News and Publications

Brexit - the implications for the tech sector

Posted: 29/06/2016

Although the UK has voted to leave the European Union, the UK’s tech sector was strongly in favour of staying in. Despite the result, the sector is in good shape and, according to certain investors, analysts and founders of start-up and growth businesses, is well placed to handle the exit as and when it occurs.

It is important to stress that, until the UK formally leaves the EU, EU law will continue to apply within the UK and there will be no immediate change in the way that people move or trade. But the same cannot be said of public perception and the uncertainty felt by tech companies and those who are planning to move to or do business in the UK.

Some investors have cited the fact that there are billions of dollars of venture capital at work in the UK and that the government is at the forefront of the adoption of technology. The tech sector currently accounts for around 10 per cent of UK GDP and is one of the fastest growing components of the economy. With a thriving start-up community,  London is widely renowned as the digital capital of Europe.  

The UK has maintained its lead in Europe as the home of billion-dollar valued tech companies - the so-called “Unicorns”. That 18 (at the last count) of Europe’s 47 Unicorns  are based in the UK is clear evidence of how the UK is leading the way in AI, open data, block chain and tech-enabled verticals from bio to health, education to financial and regulatory tech.

What are the implications of Brexit for tech businesses?

Brexit poses the question as to what role the UK will (continue to) play as a leading digital hub. For many overseas companies, particularly those in the US, the UK has long been a gateway or springboard into Europe, due to the cultural affinity between the two countries. Start-ups, in particular, have been attracted by London’s dynamic culture of innovation, diversity and creativity.

Access to talent for UK businesses will be on the agenda even more now as one of the main benefits of being part of the EU is the free movement of labour. The UK tech sector, and all of the innovation that surrounds it, needs highly skilled people to allow it to flourish.

Retaining strong links with Europe will be a priority. For example, the UK’s access to the Digital Single Market, an attempt by the European Commission to simplify the EU’s diverse digital market, its goal to break down regulatory walls and bring 28 digital markets into a single market,  is an initiative that is widely supported by US businesses.

What will happen next?

To exit the EU, a notice will need to be served on the European Council in accordance with Article 50 of the Lisbon Treaty. Once the notice is served, there will not be any immediate change. It will simply trigger a two year negotiating period with the other 27 EU states on the exit terms for the UK.  Prime Minister David Cameron made it clear that he will remain in Government for up to three months but he will not be the one to serve the notice on the European Council.  There is likely to be some debate on when the notice to leave the EU is served but a new Prime Minister is expected to be in place by 9 September 2016.

What will happen to UK immigration law?

The type of immigration system the UK will end up with in relation to EU nationals will be dependent on which of the following two outcomes currently being debated is pursued:

  • The UK leaves the EU and the single market which may mean that EU/EEA nationals will have to comply with domestic UK immigration laws (Points Based System).
  • The UK leaves the EU but signs up to the EEA option ie the UK stays in the single market, in which case free movement for EU nationals could continue.

In the highly unlikely scenario that the referendum is overturned, the changes negotiated by the Prime Minister ahead of the referendum placing certain restrictions on free movement of family members of EU/EEA nationals may be brought in.

Regardless of which option the Government takes forward, there will be a significant job to do in the two year period before the UK leaves and all EU treaties cease to apply. This will include negotiating new trade deals, considering its stance on immigration, and identifying which UK laws need redrafting and which should be repealed.

The impact on UK tech companies

There continues to be a shortage of tech talent in the UK. This was acknowledged when the Migration Advisory Committee (MAC) was commissioned to review digital tech jobs on the shortage occupation list. Many tech start-ups who find sponsor licensing and Tier 2 sponsorship to be too expensive, will often hire a talented EU/EEA national to fill the first vacancy within their organisation. They will then go on to become Tier 2 sponsors once they are more established.

What happens to your current EU/EEA employees and their family members?

EU/EEA passport holders, those holding EEA residence cards, and their family members already in the UK can continue to work and travel freely (free movement rights). Those employees who have been in the UK exercising treaty rights for at least five years may wish to apply for permanent residency to confirm their status. These applications can take up to six months to process.

For employees who do not currently qualify for permanent residency but are in the UK exercising treaty rights, it is expected that transitional arrangements will eventually be put in place to allow them to continue their employment. If the UK opts for the EEA model, then these employees may still be able qualify for permanent residency. 

What happens to those EU/EEA nationals recruited following the BREXIT vote but before the UK formally withdraws from the EU?

For those employers looking to hire or in the process of recruiting EU nationals, new hires are also expected to be covered by transitional arrangements.

What will be the process for hiring EU/EEA nationals once the UK formally withdraws from the EU?

Nationals of EU/EEA member states would need to meet the requirements of UK domestic immigration laws.  Any new immigration laws affecting EU/EEA nationals will also need to take into account the reciprocal arrangements that the UK will require for its nationals. For those simply visiting the UK for leisure or business, there is unlikely to be a significant impact but for those seeking to work or study in the UK, it is expected that entry clearance applications will be required, in the same way as for non-EU nationals.

Setting up a business

Currently, the single market allows businesses to set up and operate freely in all member states (freedom of establishment). Crucial to this is the freedom of movement allowing employees to move freely between member states. Should the UK leave the EU and the single market, businesses based in the UK looking to set up branches in the EU or vice versa will need to comply with any new arrangements agreed as part of the negotiations. If the UK opts to join the EEA, the freedom of establishment should remain.     

British nationals working in Europe

UK employers also need to be aware of the potential impact on British workers who are required to work in Europe. If the UK imposes restrictions on EU nationals working in the UK, it is only reasonable to assume such restrictions would be reciprocated.

The impact on European tech entrepreneurs already in the UK

These are the likely scenarios for self-employed tech entrepreneurs:

  • EU/EEA nationals who are self-employed in the UK are considered to be exercising treaty rights. Those individuals who have been exercising treaty rights  for at least five years may therefore wish to apply for permanent residency to confirm their status. These applications can take up to six months to process.
  • For EU/EEA nationals who are self-employed in the UK and exercising treaty rights but who do not currently qualify for permanent residency, as with employees, it is expected that transitional arrangements will eventually be put in place to allow them to continue their employment. If the UK opts for the EEA model, then these individuals may still be able qualify for permanent residency. 

As yet no one knows how any new immigration system for EU/EEA nationals will pan out.

The immigration and corporate teams at Penningtons Manches will provide further updates as soon as they are available.

Arrow GIFReturn to news headlines

Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP