designed to let the Northern Ireland Assembly have a voice on EU laws affecting the region. In effect, every four years, the Assembly will vote on whether relevant EU laws should continue to apply.
Who will Brexit affect?
Every business, including British-based tech firms large and small. The principal issues worrying tech firms are the introduction of new regulatory barriers and tariffs to trade of goods and services, and restricted access to European skills post-Brexit.
Perhaps the biggest area of concern for the UK tech industry is access to skills. The sector is reliant on skilled workers from outside Britain, with 19% of digital technology businesses sourcing talent from the EU, and 15% of tech businesses sourcing from outside the EU, according to the government-backed UK Tech Nation report.
Tech industry body techUK says the UK’s digital skills shortage means the need for talent can’t be met domestically, and has warned the tech sector faces a “triple hit” on its ability to recruit and retain skilled workers, cautioning “there is significant uncertainty on access to EU talent”. That difficulty will be compounded, it stated, by restrictions on hiring workers from outside of the European Economic Area.
More than half (55%) of tech company founders surveyed by Tech London Advocates (TLA) said the biggest threat to startups in London was Brexit’s impact on access to skilled workers, with one third claiming an attempt to hire an international worker had fallen through because of the Brexit vote.
Since the vote, the recruitment consultancy Gordon & Eden says there has been a 40% reduction in applications from EU migrants for visas to work as technology executives in the UK.
And there are not only concerns over access to skills, but also over how the cost of employing skilled workers from the EU will increase, due to changes to the visa system.
UK-based Arm, which designs the chips inside 95% of smartphones and is now owned by Japanese firm SoftBank, has previously expressed concerns about the impact on Brexit on the availability EU workers — stressing it employs about 200 non-UK EU citizens at its Cambridge headquarters.
Under the government’s proposed Immigration and Social Security Co-ordination Bill, EU citizens will have to apply to come to the UK under a new skills-based immigration system, which will come into effect from 2021. The government has already pointed to a system in which points would be awarded for having English-language skills, being sponsored by a company, or meeting a certain salary threshold.
The points-based system is already used to allocate visas to visitors from outside of the EU. Critics, however, have pointed to the fact that the cap on those visas is rarely reached, suggesting that the scheme is already too selective to attract talent.
One fact the majority of tech firms agree on is that it would be disastrous for Britain to leave without any formal trade agreement for continuing existing trading and regulatory relationships with the EU.
In a survey of 276 member companies by tech industry group techUK, 70% said a no-deal exit from the European Union on the original March 2019 date would have a ‘very negative’ or ‘fairly negative’ impact on their business. Only 5% said it would have a ‘very positive’ or ‘fairly positive’ impact on their business. The primary reason for these members’ concern is the uncertainty that would result from a no-deal Brexit, in the key areas like access to talent and continued sharing of data outlined above, combined with the feeling that the UK hasn’t prepared for a no-deal Brexit.
Brexit will also mean the end of EU research grants that have benefitted various technology firms over the years.
Between 2007 and 2013, the EU funded nearly £7bn worth of research. Once British contributions to this funding are taken into account, this worked out as a net gain of about £300m a year for the UK. In the wake of Brexit, the UK Treasury has pledged to continue supporting “key projects supporting economic development across the UK”.
What has been the affect of the Brexit vote to date?
Many companies have reported that a number of European developers and other IT workers quit their jobs in the UK and left after the Brexit vote, feeling that they were no longer welcome. There is also some evidence to suggest that, rather than hiring staff in the UK, some companies are now building up teams in other European locations instead.
The impact of the Brexit vote on tech investments was initially mixed in the days after the 2016 vote. While there were a record number of investment rounds and takeovers in 2016 compared to the year before, according to figures from technology investment bank GP Bullhound, the number of deals dropped sharply in the second half of the year, following the Brexit vote.
A further slump was evident in 2018, according to figures published by London & Partners and PitchBook, which found that London’s tech companies received £1.8 billion that year, down 29% on the year before.
