Prayer Is Brexit Strategy as Services Brace for Red Tape Storm

Jill Ward and Bryce Baschuk (Bloomberg) -- U.K. services companies aren’t buying the argument that splitting from the European Union will cut down on red tape.

After leaving, British providers will have to navigate complex regulatory, legal and administrative hurdles in order to trade with the continent. An abrupt departure from the bloc would see British businesses lose benefits including the freedom of establishment in EU countries and the free movement of people within the bloc.

Services make up the bulk of the U.K. economy and 45% of the country’s exports. While the continuation of trade in financial services with the continent has drawn attention from the Bank of England and others, the rest of the sector, ranging from accountants to travel agencies to IT service providers, can take little comfort from the advice it’s getting.

A British government report on the country’s readiness for no deal highlighted the issues, saying services firms operating on the continent will need to comply with host-state rules, and professional qualifications will no longer be harmonized in some fields.  It published 31 country guides for the sector’s exporters, though it’s “not an exhaustive list of the changes that will take place.”

Other official guidance suggests companies consider appointing an English-speaking lawyer in each country to help comply with specific regulations. The legal profession itself will face a slew of new rules if the U.K. leaves with no deal, including laws in some countries prohibiting EU lawyers partnering with those outside the bloc.

Related:A No-Deal Brexit Would Throw Billions of Data Transfers Into Legal Limbo

“A lot of British companies selling into Europe or across Europe are going to be breaking the law without realizing it,” said Samuel Lowe, a researcher at the Centre for European Reform.

Leaving the single market will most probably mean fewer services are provided across borders, and an increase in the proportion being provided by establishing a commercial presence within the EU, according to Lowe. That would have knock-on effects on employment and tax receipts.

Currently, Britain has access to the EU’s market of over 500 million consumers, the free flow of data and the ability to easily send workers on trips to the continent for things like installing software or drafting contracts.

The free flow of data is a particular concern for south east England-based 4D Data Centres, which manages IT for clients, including helping them move data offsite or to the cloud.

Being outside the EU could mean changes to rules on where data is physically stored, and 4D is advising its clients to do the legal legwork now and commit to the EU’s data standards individually. That should ensure they’re covered come Nov. 1.

Related:France Touts Tax Break for Data Centers to Lure Brexit Clients

“There is no fallback position as far as data is concerned, which is a bit of an oversight,” said Jack Bedell-Pearce, 4D’s CEO. You need to understand “how you’re going to be impacted when the rug is pulled from underneath your feet.”

4D helped survey businesses about data sovereignty — the location where data is stored — in the aftermath of the Brexit vote, and found that 87% were not looking at the issue. Judging by anecdotes, the figure is probably similar now, Bedell-Pearce said.

Brexiteers have proclaimed that falling back on trade rules established by the Geneva-based World Trade Organization will be more than sufficient to ensure that the U.K. can continue to trade with Europe and the rest of the world. But the rules regarding services are particularly complicated and will provide less certainty to exporters.

Further complicating matters is the fact the European Commission does not have exclusive authority over the EU’s internal services market as it does with goods under the customs union. That means each EU member state can impose their own services rules.

Julian Braithwaite, U.K. ambassador to the WTO, says that very often countries’ domestic regulation of services can be “deliberately or inadvertently trade-restrictive.”

Britain has tried to simplify rules and seeks to restart negotiations for a WTO Trade in Services Agreement. But TiSA, which aimed to increase market access among the EU, Japan, the U.S. and 20 other negotiating parties, went into a deep freeze following President Donald Trump’s election.

Nish Kotecha, co-founder and chairman of London-based software company Finboot, which helps firms use blockchain technology, is unsure of what Brexit will lead to. The business is thriving, but with their small team, Kotecha and his colleagues don’t have the capacity to formulate a detailed plan or hire a dedicated adviser.

“The movement of our product — it’s software that I email, or use video conferencing, or implement remotely to people in different locations — I have no idea how this would be administered,” Kotecha said, citing increased security checks, difficulties making business trips to the continent, and new taxes as his main worries. “Our approach is to pray.”