Brexit: A Major Challenge for Companies Operating in the UK

31 Mar 2017

On 23 June 2016, British citizens voted with a narrow majority (51.89%) in favour of withdrawing from the EU, thereby bringing an end to their longstanding love-hate relationship with the continent. Brexit proponents were driven by their strong aversion towards alleged overregulation by authorities in Brussels and a rejection of immigration of young people from the EU.

The Current Situation

Just over nine months later, the Brexit vote still divides British society: The British Prime Minister, Theresa May, initiated the official secession procedures on March 29, 2017. While May does not want the UK to maintain a partial membership in the EU and prefers her country to leave both the internal market as well as its customs union, several public campaigns and renowned politicians like former Prime Minister Tony Blair have kept trying to stop the Brexit.

 

Pixabay/ Elionas2

Consequences For the Economy

The details of the economic consequences of this historic decision for Britain and the EU remain to be seen even 9 months on. Economic experts provide conflicting forecasts on a daily basis. The coming years will show whether countries will experience the Brexit as a blessing or a curse.

 

For now, the United Kingdom recorded growth of 2% in 2016, but the pound sterling has weakened since the Brexit referendum. And even the creditworthiness of the UK has been downgraded by several rating agencies. In general, London’s position as the financial capital of the world has become unstable. Several major banks such as Goldman Sachs and UBS have already announced that they will set up offices in Frankfurt for their EU-related business. Other European capital cities will benefit from the crisis of the British financial hub.

 

However, companies from other industries will also seek to leave a United Kingdom that no longer wants to have ties to the European internal market. To combat this trend, the British Government is offering new incentives for locating to the United Kingdom such as low corporate taxes.

 

Companies that have economic connections to Great Britain, either because they maintain holdings there or conduct extensive business activities in the United Kingdom, can expect significant changes in terms of administration, finance and taxes. Questions of value-added tax and income tax, customs law and the free movement of workers must be revisited and re-evaluated, which will require a considerable effort. No fewer than 21,000 EU laws must be adapted for the UK’s departure.

 

Companies that have subsidiaries on the island are already starting to feel the effects of the continuing decline of the pound sterling and therefore face significant challenges in their balance sheets when compiling their annual reports. A decrease in investments, locations and assets associated with the decline of the pound sterling may cause problems for profitability.

 

To avoid financial and tax risks, companies should therefore seek advice at an early stage.