CXO

Brexit: A cheat sheet

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 UK to leave the European Union has been described as the biggest challenge facing Britain since World War II.

As for every firm in the UK, Brexit throws up a raft of questions for tech companies about how Britain's departure from the EU will change the way they do business.

SEE: All of TechRepublic's smart person's guides and cheat sheets

What is Brexit?

Brexit refers to the UK leaving the European Union, and is portmanteau of the words Britain and Exit.

The Brexit process was triggered by a referendum on the UK'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.

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. These meetings focused primarily on three core issues that need to be settled before the UK leaves: 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.

An agreement on these issues was reached in December this year, and the EU and UK are now expected to move onto the next phase of talks early next year, where they will discuss the future trading relationship between Britain and the continent.

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When will Brexit happen?

The UK government wants to enshrine the date of Brexit in law, setting it as 29 March 2019, although there is uncertainty over whether politicians will back such a move.

After Britain leaves there will also be a transition period of about two years, during which the UK's relationship with the EU would be largely unchanged.

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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 tech firms.

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 point for those opposed to single market membership is the requirement that EU citizens be free to live and work in the UK, while those set against staying in the customs union point out membership would limit the ability of the UK to make its own trade deals.

While Theresa May has ruled out the UK staying in the single market in the past, today there is less certainty over how far the UK will diverge, with the British government recently agreeing to 'maintain full alignment with those rules of the Internal Market and the Customs Union' if it fails to reach a trade agreement with the EU that would avoid the return of a hard border between Ireland and Northern Ireland.

If the UK left the European Union 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. The Brexit secretary David Davis recently said the chance of the UK crashing out of the EU without a trade deal in this way had "dropped dramatically", due to progress in EU-UK negotiations.

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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 skills. The sector is reliant on skilled workers from outside of 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, in March this year, 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 recent 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.

SEE: The secret to being a great spy agency in the 21st century: Incubating startups (TechRepublic cover story)

And there are not only concerns over access to skills, but also over how the cost of employing EU skilled workers 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.

When it comes to cross-border trade of goods and services post-Brexit, TechUK has welcomed plans to smooth the transition by introducing an Authorised Economic Operators scheme. However, TechUK is concerned that firms will still face additional regulatory burdens when trading goods and services with the EU and in recouping money spent on new tariffs.

That said, the need for UK-based firms to take additional steps to ensure they comply with EU laws post-Brexit should be reduced by UK plans to transpose directly-applicable EU law into UK law before Britain leaves the EU.

TechUK also supports government plans for a two-year transition period after Brexit, during which the UK's relationship with the EU would stay broadly the same, but has raised concerns about whether this period will be long enough for businesses to prepare for the new relationship with their EU trading partners. TechUK says Britain needs a comprehensive free-trade agreement with the EU on services, warning Brexit risks a 60% drop in service sector exports within the European Economic Area.

The UK government stresses the opportunities that Brexit will present for Britain to strike new trade deals and international partnerships, and earlier this year, the government sent ministers to Sweden, Singapore and Japan to lay the groundwork for British-based technology firms to work more closely with foreign counterparts after the UK leaves the EU.

SEE: Electronic data retention policy (Tech Pro Research)

Another big unanswered question is how Brexit will impact on the ability of technology firms to handle EU data, and for the UK and the EU to share data freely.

To calm worries that the unfettered sharing of data might stop, the UK has taken steps to try to ensure its approach to data protection meets European standards. The Data Protection Bill was introduced in September to enshrine the principles of the EU General Data Protection Regulation into UK law.

However, if the data is to continue flowing between the UK and the EU, the UK will still need to be granted an adequacy decision—a ruling by the European Commission that the country meets the bloc's data protection and data privacy standards. 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 such a decision, 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 Data Protection Bill will help ensure adequacy between EU and UK data protection standards.

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".

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What has been the affect of the Brexit vote to date?

The impact of the Brexit vote on tech investments has been mixed. 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.

There have 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 some 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.

SEE: Hiring kit: IT finance manager/budget director (Tech Pro Research)

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 made prior to the Brexit vote.

While Microsoft has stated that its commitment to the UK is unchanged post the Brexit vote, earlier this year 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 the 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.

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brexit-falgs.jpg

Brexit, Flags of the United Kingdom and the European Union on cracked background

Delpixart, Getty Images/iStockphoto

About Nick Heath

Nick Heath is chief reporter for TechRepublic. He writes about the technology that IT decision makers need to know about, and the latest happenings in the European tech scene.

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