Brexit deal: What Start-ups Need to Know

On 23 June 2016, despite the betting odds being largely in favour of “Stay”, the UK decided to leave the European Union. Four and half years later, we finally know what this means – or at least have a guiding framework as several items still need to be worked out. For those of you who need a reminder of the complex chain of events triggered by the results of the referendum, I've included a full time line up until the trade deal was agreed on 24 December, 2020 below.

 

In the meantime, let’s go back to May 2016. Ahead of the  referendum result, Accel published a post discussing the potential implications of Brexit for start-ups. Then, the expert views on the outcome for the UK were fairly negative. In one of the most comprehensive polls of experts (FT poll of more than 100 economists in Jan 2016), more than75% thought Brexit would adversely affect the UK’s medium-term economic prospects; only 8% thought Britain’s economy would benefit.

 

Back to today: were these predictions accurate? Did the deal reached on 24 December  negatively impact the tech ecosystem? In 2016, we highlighted five key areas which could have a major impact on start-ups: freedom of movement for EU and UK citizens, Fintech regulation, EU R&D funding, data privacy and currency impact. Let’s have a look at where we landed.

 

Freedom of movement

For EU founders or start-up employees already living in the UK, the changes are minimal. EU citizens already living in the UK can apply for the EU Settlement Scheme to continue living in the UK after 30 June 2021 (which is the deadline for applying). So nothing really changes and the application is very straightforward. Similarly, UK citizens living in an EU country will need to go through a country-specific residency application. 

Unfortunately, for the future, the changes are more significant with no right to live or work in the EU and vice versa. However, both parties have put in place specific rules to facilitate short term business trips and temporary secondments of highly skilled employees. UK nationals will need a visa if they want to stay in the EU for more than 90 days within a 180 day period and similarly EU citizens traveling to the UK will need a visa. How difficult it will be to obtain these visas is unclear, but the UK has Start-up, Innovator, Global Talent and Investor visas, which are all relevant for the tech ecosystem and will hopefully be prioritised. So, if your start-up requires frequent back-and-forth trips to the EU or vice versa, it’s a good idea to start keeping track of the number of days. Also note that ID cards won’t be a valid form of identification when travelling between the UK and EU anymore; you’ll need a passport. The other thing to pay attention to is mobile roaming. Nothing has been agreed yet, so your phone bill may increase significantly. Check with your operator.

So, net-net, start-ups will have to carefully check the rules before sending someone to work in the EU (or the UK), particularly as there may be some differences in rules depending on the member state visited. It will very likely mean more admin and paperwork, which isn’t ideal for the ecosystem as we’re now seeing more and more start-ups expanding across Europe. In the current environment, physical location has become less important, but the balance office/home will likely be different post pandemic and the need for a founder to travel frequently to a newly open country will unlikely go away. 

 

Fintech

The biggest risk we highlighted in 2016 was the potential loss of European passporting for financial services. This benefit enables firms that are authorised in any EU state to operate freely in any other with minimal additional authorisation. These passports are the foundation of the EU single market for financial services. In anticipation of UK firms’ inability to participate in the passporting system going forward, EY has stated that since 2016 more than 7,500 financial services jobs have left the UK.

Unfortunately, the trade deal doesn’t cover financial services and both sides have agreed to discuss this topic separately. This means that on 1 January 2021, the passporting rules no longer apply and UK financial services firms won’t be able to serve EU customers and vice versa. The only exception is for UK clearinghouses, which have been granted temporary equivalence.

While discussions are ongoing, how long it will take for the UK and the EU to reach an agreement is anyone’s guess at this point. This is obviously a big blow to London’s fintech ecosystem. 

 

EU R&D funding

The UK is the second largest recipient of EU research and innovation funding (around £1B per year – roughly 20% of the total science budget allocated by the UK government). Most of this funding has gone to university R&D programs, but at least 15% typically goes to start-ups/SMEs. This funding will no longer be available after Brexit, even though UK researchers will be allowed to participate in EU research programmes. The question is whether the UK will expand its start-up grant program to compensate for this loss.

 

Data privacy

The core issue around data privacy was the potential restriction on the transfer of  personal data between the EU and the UK. This is obviously key for the digital ecosystem with vast implications on how business operates and the need for new data centres and compliance processes.

Unfortunately, the trade deal leaves us with the same question mark as the agreement doesn’t cover the flow of personal data between the UK and the EU. However, this issue will be addressed separately in “early 2021” as the EU is considering giving the UK its Data Adequacy status. This status would mean that the EU recognises the UK data protection regime as equivalent to the EU and allows for the free flow of personal data. It seems like this is the intent on both sides, so fingers crossed.. In the meantime, we have to assume that this is not the case.

For non-personal data, both the UK and the EU are committed to ensuring cross-border data flows to facilitate trade in the digital economy so they won't impose localisation requirements for data storage and processing. This is good news for cloud businesses as long as the data isn't personal.

 

Currency impact

We predicted in 2016 that the GBP would continue to suffer as a result of Brexit and the data confirms it. The two major currencies relevant for the tech ecosystem are USD and EURO. Let’s look at where we are today.

 

 

GBP vs Euro

On 23 June 2016, the day of the referendum, which was expected to be in favour of “stay”, the GBP was trading at 1.30 EURO. After the trade deal was announced, the rate was 1.11, representing a 17% drop. This is good news if your start-up is planning to expand in the UK with most of the revenue denominated in EURO. However, the news isn’t so good if you’re a UK start-up expanding to the continent, at least until your EURO denominated revenue can cover your cost base

 

GBP vs. USD

On the referendum day, the GBP was trading at 1.48 USD. After the trade deal was announced, the rate was 1.36, representing a 9% drop. While the GBP has weakened against the USD, its decline has not been not as sharp as against the EURO. So, not great if you’re planning to expand to the US but not as bad as the EU.

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In summary, I’d say that beyond the need to apply for a visa for a business trip of more than six months, the loss of EUR R&D grants and a weaker GBP, the two biggest areas set to impact the tech ecosystem are still hanging in the balance. Firstly, fintech’s inability to benefit from the EU financial services passport will add important operational and compliance costs. Secondly, the management of personal data for start-ups operating in both the UK and EU is unclear. This is particularly relevant for SaaS businesses operating in the UK with EU servers or vice versa. Hopefully, more clarity will be provided in these two areas over the coming weeks or months so that start-ups have a better view of the playing field. 

So where did we land? Better than a no deal scenario of course, but it looks like in all five key areas we highlighted, the UK and European tech ecosystems are left worse off - as expected.

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Timeline up to the trade deal agreement

Here is a reminder of the complex chain reaction of events triggered by the results of the referendum, which concluded on 24 December 2020 with the trade deal:

-   23 June, 2016: UK votes in favour of leaving the EU

-   29 March, 2019: UK serves the withdrawal notice under Article 50 of the EU treaty, triggering the start of the negotiation on the terms of its exit from the EU, with a two-year limit

-   15 January, 2019: UK parliament rejects the Brexit Withdrawal Agreement negotiated by Theresa May

-   12 March, 2019: UK parliament rejects the Brexit Withdrawal Agreement for a second time

-   29 March, 2019: UK parliament rejects the Brexit Withdrawal Agreement for a third time. Negotiation of a two-week delay to give parliament more time, moving the date from 29 March to 12 April, 2019

-   10 April, 2019: a further six-month extension is agreed until October 2019

-   24 July, 2019: Theresa May resigns as prime minister. Boris Johnson is appointed leader of the conservative party and becomes prime minister, calling for a snap election on Dec 12th to gain majority in parliament

-   17 October, 2019: a revised Withdrawal Agreement Deal is announced. The withdrawal agreement provides for a transition period until 31 December, 2020

-   12 December, 2019: Conservative party achieves landslide victory in the general election. Boris Johnson remains prime minister and gains a majority in parliament

-   23 January, 2020: UK parliament ratifies the agreement

-   29 January, 2020: EU parliament gives its consent

-   24 December, 2020: EU and the UK reach agreement on a trade deal 

Tech Investments: is Paris ahead of London?

Interview (in French) on BFMTV earlier this week

Brexit: What Start-ups Need to Know

In 30 days, on June 23rd, UK voters will be asked a simple question: 

“Should the United Kingdom remain a member of the European Union or leave the European Union?”

I hope the answer will be "Stay" - currently the betting odds are 1:5 for "Stay" and 10:3 for "Out", so the odds are clearly in the "Stay" camp. But who knows? The interesting part about this vote is that voters will not have a clear picture of what a Brexit actually means, since the post-Brexit UK/EU relationship will have to be negotiated after the referendum.  If the "Out" vote succeeds, it will trigger a 2-year notice period during which the negotiations will take place.  

I worked with my colleague James Cameron to look at the potential outcomes and in particular how it would impact start-ups in the UK and Europe and we put together this short post.

Three key areas will be on the negotiation table:  

1. Trade terms and the extent to which the UK can still access the EU single market
2. UK control over EU immigration
3. How EU regulations will continue to impact the UK

All are interrelated and there will be trade-offs between all three. 

The likely options

Neither the major parties nor the "Out" campaign have released proposals for the UK’s future after a Brexit –so we can only speculate based on other models that currently exist: 

Option 1: The Norwegian model	Option 2: The Swiss model	Option 3: The Turkish model	Option 4: WTO rules
Out of EU, but still in EEA (e.g. like Norway, Iceland). Preserves access to the EU single market for most trading sectors, but most EU-derived laws remain in place.  Free movement still applies.	Out of EEA, but the UK would negotiate access to the single market, sector by sector.  Example - Switzerland has 129 different bilateral trade accords with the EU, but must accept free movement of people and still pays fees to the EU.	Outside EEA, but with a negotiated customs union.  In Turkey’s case, it doesn’t pay fees to the EU and there is no freedom of movement.	Simply rely on WTO rules for access to the EU market.
The situation would be very similar to what we have now, but the UK would have reduced power to influence the rules that would apply domestically.  This solution may appease ‘Out’ voters’ desire for more sovereignty - but is arguably an unattractive result for both sides.	This model could give UK more latitude to negotiate preferred deals in certain areas. However, the EU think the current situation with Switzerland is unsustainable, and many commentators think it’s unlikely they will accept a similar deal for the UK.	The Turkish customs union covers only goods, not services or finance, so a similar deal for the UK would deny the UK access to a big part of the single market.	This is a fallback option would give the UK more sovereignty at the price of less trade and a potentially big fall in income.

