Executive summary
On 23rd June 2016, the British people voted to leave the EU and the commercial sector is faced with a difficult decision. The UK’s decision to leave will be felt by the construction company JK Roofers LTD, in Lincolnshire whose employees are mainly migrants.
Although the UK law will not change considerably for quite some time. Businesses will be stung by these issues and should consider all possible consequences in their negotiations with suppliers and customers. In the wake of Brexit, firms should factor in these alterations when making both their short- and long-range plans.
For immigration, a post Brexit scenario is listed as an option, including a points-based system for current EU nationals to remain in the UK.
The UK could join the European Economic Area (EEA) or follow the ‘Swiss model’ to negotiate trade agreements with the EU.
The UK taxation would no longer be restricted by the EU’s VAT rates, but business administration cost could rise because of restricted access to the EU’s co-ordinated VAT.
Table of contents:
1.0 Introduction …………………………..………………. Page 3
1.1 What is Brexit? ……………………..…………..…… page 3
1.2 Source …………………………………..….……….. page 3
2.0 Findings ……………………………..……………..... page 3
Leaving The EU ………….………………..….……..….. page 3
Economic Growth ………………………..…….……..… page 3
Credit Downgrade ………………………..………..….… page 3
EU Funding ………………………..…………….…… page 3
Investment …………………………………..…...……… page 4
Trade Options ………………………….…..……….…… page 4
Commercial Contracts…………………..…………..…… page 4
Construction ………………………..…………...….…… page 4
Immigration ………………………..……………….…… page 4
Migrant ………………………..…………………....…… page 4
Import Cost Increase ..………..……………………….… page 5
Taxation ………………………..……………………..… page 5
3.0 Conclusion ……………………………………….…. page 5
4.0 Recommendations ……………………………...…… page 5
5.0 Bibliography …………………………………..…….. page 5
1.0 Introduction
On 23rd June 2016, the people of Britain voted to leave the EU. The commercial sector is now faced with a difficult future because of that decision. JK Roofers Ltd, is a small construction company based in Lincolnshire, and employs mainly migrant workers. The UK’s decision to leave the EU will greatly affect the UK’s access to European workers. Currently sixty percent of JK Roofers skilled and semiskilled employees come from Poland.
This report attempts to address the impact Brexit could have on JK Roofers Ltd. It aspires to identify any short- and long-range policies which may be put in place to offset against any negative fallout of Brexit. These findings and suggestions can play a crucial part in safeguarding companies against any interruptions to businesses that Brexit may bring. JK Roofers should exploit any opportunity Brexit might raise. This is completed to safeguard the growth of the company.
1.1 What is Brexit?
Brexit is an abbreviation for ‘British Exit.’ This refers to the referendum, the British people voted for on 23rd June 2016 to leave the European Union. In an article in Investopedia, the referendum upset both domestic and global markets, causing the British pound to fall to the lowest it has been in decades.
1.2 Source
This report will focus on information derived from the following three articles.
The Construction Intelligence Centre (CIC) which provide data online, analysis and advisory services on financial and I industry sectors. Head of trade and European policy at the Institute of Directors (IOD), Allie Rension gives an extensive valuation of what Brexit means for UK businesses.
2.0 Findings
Leaving the EU
· The UK must decide on two ways of leaving the European Union: Repel the 1972 European Communities Act [1] which would cause the UK reverting to membership with the World Trade Organisation (WTO). The other way is to trigger Article 50 of the Lisbon Treaty by notifying the European Council [2] of its intention to leave. This allows them two years to negotiate a new arrangement with the EU.
· During the upcoming EU exit period, it is anticipated that potential investors will most likely refrain or curtail their investment plans while they wait for a clearer picture to emerge about how well the industry will manage post Brexit.
Economic Growth
· The CIC do not forecast any real benefits or opportunities however, they do envisage potential risks business 2016.
· Based on previous CIC forecast, growth was expected at 3.4% if the referendum was in favour to remain in the EU. The new forecast, post referendum is now 2.8%.
· Britain construction growth in 2017 is expected to become sluggish and go from 4% to 1.5%
· With Britain’s vote to leave the EU, invertors confidence will drop over the growing uncertainty of the state of economy.
Credit Downgrade
· The UK’s credit rating has dropped to AA from AAA by Standard and Poor’s and they warned the potential of further downgrade exists.
EU Funding
· The UK would lose future funding from EU sources for large developments. The UK receives it’s funding from the European Fund for Strategic Investment (EFSI). The UK is one of the biggest beneficiaries of EFSI funding and the European Investment Bank (EIB) and has also increased it’s funding to the UK in 2015 to EUR5.5 billion for infrastructure projects. The impact of Brexit could lead to large developments being put on hold, such as the GBP55 billion High-Speed 2 railway project and the expansion of Heathrow airport.
Investment
· The UK economy may well suffer going forward if a slowdown in the economy materialises. Foreign investment, business investment and household spending may all have an adverse effect on construction project as a whole.
· Trends are forming with the IOD members and a recent poll found more than a third of directors’ plan to cut investment in their business. Eighty three percent of IOD members have links in one form or another to the EU.
Trade Options
· Regarding trade the article suggests the UK could join the European Economic Area (EEA), made up of Norway, Iceland and Liechtenstein or follow the ‘Swiss model’ by negotiating a whole host of bilateral trade agreements with the E.U. but this could prove very time consuming and may not lead to an eventual satisfactory outcome.
Commercial Contracts
· Companies should start negations now with suppliers and clients, to clarify their contractual agreements post Brexit and what implications the changes may mean. For example, exchange rate fluctuations affecting pricing in contracts, contracts where the “E.U.” is used may need to be changed.
Construction
· Another area of concern for the industry is imports. The UK construction industry uses a lot of imports from the EU, most notably German, Italy and Sweden. Within a post-Brexit environment, trade tariffs could lead to increased import costs. It is not certain that any potential new trade deals outside the EU will offer cheaper alternative.
· As expected, shares among housebuilding companies were hit badly following the vote leave. The UK treasury had predicted a possible 17% drop in house prices if a leave results ensued. In total 17 of the largest UK housebuilders believed that Brexit would reduce house housebuilding due to a combination of higher import prices and a reduction in the labour force. A reduction purchases from foreign investors was also cited.
· Additionally, the forecast for the UK construction industry has been downgraded from 9th to 15th in the Timetric’s Construction Risk Index.
Immigration
· Immigration is mentioned in the report and is noted as being the top topic of the referendum debate. Whilst various options are listed for a post Brexit scenario, including a point-based system. Protecting the existing EU nationals’ right to remain in the UK and a potential continued commitment to free movement of EU citizens. The report highlights to overall uncertainty that currently exists and is likely to remain for some time until proper negotiations get underway with the E.U.
Migrant
· The UK construction industry is heavily dependent on labour within the EU because of the lack of skilled domestic workers. The Chartered Institute of Building warns that the potential inflated cost for labour and materials may see a diminished number of skilled workers coming from the EU. This could aggravate the skills shortage, delaying projects and increase the cost of labour.
· With a shortage of skilled and non-skilled UK workers, the construction industry counts on migrants to fill those positions. If the UK triggers article 50, free movement of people will hurt an already flagging construction industry.
· EU nationals mostly filled the gap for low wage qualified jobs because there has been for some time, a shortage for qualified workers, such as civil engineers.
· The construction industry should focus on training their own home-grown employees and entice more women into the industry to help meet demand.
· One way this can be done is by having more diversity in recruitment to include, young men and women leaving school, more women and other professionals.
Import Cost Increase
· Presently the construction industry depends on countries such as Germany, Sweden and Italy for equipment and resources. If the UK is unsuccessful in negotiating an auspicious deal, the construction industry may see price rises for key inputs. With the announcement of Brexit, the pound has taken a pounding making some goods costlier, resulting in an increased cost for construction projects.
Taxation
· Domestic taxation is another part the article looked at. The UK would no longer be restricted by the EU’s VAT system and they would have more freedom on setting their own VAT rates. However, the administrative costs for business whose products travel through the EU would probably rise because they would no longer have access to the EU’s co-ordinated VAT collection system. Import duties may be included as well depending on the post-Brexit arrangements.
3.0 Conclusion
· The British people have spoken loud and clear to leave the EU. This has historic leap has unearthed a tremendous amount of questions in regard to the country’s economic welfare.
· It is important for businesses to engage with the government and the E.U. to make their priorities known, domestically and in Europe. With the existing negotiations with Brussels, the UK just cannot hunker down when it comes to making crucial decisions in regard to immigration, taxation, infrastructure and digital policy.
· It is of vital importance that Whitehall and Westminster embrace a more liberal approach, when negotiating with the E.U. and the world for its business’s longevity. Businesses should not concern themselves with the political fallout, they need to be on survival mode, have determination and ability to adjust to the new state of affairs.
4.0 Recommendation
· When bidding for work, JK Roofers must consider the increased labour cost and the likelihood of price increases on materials. There is a possibility that labour and supply costs will increase in the future, so if the company is bidding for work to commence sometime after that, they should take note of potential costs.
· JK Roofers should expand and upskill its present staff so that the company will see the rewards in the long term. JK Roofers must focus on the young British citizens, by investing in training, developing and mentoring them.
· JK Roofers also need to be aware of any E.U. construction funding their clients currently receive as they may dissipate post Brexit.
5.0 Bibliography
References: Article 1 Skills, not Brexit, the main threat to the construction industry, says One Way (Appendix 1); Article 2 ‘Brexit’ and the impact on construction in the UK (Appendix 2); Article 3 Brexit what it means for your businesses (Appendix 3); http://www.investopedia.com/terms/b/brexit.asp
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