2020 – what Brexit means and how to prepare for it

This is advice for UK tech companies for 2020 and into 2021.

As anyone who follows me on Twitter knows (@smrdch), I am very negative about Brexit. For the last three and a half years I have hoped it wouldn’t happen but with the decisive election of the Johnson Tory government on 12th December 2019 Brexit is now certain to happen and of the various Brexit options in the excellent diagram of possible Brexit outcomes it will either be a Hard Brexit or a World Trade Organisation (WTO) rules Brexit.

This is my personal view of how it could affect UK tech companies including Episode 1’s investee companies, and what you should do to prepare for Brexit on 31st December 2020. 

The first important point is that for political messaging reasons, the government is going to portray Brexit as happening on 31st January 2020 when the real effects will only come into force on 31st December 2020. For 11 months of this year, we will be in a transition period subject to the Withdrawal Agreement (WA). We will still be part of the single market and customs union in that period, though of course politically the UK government will have no further say in making European laws and decisions, and our MEPs will all lose their jobs on 31st January. 

So from February onwards, the government will probably make a song and dance about how Brexit has had no effect, and at least until 30th June everything will appear relatively calm after the angst of the last 3 1/2 years. June 30th is the deadline given in the WA if the UK wants to ask for an extension of the transition period. Johnson has declared that he will never seek an extension and will soon even make it illegal for his government to ask for an extension.

That’s important because most experts agree that it is very unlikely that a comprehensive Free Trade Agreement (FTA) can be negotiated between the UK and the EU in 2020, and certainly not by the end of June 2020. So in the second half of this year, the UK will be negotiating from a position of weakness, ie with a fixed deadline at which a no deal Brexit could happen on 31st December and with the EU knowing that a no deal is much worse for the UK than it is for the EU (though admittedly the Tories and especially the ERG state – and imply they believe – that we hold all the cards and the EU will hurt enough to give the UK what it wants – they are surely wrong about that). 

Anyhow, what this means is that in the second half of 2020, there could be some turbulence in the UK economy if press speculation is that we are heading for a no deal Brexit, and more importantly it means businesses should start planning soon for the effects to come in 2021.

So what will be the situation in 2021? The worst case is “no deal Brexit 2.0” as Chris Grey calls it (for anyone planning for Brexit, Chris Grey’s Brexit blog is essential reading btw), and no deal 2.0 is slightly less bad for business than no deal 1.0 as he explains.

Trade – the aim of a Free Trade Agreement (FTA) with the EU is to agree terms for trade in goods. No deal would mean failing to agree a FTA and falling back to WTO terms which would impose standard tariffs on all goods moving between the UK and EU in either direction. Tariffs vary by product type from nothing to a huge 74.9% of the value of the goods and are fiendishly complicated with c 20,000 categories. Also some manufacturing processes have parts moving to and fro between EU and UK multiple times so potentially incurring multiple layers of tariffs. To complicate matters further, Trump has neutered the WTO so that it is currently in limbo and unable to rule over trade disputes. It seems likely that some sort of FTA might be agreed with the EU by end 2020, but it will be relevant to only some goods so at most 15% of the UK economy.

The UK economy is 80% services and most tech businesses provide services rather than goods. It seems likely that there will be no agreement by end 2020 on how to trade services between UK and EU. At least now we have plenty of time to plan, so my first key recommendation is:

  • at some point in 2020, at board level, you must plan ahead for the change coming to sales of your services (or products) across EU/UK borders

We are starting a Brexit readiness project early 2020 to:

  1. capture requirements across our portfolio,
  2. discuss and consult with various third parties, and then,
  3. give general advice applicable to our portfolio companies.

We would like to work with other UK based VCs on this – please get in touch if you are interested in cooperating.

Once we have the advice, if there are simple recommendations to be had, we will publish them (caveat: if the advice ends up being very company-specific, we reserve right not to publish as it might confuse).

People: many of our entrepreneurs and their employees are from the EU. Unfortunately, the UK government has taken a divisive and unhelpful approach to the 3 million EU nationals living here. However much we might dislike it, it is what it is and we can’t change it, so all our companies need to review the paperwork for their whole teams and assist any who need to apply for Settled Status which must be granted by the Home Office by 31st December 2020 for EU nationals to be able to stay and continue working here. 

The position for UK nationals living and working across Europe is less clear – though more likely to be ok – as European governments are tending to wait and see how it plays out for the EU nationals in the UK before making decisions about how to treat UK nationals in their countries. So the second key recommendation is:

  • help everyone on your team get the right paperwork to be able to continue working for you.

Hiring for talent to come to the UK has been a little harder since the 2016 referendum and will continue to be so. Help is available for bringing skilled workers in, like for tech development. Ask us or your other investors if you need help on that front. 

Other issues – our country is of course the United Kingdom of Great Britain and Northern Ireland, but expect Brexit in 2021 and beyond to cause challenges to the cohesion of the four countries. Firstly Northern Ireland will be treated differently with a customs border in the Irish sea and not even Boris Johnson understands the implications of that for trade between Northern Ireland and the rest of the UK. It’s unclear how the various communities in Northern Ireland will react to the changes, but many will be unhappy with the new arrangements especially if many tariffs are applied, so there could be challenges ahead.

Boris Johnson misleading the public regarding customs checks after the transition period

Scotland voted 62% to 38% to stay in the EU and especially if we have a no-deal Brexit, there will be more and more strident calls for another independence referendum. While it will be contentious, we believe there will be little impact on business between Scotland and the rest of Great Britain in the short term. 

So in conclusion, having resisted Brexit for 3 1/2 years, there is no stopping it now. We must do our best to mitigate its effects on business and at least we have 12 months to plan ahead because Brexit is only really happening when the transition period ends on 31st December 2020. 

Simon

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