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.
Any negative impact on the UK's £180bn-a-year tech industry will be felt by the country as a whole, due to tech being one of the fastest-growing sectors of the economy and supporting a raft of related jobs.
Editor's note: This article was first published in December 2017, and it was most recently updated in January 2019. We will continue to update this article with the latest developments about Brexit.
What is Brexit?
Brexit refers to the UK leaving the European Union, and is a portmanteau of the words Britain and Exit.
The Brexit process was triggered by a referendum on the United Kingdom'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.
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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 2017, and was followed up by a Withdrawal Agreement that was negotiated between the EU and UK. That deal, which has become known as Theresa May's deal, was voted down by 230 votes, a historic loss for the government in the UK Houses of Parliament, which triggered an unsuccessful vote of no confidence in Theresa May's government.
Since that rejection, MPs have backed an amendment that requires Theresa May to renegotiate the Withdrawal Agreement and return to Parliament with fresh options. However, following the vote to reopen talks with the EU, president of the European Council Donald Tusk said that renegotiating the agreement was not an option so close to Britain's departure date in March 2019, a sentiment echoed by the spokesman for German chancellor Angela Merkel and the Irish Government.
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When will Brexit happen?
The UK government has enshrined the date of Brexit in law, setting it as 29 March 2019, although there is now uncertainty over whether this date will hold due to the lack of firm agreement in UK parliament over what form Brexit should take.
Even Foreign Secretary Jeremy Hunt has said the UK government may not be ready to leave on 29 March and may need to ask the EU to extend the two year window the UK was given to make the necessary arrangements after triggering Article 50 of the Treaty on the European Union. Any effort to keep the UK in the EU for longer will be complicated by the upcoming European Parliament elections in May 2019.
If no Withdrawal Agreement is approved by Parliament by 29 March, then the UK will crash out of the EU with no deal and be forced to trade with Europe on WTO (World Trade Organization) terms, something the industry body the CBI have warned would put thousands of jobs at risk.
If Britain leaves the EU under the terms of the deal Theresa May agreed with Europe, 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 the day-to-day operation of tech firms in the country.
At present, no-one can say what that final relationship might look like, due to the profound divisions among British MPs about the best way forward.
Complicating matters is the fact that the leaders of Labour and the Conservatives, the UK's two largest political parties, have both been accused of playing politics and pursuing Brexit policies that place party unity above what's best for the country.
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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.
Theresa May has ruled out the UK staying in the single market or customs union in the past. However, as part of Theresa May's deal, the British government has agreed to "maintain full alignment with those rules of the Internal Market and the Customs Union" if it fails to reach a future trade agreement with the EU that would avoid the return of a hard border between Ireland and Northern Ireland. But, even this agreement is now up in the air, due to a number of MPs demanding this so-called backstop agreement be rewritten.
As matters stand at the end of January 2019, the survival of the backstop is in doubt, after MPs backed an amendment to the Withdrawal Agreement that requires the backstop to be replaced with alternative arrangements to avoid a hard border in Ireland. Theresa May has said she will return to the EU to renegotiate her Withdrawal Agreement and return to Parliament with the results of that negotiation as soon as possible, although the EU has ruled out reopening negotiations on the backstop.
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, and the possibility of increased checks on goods at the border. At the end of January 2019, the EU's deputy chief Brexit negotiator, Sabine Weyand, said the risk of a no-deal Brexit was now "very high".
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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 access to 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 has 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 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.
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And there are not only concerns over access to skills, but also over how the cost of employing skilled workers from the EU 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.
Under the government's proposed Immigration and Social Security Co-ordination Bill, EU citizens will have to apply to come to the UK under a new skills-based immigration system, which will come into effect from 2021. Providing there is a Withdrawal Agreement, up to this point EU citizens would enjoy the same rights to work and study as they do today, but under a no-deal Brexit, EU citizens would immediately need to obtain visas for visits lasting longer than three months.
The status of Europeans already in the UK is another pressing issue, with about one in five existing London tech workers being from the EU. The UK government has said EU citizens and their families resident in the UK by 29 March 2019 will be able to stay and carry on working or studying and enjoy the same protections as currently available. To enjoy these same rights, EU citizens will need to apply for "settled status", which will be open to EU citizens who have lived in the UK for five years without a break.
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.
techUK also supports the government plan 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. However, as of January 2019, there is a question over whether there will even be a transition period, as, like so much about Brexit, this matter will remain unresolved until UK parliament can agree on a way forward.
The UK government has previously stressed the opportunities that Brexit will present for Britain to strike new trade deals and international partnerships, and the government has sent ministers to Sweden, Singapore and Japan, among others, to lay the groundwork for British-based technology firms to work more closely with foreign counterparts after the UK leaves the EU.
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Another big unanswered question is how Brexit will impact 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 Act was passed in 2018 to enshrine the principles of the EU General Data Protection Regulation into UK law.
However, if 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. However, as recently as September 2018, it was reported the UK and EU hadn't even begun negotiations related to a future adequacy ruling.
The government has also warned that in the event of a no-deal Brexit, "transfers of personal data from the EEA [European Economic Area] to the UK will become restricted once the UK has left the EU". That could be a problem for a lot of firms, as the definition of personal data is quite broad, including any information that can be used to identify a living individual, such as a customer's name, their physical or IP address, or employee details such as staff working hours and payroll details.
One fact the majority of tech firms agree on is that a no-deal Brexit, where Britain leaves without any formal Withdrawal Agreement for continuing existing trading and regulatory relationships with the EU, would be a disaster.
In a survey of 276 member companies by tech industry group techUK, 70 percent said a no-deal exit from the European Union in March 2019 would have a 'very negative' or 'fairly negative' impact on their business. Only five percent said it would have a 'very positive' or 'fairly positive' impact on their business. The primary reason for these members' concern is the uncertainty that would result from a no-deal Brexit, in the key areas like access to talent and continued sharing of data outlined above, combined with the feeling that the UK hasn't prepared for a no-deal Brexit.
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 was initially mixed in the days after the 2016 vote. 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.
A further slump was evident in 2018, according to figures published by London & Partners and PitchBook, which found that London's tech companies received £1.8 billion that year, down 29 percent on the year before.
There have also 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.
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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 been made prior to the Brexit vote.
While Microsoft has stated that its commitment to the UK is unchanged post the Brexit vote, earlier in 2017 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.
And as the UK approaches leaving day on March 29 2019, some tech companies have relocated parts of businesses out of the country. ZDNet's Steve Ranger recently reported on tech companies moving various parts of their businesses out of the UK and onto the continent, including back-office functions—those involving European tax or customs, for example—offices of tech companies serving the financial industry, and bank data centers.