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Brexit: So what does this mean for UK entrepreneurial businesses?

With the Brexit vote taken and the outcome known, the wheels of government will start to slowly turn as part of the UK’s withdrawal from the EU.  This process of divorce from the EU is going to take some time, at least two years, and it will involve complex and detailed negotiations taking place. 

We have added this Q&A page to the Brexit Section of our website which will hopefully help entrepreneurs and business owners with a number of questions which we think are likely to apply.  Many of the answers we have set out highlight a number of scenarios and in some cases pose further questions which government and other institutions will need to provide answers to.  We will keep the Brexit section of our website updated and expand on it as the Brexit process unfolds.  We welcome your feedback and comments on this section in particular if you think there are other important questions which are not yet covered and which should be.  We should stress that there is no immediate change to the current legal position for entrepreneurs and companies operating within the UK.  That said there certainly are things which you should be thinking about now in relation to your corporate and commercial activity and we hope our Q&A section will give you some useful food for thought.

We are pleased to announce that we have joined forced once again with the Business School at the University of Edinburgh to put on an event on Tuesday 27th September 2016 called “Brexit For Entrepreneurs”, which will involve discussion involving a number of exciting and growing entrepreneurial businesses.  For more details please contact events@mbmcommercial.co.uk.

If you would like specific advice about certain aspects of your business then please do get in touch with your usual contact at the firm or contact me directly at seniorpartner@mbmcommercial.co.uk. 

Best wishes,

Stuart Hendry, Senior Partner

________________________________________________________________________

Brexit - Your Questions Answered

Q: What does this mean in relation to any EU grant which we have either secured or applied for?

 

A: In relation to any EU grant which you have secured the payments you have received and will receive until the point of Brexit should be secure and not clawed back due to the event of Brexit itself, bearing in mind that the UK continues to be a fully paid up member of the EU until that point.  Please also bear in mind that the point of Brexit could be several years away and not just in two years time.    

After the point of Brexit then any ongoing grant funding from the EU will depend on the negotiations with the EU and the UK Government and there is simply no certainty on this.  If the UK remains part of the European Economic Area then existing EU grants to UK businesses that are only part-completed may be honoured although this is pure conjecture and we simply do not know.  Any UK businesses which currently benefit from a long term EU grant should make sure that they have contingency plans in place in the event that funding is withheld following the point of Brexit.

The terms of any EU grant should be checked very carefully to see what the grant claw-back, suspension and termination provisions are.  We would expect a termination provision to apply, either directly or indirectly, as a result of Brexit although this needs to be looked at on a case by case basis.  For example we have looked at one Horizon 20:20 EU Grant document and although there is no specific and express termination right for a Brexit event, there are other provisions which could potentially be used by the relevant EU agency to terminate the grant.  For example one possible termination right for the EU agency is: 

“a change to the beneficiary's legal, financial, technical, organisational or ownership situation, is likely to substantially affect or delay the implementation of the action or calls into question, the decision to award the grant”

It should not be overlooked that if a business breaches any of the often complicated and numerous grant obligations and requirements then the grant can be terminated.

It will be important that the relevant EU grant agencies can give some guidance to UK businesses about what their policy will be on Brexit although we may have to wait some time for this to happen and we would not expect any guidance to be provided until the UK provides formal notice to the EU of its decision to leave via the Article 50 procedure.  For example there is no mention of Brexit on the EU Commission’s website for Horizon 20:20 grants at the time of writing this note. 

In relation to any applications for EU funding which you have applied for or are just about to apply for then if it is for a short term grant then you may be fine and as far as the relevant EU grant agency is concerned it will be business as usual.  For anything longer term (ie longer than two or more years) then there is no certainty and you will want to contact the relevant organisation for any information on what they are doing.  Depending on the time it takes to prepare and submit the application you may decide to do it regardless and view any funding that you receive as a bonus.  

Q: What does this mean in relation to the EU collaboration which we are working on?

 

A: You will need to check the terms of your collaboration agreement very carefully and look at key provisions such as the contract term, the obligations of each party (eg secondment of personnel), funding basis and termination rights.  Many collaborations agreements will be unaffected in the short term and it should be borne in mind that the point of Brexit could be several years away and not just in two years time. 