A Fifth option?

• A fifth option that is advocated by ‘Out’ proponents is to negotiate a special deal for Britain alone that retains full access to the single market without observing all the EU’s rules (including freedom of movement) or contributing heavily to its budget (i.e. a form of ‘EEA lite’). 
• Whether the UK will be able to negotiate such a deal comes down to the relative bargaining power of the two parties.  The Leave camp believes that UK will be in strong position since it is the 5th biggest economy in the world.  However, the Remain camp notes that it is the relative size of the market that matters most - the EU is half of Britain’s export market, whereas Britain would be only 10% of the EU’s. 
• Ultimately, in a post-Brexit with a potentially hostile EU, we can expect that it will be extremely hard to secure as favourable a trading relationship as the UK enjoys at present, especially if it insists on curbing free movement of people. 

Possible impacts on the UK tech ecosystem

• Skilled labour migration:  This is probably the biggest single concern for the UK tech scene. Restricting free movement will need to be negotiated if the UK wants to keep favourable trading terms post Brexit, but given immigration control is central to the Out campaign, we should expect the UK to push for at least some restrictions on free movement.  Many in the Out campaign want to design a system that will favour immigration from skilled migrants regardless of origin (the ‘Australian model’).  This may be workable in the longer term, but at least in the short-to-medium term we should expect a Brexit to trigger a sharp drop in the number of available skilled immigrants from the EU, which would be highly detrimental to the UK tech ecosystem. 
• Existing immigrants: Any EU nationals that are already in the UK pursuant to the existing arrangements should be unaffected.  Under the Vienna Convention on the Law of Treaties they cannot be removed from the UK unless the countries agree otherwise – which is unlikely.
• Financial services: Unless UK remains in the EEA (i.e. the Norwegian option), the European passporting rules for financial services will no longer apply to UK firms after Brexit.  This will impact any UK companies operating regulated financial services in Europe or vice-versa.  
• EU R&D funding: UK is the second largest recipient of EU research and innovation funding (expecting £2bn in the next 2 years – roughly 20% of the total science budget allocated by the UK gov).  Most has gone to university R&D programmes, but at least 15% typically goes to startups/SMEs. This funding will likely no longer be available after a Brexit.   
• Data privacy: On a Brexit, the EC must decide whether to designate the UK as a 'safe third country' for data. If it didn’t, personal data transfers to the UK could be restricted – similar to the US. 
• No Digital Single Market:  A Brexit will most likely mean that the UK firms are excluded from the proposed digital single market – a basket of regulations that expect to be implemented between now and 2018 to streamline EU copyright applications, streamline VAT payments for digital goods, harmonise ecommerce rules and abolish EU roaming charges, amongst other things.
• Currency impact:  The pound will almost certainly continue to suffer a sharp sell off in the wake of a Brexit vote – which will benefit any UK based startups that sell globally, at least in the short term.

Possible impact on the broader economy

Base case	Upside case	Downside case
Similar to Norway or Switzerland - the UK maintains deep and wide trade relations with the EU after leaving the bloc, but continues with many of the laws and regulations that are currently part of EU law (inc. free movement).	UK negotiates more favourable trade terms with the EU and is able to quickly put in place favourable terms with other key countries.  At the same time, the UK gets more control over immigration and finds an immigration solution that does not restrict flow of skilled labour.	Drawn out negotiations, with UK eventually trading controls over immigration for much weaker access to the single market.  At the same time, UK finds it difficult to sign beneficial trade deals with other countries.
The impact on the broader economy over the long term may be neutral, but we will likely still see a period of volatility and low investment with the risk of a run on the pound.  Sovereignty will be re-established, but in practice UK will be subject to regulation without representation.	Most commentators discount the likelihood of this scenario heavily – it will be very difficult to secure as beneficial trading relationship outside the EU as it enjoys at present, especially if it insists on curbing free movement of people.	Britain receives less inward foreign direct investment, fewer skilled immigrants, and does not improve the regulation of the economy.  The tech ecosystem is disproportionately impacted by the reduction in skilled immigration.
Broadly neutral (between -0.8% and +0.6% of GDP by 2030 according to OpenEurope)	Moderately positive (+1.6% of GDP by 2030 according to OpenEurope)	Strongly negative (-2.2% of GDP by 2030 according to OpenEurope)

Expert views on the outcome

• In one of the most comprehensive polls of experts done so far (an FT poll of >100 economists in Jan 2016), >75% thought Brexit would adversely affect the UK’s medium-term economic prospects, only 8% thought Britain’s economy would benefit.
• “There are few issues that unite UK economists but Brexit is one of them: they overwhelmingly believe leaving the is bad for the country’s economic prospects.”  Financial Times

30 more days before we know...let's hope the "Stay" will prevail!