Britain is a hub of innovation, with UK technology centres vying to be the European home for the largest global technology conglomerates. Andy Morgan looks at how Brexit will affect one of the country’s most prominent sectors.
There is not long left until we discover the full impact Brexit will have on the economy. However, trade deal negotiations with the EU are still dragging on. It is increasingly difficult to plan for 2021 without knowing what the situation for European trade will entail.
Technology experts are particularly concerned about the implications of a No-Deal Brexit on the country’s fledgling UK tech start-ups and their ability to attract investment, given how important international venture capital (VC) and private equity (PE) money has been in recent years.
The UK has historically led the EU in terms of investment: VCs invested over £30 billion in UK companies from 2017 to 2019, more than France and Germany combined over the same period.
UK tech talent pipeline under threat
All this is without even mentioning that around 8% of workers in the UK tech sector hail from the EU. Restrictions imposed by the tier 2 visa cap, which restricts the number of skilled workers applying for work in the country to 20,700 annually, prevents UK tech firms from recruiting new employees from outside of the EU.
The pipeline of UK tech talent will need to be supplemented by other means, to avoid any disruption to the UK’s great recent track record in innovation.
A lack of a Brexit deal would mean all free-trade agreements disappear into the ether and, perhaps more worryingly for UK tech companies on both sides of the Channel, any moves to secure data-sharing rights between the UK and the EU may also be off the table.
Still, since the referendum in 2016, well-known tech conglomerates have gradually increased their London presence. For example, Google has re-affirmed its commitment to its new central London headquarters, a horizontal skyscraper known as the “landscraper”, and will move thousands of workers there once it is completed.
This is despite the tech firm’s decision to allow all of its global employees to work from home until July 2021. Indeed, the general rhetoric from US west coast tech giants in recent months seems to have moved towards a desire to form strong relationships with the UK, independently from the EU.
Stark differences between Deal and No-Deal
While established UK tech firms are more likely to be positive about the potential effects of Brexit, other sectors reliant on the movement of goods across borders are desperate for an agreement to be reached.
This is especially true for those with potentially high tariffs, such as food and drink and automotive. Clients in the automotive sector face tariff barriers ranging from 10-22% on finished goods alone, for example. A deal reducing these to zero is vital to their survival.
UK tech businesses in some areas may be insulated from the primary impact of Brexit, but no-one will escape the secondary impact on the wider economy.
This concern spreads to the public sector too, with local authorities aware of the economic make up of their regions and the deep potential impact the failure to reach a deal will have.
M&A for UK tech firms
M&A is a long-term decision-making process, and many dealmakers are in 'wait and see mode', approaching the post-Brexit world in a rational and considered way. However, some international tech vendors do seem to be actively considering inbound, incremental bolt-on M&A opportunities in the UK for next year.
At present, deals are still being done, and attractive, strategically important acquisitions are demanding premium valuations, albeit deal volumes are still relatively subdued. A time of high uncertainty and market volatility can be an opportune one as well, and some buyers will be ready to pounce.
Preparing for 2021
Given the time constraints, what are the steps you need to focus on in your preparations?
The training grant will cover up to £1,500 per employee for external training and £250 for internal courses
The recruitment grant will give you £3,000 towards recruitment costs for each new employee and up to £12,000 to cover the salary costs for each new or redeployed employee
Review social security positions
While Brexit negotiations are ongoing and the final outcome is still unclear, indications are that there may be agreement to mirror the current EU regulations for social security. Notwithstanding this, organisations still need to consider:
reviewing the social security position of their current mobile employees to ensure coverage is up to date
assisting with relevant social security applications in home/host locations
the potential impact if no agreement is reached and old bi-lateral agreements need to be relied on.
If possible, bring payments of intra-group dividends, royalties and interest forward to before December 31, 2020, to benefit from European Directives. Consider domestic and treaty positions for 2021 and beyond.
Ensure transfer pricing rules are up to date
Transfer pricing policies will need updating as new operating models are set up and intra-group transactions are implemented. It is particularly important to account correctly for the intangibles used and exploited around the group post-Brexit and in any pre-Brexit planning.
There is still time for you to get ready for 2021, regardless of the outcome.
For further support on Brexit, visit our Brexit hub.