There have also been reports that the European Investment Fund, a public-private partnership that accounts for more than one-third of investment in UK-based venture capital funds, is scaling back efforts in the UK. To help offset any loss of investment post-Brexit, the UK government has pledged to invest £400m into British venture capital firms through the British Business Bank.
Business groups, such as the CBI, also report that some firms have put discretionary spending, such as large IT projects and tech investments, on hold while they wait and see how Brexit plays out.
Other figures have shown the tech sector to be more resilient, with London & Partners, the Mayor of London’s organization for promoting the UK capital, reporting that VCs invested more than £1.1bn in London’s tech sector in the six months to July 2017, more than any half-year period during the past decade.
In 2019, in fact, US investments into the British tech ecosystem reached record levels in spite of Brexit uncertainty. Research showed that over the past five years, the UK capital had received over $12.5 billion (£9.6 billion) from American investors – almost twice as much as the second European city, Berlin, which boasts $6.5 billion (£5 billion) investments from American VC firms in the same time period.
The outlook for the UK has also been buoyed by a series of major investments in the UK by large tech firms following the vote. Since June 2016, Google announced it would take on an additional 3,000 staff by expanding its London campus at King’s Cross, Facebook announced it will create 800 jobs at a new office in the capital next year, Amazon revealed plans to double its research and development team in London by adding 450 staff, and Apple committed to creating a £9bn new London headquarters at Battersea Power Station. That said, some commentators have pointed out that many of these investment decisions would have been made prior to the Brexit vote.
While Microsoft has stated that its commitment to the UK is unchanged post the Brexit vote, earlier in 2017 a Microsoft employee said that the firm could “build out our datacenters across other European countries”, instead of the UK, if large tariffs were introduced on datacenter infrastructure like server racks. However, Microsoft later said this individual’s comments “were not reflective of the company’s view”.
An analysis by law firm Bird & Bird predicts the Brexit vote to be a double-edged sword, with the possibility the vote will lead fewer overseas tech and comms businesses to establish operations in the UK to serve as a stepping stone to trade with other EU countries, and raises the prospect of UK-based regional headquarters being relocated. In European capitals, it is certainly true that money is being pumped into persuading UK tech startups to move following the Brexit vote.
However, the flipside of the vote is that, as a consequence of the value of Sterling dropping precipitously since the Brexit negotiations got underway, international firms may be more inclined to buy British tech startups, with Bird & Bird pointing out that Apple’s acquisition of British music analytics start-up Semetric in January 2015 for a reputed $50m would have been nearly 10% cheaper today.
The downside of sterling’s fall is that tech products and services are becoming more expensive in the UK, with Apple and Microsoft hiking the prices of their software and services in the wake of the Brexit vote.
And as the UK steps deeper into Brexit, some tech companies have relocated parts of businesses out of the country. ZDNet’s Steve Ranger recently reported on tech companies moving various parts of their businesses out of the UK and onto the continent, including back-office functions — those involving European tax or customs, for example — offices of tech companies serving the financial industry, and bank data centres.
Elon Musk, for one, recently had second thoughts about bringing a Tesla base to the UK. The tech entrepreneur, after fuelling hopes that the UK would be among the first European countries to boast a Tesla R&D base, if not a factory, had a change of heart and announced that a Gigafactory would be built on the outskirts of Berlin instead. He was reported to have justified the move saying: “Brexit made it too risky to put a Gigafactory in the UK.”
Still, after three-and-a-half years of uncertainty, now that the first stage of the UK’s Brexit process is completed, companies may be more willing to start spending again, and invest in new projects that have been delayed. As such, there may be a mini Brexit-boom in the first half of 2020 as firms and consumers relax slightly. Still, there is much to do before the end of the implementation period, due to close at the end of 2020. If the government doesn’t have a deal on trade, data protection and more by that date, then the real shocks will begin.