Following the point of Brexit there is great uncertainty about ongoing EU funding (see our separate note on EU grants) and a key issue is the ability for EU workers to move freely between EU member states as part of cross-border collaborations and what happens next.  To put some context on how important the free movement of EU workers is, at least a third of researchers at Cambridge are overseas nationals and almost a quarter of researchers there are from other EU countries.  A post Brexit UK could make it much more difficult for UK universities to attract talent and participate in cross-border collaborations in Europe.  There will certainly be more red tape and costs involved for UK universities and businesses.  However it should not be overlooked that scientists from non-EU countries are currently able to work in UK universities and businesses and do so by meeting the Tier 1 or 2 qualifications for UK work visas.  We would not expect this to change in a post Brexit UK.   

Q: What does this mean in relation to our prospects of securing future funding?

 

A: A lot of funding is often drip fed into the companies by a process of trenching or through banking facilities that can be drawn down and you will want to seek reassurances from your investors or lenders that the event of Brexit, when it eventually happens, will not result in either a change of terms or a complete withdrawal of financial support that is available to be called upon and drawn-down.  It will in most cases depend on the actual contract terms as well as the continuing commitment of your investor(s) and/or lender(s) to the UK.  If you cannot receive any reassurances then you will want to consider putting contingency plans in place.   

If you have been speaking to prospective investors about investing into your business then you will want to double-check that they still have committed funds.  However for most private equity and venture capital funds their current funds will be committed and the issue of Brexit may only apply to any new fund that is planned and whether they still have the support of their cornerstone investors. 

A number of investors are certain to be evaluating the outcome of Brexit and may choose to hold off until the position is clearer.  With a reduction in access to finance, which seems likely in the short term, this will also provide an increased market opportunity for those investors who decide to get on with it whilst others wait.  For those who swallow their ‘brave pills’ they will be able to secure some great deals at very sensible valuations. 

We think great companies will always get funded although we acknowledge that companies may need to work harder now to secure their funding.  We have the experience of working with many tech companies throughout the recent recession and also during the times when the dot com bubble had well and truly burst and many of these companies not only survived these challenging times but flourished and have become very successful.

Q: Will this have any impact on our R&D tax credits?

 

A: Existing R&D tax credits will not be affected and no changes to the regime are expected to be introduced in the short term.  Looking further forward, it’s feasible that a relaxation of State Aid obligations could allow the UK Government greater flexibility in relation to such tax incentives.

Q: What does this mean in relation to the future availability of funding from the Institutions which receive EU funding (eg Scottish Investment Bank and Scottish Loan Fund)?

 

A: Institutions throughout the UK receive substantial funding from Europe and, in the long term, this must be likely to fall away.  However, in the short term, nothing will change as these funding programs will have their own commitment periods which will have some time left to run.  It is perhaps the non-renewal of these funding programs in the medium term which could have the greatest impact.  Given the recognised importance of many EU backed funding institutions within the UK (eg the Scottish Investment Bank and the Scottish Loan Fund), it is likely that the UK and Scottish governments (as applicable) would try to ensure that they, or some successor organisations, are able to continue to service the market although it remains to be seen whether the levels of financial support can be maintained.  It is important that any UK institution which relies on funding from the EU gives a clear and transparent statement as soon as possible to help ensure that companies can start to make contingency plans.     

Q: We are planning to refinance our banking facilities and will this have an impact?

 

A: Yes. The only thing that is certain is uncertainty. It will be a number of months (best case) before the banks feel that the economic stability which we have enjoyed in the last few years has been regained. Uncertainty is the enemy of investment; particularly debt.  Banks are likely to increase the cost of borrowing as a result of this uncertainty and their increased costs of borrowing (which is inevitable after the downgrading of the UK’s credit rating).  Borrowers may find that the costs of refinancing their debt has gone up, perhaps to unaffordable levels.  Banks may simply refuse to refinance in some cases. Financial and other covenants are likely to become more onerous, and we may start to see the introduction of Brexit-related events of default.

Q: Could Brexit be used as an excuse to call up our banking facilities?

 

A: Indirectly, yes. The economic uncertainty caused by the leave vote, and eventual Brexit, is inevitably going to put customers at odds with their banks. In a worst case scenario this could result in the types of legal and financial issues experienced both during and after the 2008 financial crisis. When put under pressure banks may well try to terminate facilities and recover their loans and overdrafts. Facility documents often contain a clause allowing banks to re-evaluate and withdraw lending, especially overdrafts, as a result of “material adverse changes in circumstances”. In deciding whether a contract can be terminated on the basis of the Brexit a court would have to look at the fine detail of the contract wording, and also consider the circumstances in which the contract was made – particularly whether the UK’s continued membership of the EU was essential to the performance of the contract. This might be less of an issue with banking agreements, but could be relevant in cases in which project funding was related to EU linked endeavours or which also involved EU funding.

Customers should also be live to their loan to value covenants, and wary of breaching them. It was widely speculated prior to the referendum that a leave vote would damage the property market. It is early days but there does appear to be some negative impact on the market. It is possible if there continues to be an adverse impact on property prices that banks may request valuations in order to test covenants. If this happens care should be taken to ensure that any valuations are instructed on an appropriate basis to ensure that they are carried out fairly. Borrowers should be wary of valuations being instructed on a vacant possession or “fire sale” basis.

Lastly, in any period of economic uncertainty, banks are going to be much more reluctant to lend. Customers should avoid embarking on courses of action as a result of vague or otherwise non-binding commitments to lend made before the Brexit vote. Indications that the finance will be forthcoming in the future should not be taken at face value. What might have satisfied a credit committee prior to the referendum might not necessarily be the case in the post-Brexit landscape. Unless a written agreement is in place it is highly likely that indications of support from a lender will be “subject to credit” and not binding on the bank. Indications of lending support made prior to the referendum should be revisited before business decisions are made. If discussions are taking place regarding the provision of finance, ensure that any undertakings to lend (unconditional or otherwise) are obtained in writing and that meetings are properly minuted and contemporaneous notes taken. All this will help if there is a dispute in future regarding what was said.

Q: What will be the effect on businesses in financial difficulty or who want to restructure?

 

A: Since the credit crunch there has been a remarkably low level of insolvencies.  There is a cohort of companies that are fundamentally bad businesses, and which need to be restructured, but they limp on as zombie entities fed on low interest rates and protected by the banks’ reluctance to crystallise a write off on their balance sheet.  Derivative mis-selling claims have also prevented bank enforcements. Higher costs of borrowing may now start to force some companies into insolvency. 

The process of UK insolvencies is not likely to be affected, but the increased cooperation between the UK and other EU jurisdictions in cross-border insolvencies is bound to be thrown into disarray.  Once European insolvency law ceases to apply to the UK (and more importantly once British insolvencies are no longer recognised in Member States of the EU), British companies with operations in other EU jurisdictions will have a much more complicated, protracted and costly task when restructuring their operations.  It will be much better to do that under the existing regime, before the changes come into effect, than it will be during any hiatus period, or even in the early untested days of the new regime.  

Q: Will this affect EIS or SEIS tax relief on any business angel investments?

 

A: EIS and SEIS are subject to EU rules on the State Aid.  This also applies to VCT and other taxes such as R&D tax credits and EMI schemes.  Only last year were the rules changed to ensure compliance with EU legislation. 

The future after Brexit could be simpler and more efficient as far as tax incentives for growing businesses are concerned.  The UK government would be free to enact the incentives that it sees fit without obtaining sign off from Brussels. However, there is much to be done to extract the UK from the EU, and reforming a part of the tax system that does not bring in much to the Exchequer in the grand scheme of things is likely to be low on the list of priorities. It may be some time before anything changes.

Even when (if) the (S)EIS rules do change, it is hard to see any government removing any benefits in relation to investments already made.  A retrospective change is unlikely so, for the time being, investors should be confident that they will still benefit, even if investing after 24 June 2016.

