Brexit: the EU Referendum and its impact on the UK’s tech industry
18 August 2016
In this article, we consider the result of the EU Referendum held in the UK on 23 June 2016 and some of the impacts on the UK tech industry.
To the surprise of many, the result of the EU referendum was announced on Friday 24 June 2016 with a vote in favour of the UK leaving the EU. Although it will be some time before the terms of the UK’s future relationship with the EU are known, the immediate impact on the UK’s tech industry was generally negative.
It was reported that shares in UK technology companies plunged as news broke of the UK’s decision to leave the European Union. Business Monitor International published research following the Referendum result, noting that the most immediate consequence for the UK tech industry will stem from the downturn in the UK’s economy and consumer spending outlook over the next few years.
They also reported that the negative impact of Brexit on the financial services sector, which accounts for around 15-20% of the UK software and services market, could reduce demand in the IT sector.
However, the long term impact on the UK’s tech industry will depend significantly on the agreements the UK negotiates with the EU in relation to exiting, and re-establishing free trade.
Throughout the run up to the Brexit vote and on the day of the vote, Eversheds has issued pragmatic briefings as to what an exit vote would mean and how it might work in practice, looking at the various models which might be adopted. Read our detailed briefing issued on the day of the vote or view our slidedeck from our TMT GC event which we held in the Spring to learn more.
Why is Brexit significant for technology businesses in the UK?
There are concerns within the tech industry that the decision to leave the EU will result in a loss of opportunity. But of course, there are those who note potential new opportunities following Brexit.
In terms of the potential loss of opportunities:
- If the UK is unable to negotiate similar import tariffs to its current trade agreements, higher import duties, increased logistic costs and changes to minimum wages could see some of the key players in the sector re-consider their decision to set up in the UK. Even before Brexit negotiations are completed, the uncertainty could result in businesses, particularly tech start-ups, moving to mainland Europe if the UK becomes less attractive for financing.
- A fundamental loss of opportunity would be the loss of a barrier-free access to the European consumer market.
- If there is a significant shift in activities in the tech industry to mainland Europe then the UK will also be at risk of losing skilled IT workers (of which there is already a shortage) as well as seeing a reduction in businesses who may headquarter (whether overall or as their European base) in the UK. This is of course one of the biggest concerns for those in the Tech, Media and Telecoms sectors operating from or in the UK. However, this brings potential opportunities for other countries within Europe.
- The UK is also set to lose access to EU funding, including from the Digital Single Market Initiative (an initiative to promote innovation, contribute €415 billion to the EU economy each year and create hundreds of thousands of new jobs).
- The UK tech industry could also lose access to the impending European Cloud Initiative, which is intended to offer Europe’s 1.7 million researchers and 70 million science & technology professionals a virtual environment in which to store and manage research data, as well as a €500 million network of digital innovation hubs across Europe, where businesses can obtain advice and test digital innovations.
However, it is not all doom and gloom for the UK.
- It is anticipated that spending on the likes of Cloud, analytics and mobile will continue to increase – the reality is that technology can be used as a means of taking cost out of “the business” and that there may be more pressure for businesses to do this – the reality is that high technology consumption has become the norm and Brexit is unlike to change this and may therefore strengthen the need in the medium to long-term.
- Since the Referendum, the Pound has been in recovery having fallen to its lowest level against the Dollar in more than 30 years. Whilst this is not good for the economy as whole, a sustained period of weakness in the Pound would make UK IT vendors more competitive as compared to their European or American counterparts. This is of course an opportunity and a threat.
Brexit and Outsourcing
For those suppliers operating in the outsourcing sector, we still await to see the effects of Brexit. Whilst some RFPs and customer deals have been held back, so far many clients are saying it is “business as usual” and, certainly, Eversheds has not seen a slow-down in contracting in this space. However, it is not a surprise that the National outsourcing Association reported, just before the vote, that 73% of the UK outsourcing industry was in favour of the UK remaining in the EU.
Although it will be some time before the terms of the UK’s future relationship with the EU are known, there are things that tech businesses can consider and plan for now, and changes they can start to make, to help protect their interests, including future-proofing their commercial contracts.
It is difficult to say in advance and with precision what will be the likely effect of Brexit. However, below are a few general factors to consider to determine any likely impact of Brexit on any particular contract or transaction:
- dependence on EU trade (including any ability to passport particular regulated businesses throughout Europe) or dependence on EU funding or grants
- pricing mechanisms having been tailored to take into account particular savings or levels based on EU free movement of goods and people or EU funding or grants (so, for example, if free movement of goods no longer applied, whether tariffs or export/import/border controls would increase the cost of supply)
- whether the transaction or any clause is dependent on particular territorial EU wide definitions
- whether terms can be amended if more strenuous EU law is no longer applicable (see more on this below)
- clearly, it is time to pay more attention to currency fluctuation clauses and work more closely with the treasury teams in this area. It is worth considering inserting a clear mechanism for calculating exchange and potentially caps on acceptable levels of fluctuations, over and above which pricing increases (or at least discussions) can be triggered. Hedging of course remains an option
- now is the time to consider auditing your key contracts – particularly in relation to your obligations in relation to change in law (something we are helping some of our clients with now). If necessary, you may need to budget in for the impact of changes in law which you have agreed to bear the cost of as a supplier. Will it mean a change in the underlying technology you supply or even parts of the business model? For example, will you need to comply with GDPR and a different data privacy law if servicing a European contract for a customer and will this mean slightly different levels are applied (or you apply the higher thresholds across the piece in your contracts). It is also time to consider changing your change in law precedent clause too and definitely worth considering whether the standard “compromises” around the clause need changing where you supply on customer terms
- as for the law, there has been some debate as to whether English law will remain a favoured choice for international contracts following the referendum. However, a choice of English law has not been historically driven by the UK being part of the EU; rather because of the strengths of certainty, stability and enforceability associated with English law and the commonality with other legal systems which grew from the English law system. It will be interesting to see if these factors mean English law remains one of the key favoured choices for private law for multi-jurisdictional outsourcing and technical deals
- English contract law itself is not obviously impacted by the UK leaving the EU in concept. However, outsourcing and technology supply contracts are models that continue to be more and more impacted by regulations and those regulations often have EU law as their source. As mentioned above, this includes data protection legislation, but also TUPE (transposing the acquired rights directive) and sector specific regulation. It will be important to monitor how we deal with EU regulations which currently have direct effect in the UK and how English law therefore changes in the future
The briefing note issued by Eversheds on the day of the vote and mentioned above details how changes in law may be approached in the coming years. Clearly, we will be monitoring the developments closely, as well as any negotiations between the UK and the EU and will keep you updated from our perspective. As a law firm with legal experts in the technology, media and telecoms sectors, we are well-placed to advise businesses across the sector and on the possible wider implications of Brexit.