Q: Will this affect our plans to introduce an Enterprise Management Incentive (EMI) share option scheme or our existing EMI share option scheme?

 

A: We do not expect any changes to be made in the short term to Enterprise Management Incentive (EMI) share option schemes and they continue to be a great way of helping to attract top talent to growing businesses in the UK.  EMI schemes are subject to EU rules on State Aid and we would expect that after Brexit the rules could be improved and simplified by the UK government.  For example a key restriction at the moment is a 250 employee limit which was imposed by the EU and we would like to see that lifted.  We do not expect EMI schemes to disappear post Brexit because they were introduced by the UK government in 2000 with the stated aim of making the UK a highly attractive place for high growth businesses and the top talent that they need to recruit.

Q: Will this affect our ability to attract a foreign buyer of our business?

 

A: This will depend on what sector you are working in but for most technology companies their markets are global and not simply the EU.  Many of the fast growing companies that we work with by-pass the UK and European markets and head straight to the US and Asia as their core markets.  Companies with best of breed technology will always get acquired and Brexit is unlikely to have a serious impact on these companies.  Some foreign buyers may well be cautious in the short term until the public markets settle down but equally with a weaker pound there may be some bargains to be had.  We have seen some foreign buyers continue with their acquisitions since 24 June where others have been put on hold.  If you are in the latter category and not subject to an exclusivity period then it would be wise to look at other buyers as part of your contingency planning.  If a foreign buyer is looking to delay their acquisition decision and have exclusivity extended then you will want them to make a quick decision and only allow an extension for a limited period of time.               

Q: What does this mean for foreign businesses with their EU headquarters in the UK?

 

A: As a result of the likely loss of the benefits of ‘passporting’ from the UK within the EU and free movement of labour, we expect that every foreign business with a European headquarters will be considering their options and unfortunately several will already be taking steps to move to another EU jurisdiction.  Many such businesses will now be checking their lease terms to see if there is a break clause in their lease or making plans to put their property on the market.  Those tied into a lease may find their landlords are less willing to agree to an early exit while high vacancy rates are on the horizon, however those who own their properties (especially in London and where able to move quickly) may benefit from the influx of non-EU investors looking to capitalise on the discounted property prices arising from the drop in the value of Sterling.  For any members of staff working in such a business the issue will be whether they want to relocate and the relevant businesses will be required to consult with their staff.

 Q: What does this mean for foreign businesses planning to set up in the UK?

 

A: Any foreign business which has been planning to set up in the UK as their European headquarters will now be taking steps to move to another EU jurisdiction.  It seems highly unlikely that Scotland will be in a position to negotiate any arrangements with the EU until the event of Brexit has occurred for the UK and we doubt any foreign business will wait to see if Scotland becomes part of the EU.  This could be a very long wait and nothing is certain.  As such we would expect countries like Ireland to do well out of the Brexit process and many other EU countries will be keen to attract such businesses.  No doubt they will also be keen to see if the various EU institutions that are already headquartered in the UK would like to make a move to remain within the EU.

Q: What does this mean for University spin-out activity?

 

A: Within the UK we have some of the best universities in the world, countless Nobel prize winners serve on their academic staffs and we out perform in relation to the publication of scientific papers.  Innovation is central to our future and it is of critical importance that we continue to nurture our intellectual assets.  The good news is that there should be no material change in the short term as we continue to be a member of the EU in accordance with the existing treaties until Brexit actually happens.  That will be at least two years away and we will have plenty of notice of any anticipated changes to the existing arrangements as the Brexit negotiations continue in the months and years ahead.  

In the short term, it should be “business as usual” but the issues which will be at the forefront of everyone’s minds are:-

  • Visa and immigration requirements for foreign students;
  • ERDF funding across a wide range of projects from ‘investor readiness’ grants and SMART awards to the Scottish Co-Investment Fund. These programmes should however all be funded for the time being until or unless such funding is taken away;
  • Horizon 20:20 projects which have been started should be able to continue, at least for the time being, but it may be difficult to apply for any new such projects;
  • It is critically important that we are still able to attract the best talent, not only from the EU but also from the wider world, to pursue research, work in scientific collaborations and fulfil key roles in high growth innovative companies;
  • The challenges of securing investment are a recurring theme for virtually every new start up technology company. We may see investors taking a more cautious approach, at least in the short term, but we should all be promoting the positive aspects.  The quality and quantity of dealflow is still there and for € and $US investors an investment in a UK technology company or fund or the acquisition of a UK technology company has just become 10% to 15% cheaper. 

Q: What does this mean for UK start up and scale up activity generally?

 

A: It is often remarked that the best companies emerge unexpectedly in a time of disruption.  During the next few years we are likely to see a period of significant disruption and political uncertainty.  However, that is the type of environment which encourages fresh thinking and new ideas and we may be about to enter into another period of creative innovation.  There are no passport controls on the internet and, with the emergence of virtual reality, augmented reality and tele-presence, we will find all sorts of new ways of communicating and doing business with each other across the world without always having to travel to meetings.  While we can look forward to a new burst of creation and innovation, we must ensure that the innovators who are building the great companies of tomorrow have access to sufficient risk capital to enable them to do so.  As we cannot depend on the clearing banks to provide risk capital for innovation, our future will be largely dependent on the wise and prudent deployment of capital into the innovative new businesses which we need to provide employment for tomorrow’s workforce.  In the short term, financing will be more of a challenge, but there will always be capital looking for a home in good quality innovative new businesses with good growth prospects.

Q: What about FinTech and financial services companies and their dealings within the EU?

 

A: It is difficult to generalise as there are many FinTech companies developing new businesses in areas such as cyber security and payment systems which have global application but do not need to be specifically regulated in any one jurisdiction.  The challenges will arise around those FinTech businesses which currently need to be authorised to trade across the European Union as the existing “passporting” regime will cease to apply.  However, we must bear in mind that things are not going to change overnight, we will receive plenty of notice of any changes to the current regulatory regime and if businesses need to incorporate subsidiary companies in local jurisdictions to trade in that jurisdiction that will simply be a price of doing business.  It has already been reported that a number of City Institutions will have to set up subsidiary companies in Europe (which includes Dublin) and that this will inevitably mean the transfer of a number of jobs to Europe.

Q: Will the UK continue to be part of the European Economic Area and why does this matter?

 

A:

The Current Position

The EU currently has 22 Trade Agreements with individual countries and 5 Multi Lateral Agreements covering a total of 52 countries.  New Trade Agreements will be required with all of these countries, subject to the fallback position of the WTO (World Trade Organisation) Rules.

European Economic Area (EEA) – The Norway Model

The 28 member states of the EU, including the UK, are currently members of the EEA along with Norway, Lichtenstein and Iceland.  The position for Norway is as follows:-

  • It enjoys full access to the Single Market in Goods. It should be noted that the Single Market in Services is still evolving across the EU;
  • It is subject to all the Regulations and Standards of the EU;
  • It is subject to “Free Movement of People” which is one of the four key pillars of the EU;
  • It is however exempt from EU Rules in relation to agriculture, fisheries, justice and home affairs;
  • Its per capita contribution to the EU is approximately the same as that of the UK; and
  • In the jargon of the Brexit campaign, it is a “rule taker” rather than a “rule maker”.

European Free Trade Area (“EFTA”) – The Swiss Model

Following a referendum in 1992, Switzerland decided not to be a member of the EEA but is instead a member of EFTA.  Its status is as follows:-

  • It relies on a series of bilateral agreements with the EU and its member states;
  • It has no general duty to apply EU laws but it must apply all relevant regulations and standards relating to products which it exports into the EU;
  • It makes a substantial contribution to the EU budget but at a lower per capita level than Norway;
  • It is, or was, subject to the Schengen Agreement “Free Movement of People” on open borders;
  • However, Switzerland decided to restrict immigration a couple of years ago. There have been a number of consequences of this policy including restricted access to scientific collaborations.

Customs Union

Turkey, Andorra and San Marino all have a Customs Union with the EU which means that there are no tariffs on goods passing between member states of the EU and the three countries concerned.

The Canadian Model

Canada has negotiated a more far reaching Trade Agreement with the EU than any other non-member state.  However, it was seven years in the making and it has not yet been ratified. 

Free Trade – The Hong Kong and Singapore Model

These two city states have adopted a “free trade” model with no barriers on imports and exports.

The WTO Model

The basic principle is that each country is required to pay the tariffs which it applies to the rest of the world.  This is how we trade with America and many of those in the “Leave” campaign believe that this is a perfectly satisfactory way to trade with the EU.  It is argued that, with the recent fall in Sterling, exports which are denominated in Sterling will be no more expensive in the EU even if the WTO Rules apply.  It will however have a negative impact on imports not only from the EU but also from the rest of the world.

Where will we end up?

The Referendum was dominated by the following issues:-

  • “Sovereignty” – “getting back our country” and control of our laws;
  • “Freedom of Movement” – getting back control of our borders and restricting immigration; and
  • Access to the Single Market which is the destination of nearly 50% of the UK’s export.

There was no clear consensus amongst the “Leave” campaigners about which of these themes should dominate any negotiations.  The EU has made it clear that there will be no “pre-negotiations” until Article 50 is triggered to start the negotiating period and that will not happen until a new Government is in place.  The new Prime Minister who will lead these negotiations has not been elected by the country as a whole and it is an open question whether she will feel that it is necessary to hold a General Election to obtain a clear democratic mandate before embarking on the process of detailed negotiations.  The UK’s “wish list” in any such negotiations will be determined by the Government of the day.

Article 50 of the Lisbon Treaty envisages a two year period for negotiation.  However, in an effort to manage expectations, Downing Street is now suggesting that it may take five years before these negotiations are complete.  In the meantime, the UK retains its current status as a member of the EU.  However, it may be anticipated that negotiations at every level will take place against the backdrop of the UK’s pending departure from the EU and the consequences which that might have in any particular circumstances.

Q: We have a number of EU nationals working for our company - how will this affect us?

 

A: The position that the UK will take is still unclear in terms of EU migrant workers as it will depend on whether the UK Government decides to remain in the single market (meaning, most likely, that the free movement of EU citizens will continue) or whether it leaves the single market and imposes a visa system.  

In the meantime, it seems likely that EU migrant workers already living and working in the UK legally will be permitted to remain and any new rules relating to visa requirements will only be imposed for those who come to the UK after we have formally left the EU (or before if transitional rules are put into place). Any anxious EU citizens working in the UK, in the meantime, could consider applying for a Permanent Residence Card or British citizenship, if eligible, to protect their position.

Permitting those EU migrant workers already here to stay is the position that was pledged by the Leave Campaign.  There is also a legal argument that under international law those who have already exercised their right of free movement can claim their ‘acquired rights’ whereby a person who has exercised their right under an international treaty, may continue to enjoy the benefit even if the treaty ends.

In any case, it seems unlikely that the rules relating to EU citizens already in the UK are going to change in the short term.  However, for peace of mind, employers could encourage eligible employees to apply for permanent residence so that they can secure a more permanent right to live and work in the UK.   EEA nationals who have been exercising Treaty rights for a continuous period of 5 years or more will have acquired the right of Permanent Residence and should apply for a Permanent Residence Card to evidence this as soon as possible. https://www.gov.uk/apply-for-a-uk-residence-card/permanent-residence-card

Q, As an EU citizen working in the UK, should I be trying to get a UK passport?

 

To be updated

Q. As a UK employer should I be encouraging my EU citizen employees working in the UK to get a UK passport?

 

Once the UK leaves the EU, EU citizens will no longer have the automatic right to reside and work in the UK unless they have already obtained permanent residency. The ‘Leave’ campaign have however indicated they are keen to preserve the rights of EU citizens already living and working in the UK. Negotiations will take place over the next couple of years and therefore it will be some time before the final outcome is known. Whilst there is no immediate impact, there remains an element of uncertainty with regard to the long term situation. Any anxious EU citizens working in the UK, in the meantime, could consider applying for British citizenship, if eligible, to protect their position.

If you’re an employer with a number of EU citizens in your employment or the few EU citizen employees you have are particularly key to your business, you may wish to encourage them to apply for British Citizenship.  You could consider offering the following support:

  • Disseminating information about how to apply for British Citizenship and the benefits of doing so;
  • Offering practical assistance with filling out the necessary forms etc;
  • Provide an English language and culture teacher to those employees who struggle with the language etc.
  • Engage an immigration specialist third party to assist your staff.

How to become a British Citizen:

The most common way to become a British citizen is called ‘naturalisation’.  You can apply for British citizenship by naturalisation if:

And you must usually have:

  • lived in the UK for at least the 5 years before the date of your application;
  • spent no more than 450 days outside the UK during those 5 years;
  • spent no more than 90 days outside the UK in the last 12 months;
  • had settlement rights (‘indefinite leave to remain’) in the UK for the last 12 months if you’re from outside the European Economic Area (EEA); or
  • had permanent residence status for the last 12 months if you’re a citizen of an EEA country - you need to provide a permanent residence document; and
  • you have not broken any immigration laws while in the UK.

If your spouse or civil partner is a British Citizen, you can apply for citizenship if:

Unless your spouse or civil partner works abroad either for the UK government or for an organisation closely linked to government, you must usually also have:

  • lived in the UK for at least the 3 years before your application is received;
  • spent no more than 270 days outside the UK in those 3 years;
  • spent no more than 90 days outside the UK in the last 12 months; and
  • not broken any immigration laws while in the UK.

Further information on applying for British Citizenship can be found here.

Q: What should we be thinking about in relation to our staff employment contracts?

 

A: In the short term, staff employment contracts will remain largely unaffected and this is likely to be the case until the end of UK negotiations with the EU. However, if the UK leaves the single market and negotiates bespoke arrangements with the EU or individual member states, then, in theory, the UK Government could repeal current employment laws (most of which originate from European Directives – e.g.  working time regulation, discrimination and equality legislation).  This said, it seems unlikely that the Government will want to make significant changes because the EU member states that we will continue to trade with will probably insist on the UK having similar employee rights, the Government is likely to want to minimise upheaval for British businesses by maintaining the status quo (at least in the short term) and, politically, it is likely to be to the Government’s benefit to maintain the rights that employees and employers have come to expect in the workplace. 

Q: How can we reassure our staff?

 

A: The vote to leave the EU has created instability, which is likely to last for some time and will be unsettling for staff.  In order to reassure staff and safeguard your business interests we would suggest considering the following:

  • Send a communication to staff or hold a meeting to reassure them that changes will not occur overnight and that you are likely to get sufficient notice of any changes so that they can be properly managed.  
  • Let staff know that in the short term at least staff contracts will not change (other than in the ordinary course of business) and existing EU migrant workers will be permitted to live and work in the UK and the current indications are that this is unlikely to change.
  • Appoint a director, senior employee or HR Manager within your business to be the person tasked with keeping up-to-date with the developments that will impact on staff and will send regular communications about this. 
  • Encourage and support key employees who are EU migrant workers to apply for permanent residence in the UK if they are eligible. 
  • If your business relies heavily on EU migrant workers, start putting together a strategy/contingency plan about how you are going to resource your business should the UK move to a points-based visa system.  You may wish to take professional advice to help with this.

Q: We are planning to apply for a European patent.  Should we still do this?

 

A: The current European patent system should not be affected by Brexit because the European Patent Convention is not a European Union instrument. It currently has 38 Contracting States and some of them (for example Switzerland, Norway and Turkey) are not members of the European Union. The UK should remain a party to the European Patent Convention.

Post Brexit, a business in the UK can still file a patent application to the EPO for whatever European foreign market it is seeking patent protection in. Patents granted by the EPO would then still have to be validated at the country level, a step that would not have been necessary under the proposed unitary system.

The much debated unitary patent was to be granted by the European Patent Office and would have been valid in 26 countries, with a centralised court of enforcement known as the Unified Patent Court (UPC). It was intended to cut down on the cost, administration and red-tape of filing and enforcing a patent across many European jurisdictions. Under the unitary system, those seeking patent protection in multiple markets would be able to file a single application to the EPO, and if granted, see it have immediate effect across all relevant states and pay a single renewal fee.

However the unitary patent is a creation of the European Union and now the UK is automatically excluded from the unitary patent scheme, as EU membership is a requirement.

Q: What about our existing European patent applications?

 

A: Brexit will have no impact on existing and future patent applications filed through the EPO.  These will continue to designate the UK and, once granted, be capable of validation with the UK IPO, for as long as the UK remains a member of the EPC.  There is not now, and never has been, any suggestion that the UK would consider withdrawing from the European patent system.

Q: What about our existing EU trade marks or design rights?

 

  1. Much like European Patent applications Brexit will have no immediate impact on existing and future European trade mark and design right applications. Once granted they will continue to be enforceable across the EU and this should continue to be the case following the UK leaving the EU. However it is anticipated that following the UK’s exit from the EU the right to enforce EU trade marks and design rights in the UK will be lost. Accordingly new applications may have to be sought in the UK in order to protect right holders.

Q: What about the transfer of personal data?

 

  1. The General Data Protection Regulation (GDPR) will replace the current data protection Directive on 25th May 2018 and will be directly applicable in all EU member states without the need for implementing national legislation. If the UK chooses to diverge its data protection laws (currently the Data Protection Act 1998) from the GDPR it will become more difficult to export data to and from the EU and UK (without putting in place EU model clause contracts). UK data protection laws would have to be approved as providing adequate protection for personal data by the European Commission.

Key data issues for businesses to give consideration to as a result of Brexit will include a review of all data ownership and uses, for example to establish:

  • what customer and third party data is held and in which locations;
  • what are the permitted terms of use of such data and when can such use be withdrawn;
  • where is such data transferred to and from;
  • what consents for the use of data have been obtained from data owners; and
  • what rules and regulations apply to the use of such data.

Q: What happens to EU laws in the UK after the UK leaves the EU?

 

A: There are two types of EU legislation that have effect in the UK: Primary legislation - mainly EU Regulations which have direct effect in the UK all on their own; and Secondary legislation - UK Acts of Parliament that have been passed in response to EU Directives and other law. 

Part of Brexit will be an agreement as to when the UK will be released from EU legislation. Whenever that happens there will be two consequences: Firstly Primary legislation will cease to have effect (although the release could be phased in relation to different Treaties or Regulations); and secondly the UK will be free to amend or repeal the reams of legislation that has been passed in the decades since we entered the common market.  In essence, once we are released from EU law, we are free to cherry pick the bits we like and the bits we don’t.  That will work well within the UK; however, it may be that in order to have access to the EU as a trading partner, we are forced to retain some of this legislation (or to enact more) – the Norway paradigm.

In any event, the amendment or repeal of any such legislation we don’t like will need to find its place on an already busy parliamentary schedule.

Q: What key things which I should be doing now?

 

A: We think the best advice is to keep calm and reassure your staff as best you can about the changes.  Please see our separate notes on this regarding staff communication.  It will be very important to review your key contracts within your business to see what terms could be affected by the UK leaving the EU and potentially not having access to the single market.  It will also be important to look carefully at your funding arrangements, both current and proposed, to see if there is likely to be any impact and if so, then how this can be mitigated.  Every business needs to be in regular contact with its backers and customers and Brexit is just another reason to do that.  We have also mentioned in some of our questions and answers that you will want to review your intellectual property portfolios and also your arrangements involving the processing of personal data.  There will be a lot of things that individual businesses will need to look at and it would be sensible to appoint a ‘Brexit team’ within your business which is given this task. Prudent cash management in these uncertain times will no doubt be a key focus whilst ensuring that you also have appropriate contingency plans in place.  If you need help with specific legal issues or concerns then please do not hesitate to get in touch.      

This Brexit Q&A section is written as a general guide only. It does not contain definitive legal advice, which should be separately sought as appropriate in relation to any particular matter.

Any anxious EU citizens working in the UK, in the meantime, could consider applying for a Permanent Residence Card or British citizenship, if eligible, to protect their position.

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