Brexit: we just don’t know, but we don’t need uncertainty

23 November 2018 | Alan Burkitt-Gray

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Industry leaders are worried that the outcome of the UK’s Brexit negotiations are still uncertain, with only months to go. But some carriers are getting ready for big business to move out of the UK to other EU members

Brexit – the UK’s expected departure from the European Union in March 2019 – is one of the reasons behind Colt’s expansion of its Dublin network, CEO Carl Grivner has confirmed. He was in Dublin to launch addition of 150km to Colt’s fibre network in the Irish capital. “Dublin is already very strong, and Brexit is maybe leading to more activity. It’s not so much Colt as our customers. Dublin is very exciting in terms of what’s happening in this market.”

Colt celebrated its expansion with a party in Facebook’s European head office in Dublin. “We already have a strong presence in the city,” says Grivner. “We looked at 250 cities in terms of growth and data centres. Dublin comes out very forcibly in that area. I can count 25 cranes from my window. There’s lots of new construction.”

Dublin is being tipped as one place many US and other international companies will go for their European headquarters – as Ireland will remain part of the EU, even if the UK leaves as the UK government plans on 30 March 2019. Airlines or banks, for example, that are based in Ireland will be able to operate across the 27 remaining EU members – while the position of UK-based airlines or banks is still not known while negotiations continue between the UK government and the European Commission.

Berlin is another possible home for companies that currently have their European headquarters in the UK. “It has some of the same characteristics – a lot of new growth. It interests us in terms of the density of our network,” says Grivner, and Colt is likely to announce an expansion there too.

Annette Murphy, who runs Zayo’s network in Europe, is another senior executive who thinks Brexit might just be good for the telecoms industry. “There might be more dispersion of organisations. They will spread more across Europe and that might lead to more demand for telecoms services, with more offices to connect,” she says.

But there’s uncertainty across the industry. The UK’s electorate voted in June 2016 in a referendum asking whether they wanted to leave or remain – and the leavers won by a small margin of 52%-48%. The referendum question was short on detail: leave or remain in the European Union. There was nothing in there about the questions that have perplexed business ever since – nothing about whether the UK should stay in the European customs union and single market, for example, or whether the borders should remain open not only to UK citizens wanting to work or study in the other 27 member states or whether their citizens should be able to work in the UK.

That’s led to uncertainly – a situation that’s not been helped by little progress in negotiations between the European Commission and the UK government, which lost its working majority in a snap election in 2017.

 

Irish problem

Much of the stalemate has been about the status of the border between the Republic of Ireland, an independent member of the EU, and Northern Ireland, part of the UK and therefore a member of the EU until March 2019. Under the terms of an international treaty that in April 1998 ended decades of sectarian conflict in Northern Ireland, there should be no border. It’s impossible to have a border and no border at the same time, and politicians have failed to resolve this.

The Irish border, like a new customs border between the UK and mainland Europe, is of minimal significance to data flows in the telecoms industry. But manufacturing industry, used to four decades of just-in-time logistics, is scared that supply chains will be disrupted by customs checks. And airlines and banks are worried that their right to operate across this new UK/EU27 border will cease after 30 March.

That will affect the UK as a whole. “The big unknown is what will be the impact on the UK economy,” says Nick Jeffery, the CEO of Vodafone UK. “Businesses like certainty.” Another of his worries focuses on Vodafone’s ability to move executives easily across Europe. With a group headquarters in the UK, Vodafone is used to moving citizens of Germany, France, Italy and elsewhere to senior positions in London – until the end of September its group CEO was Vittorio Colao, an Italian, and there are many more EU27 citizens in UK offices.

“We’re a large organisation and we move people around the world,” says Jeffery. “We also move large amounts of currency. What happens if Brexit means we can’t?”

There are two bits of EU legislation that will probably still apply to the UK after March 2019. One is the EU’s General Data Protection Regulation (GDPR), which has changed privacy laws across all 28 member states. It’s likely that the UK will adhere to GDPR, at least at first, but some worry there may be a drift.

The other rule, which came into effect in the middle of 2017, was the abolition of mobile data roaming across the EU. A mobile customer from any of the 28 member states can travel to any of the other 27 states without being hit by huge – or any – roaming charges for voice or data. How will that be affected by Brexit? “We don’t know,” says Jeffery. “A lot of our roaming traffic goes between our own companies. We like the current set-up and we’d like to continue to do that. Our job is to run a phone company, a commercial company.”

In a phrase, everything is uncertain. “At this point in time I don’t think anyone can say what Brexit would mean,” says Murphy. “A lot of companies are planning for it and the thought that will prevail is the requirement for connectivity in all the countries of Europe.” The UK is a big market, and “it’s hard to see companies pulling out completely”, she says. That’s hardly a huge vote of confidence in a post-Brexit UK: hard to see companies pulling out completely. “It’s going to be difficult to predict,” she says.

HM Revenue and Customs (HMRC), the UK’s main tax authority, also finds it difficult to predict. It administers value-added tax (VAT) in the UK and a few months ago it posted a document on “VAT for businesses if there’s no Brexit deal” (you can search for that title or go to this short link: https://tinyurl.com/HMRC-Brexit).

It starts as confidently as it can: “A scenario in which the UK leaves the EU without agreement (a ‘no deal’ scenario) remains unlikely given the mutual interests of the UK and the EU in securing a negotiated outcome.”

One partner with one of the big accountancy firms explains the importance of VAT. “VAT is a creature of the European single market,” he says, on condition I don’t use his name. That was the case with a lot of the advisers I tried to speak to about this article: they either didn’t want to talk or they didn’t want their name to be used. Most blamed uncertainty: but uncertainty is what the telecoms industry – and other industries – are living with.

So this is the VAT position. If you’re a telecoms company anywhere in today’s EU and you supply services to individuals and consumers across Europe, you have to charge VAT in the country where the customer is based, the UK, Finland, Spain, Greece or any other member country. So the telco has to register in each of the 28 member countries, or as many as it does business in. Or it uses a facility called a mini one-stop shop (MOSS). That means it can file its VAT details to its home tax authority – HMRC in the UK, for example – and it will work via a clearing house in to pay or collect tax in all relevant countries.

This is the reason that so many web companies have one sales headquarters for the EU. Buy something from Amazon.co.uk and you’ll be buying from a company in Luxembourg, but at UK VAT rates. Skype also operates out of Luxembourg, while Facebook operates out of Ireland, and so on.

But a MOSS deal only works within the EU, and you can only have one at a time – which is why, I’ve been told in confidence, that a number of UK-based telcos are looking to move their operations from a VAT point of view to Ireland, France, the Netherlands or another country that will remain in the EU.

What happens to telcos that don’t want to move? There’s a non-union one-stop shop that works similarly to a MOSS – but companies can sign up only after the UK has left. Post-brexit companies will have two weeks to set one up. It’s a pain in the neck rather than a breakdown of business, but it will need to be done. Just make sure your CFO and your head of legal don’t go on holiday in the first two weeks of April 2019.

Finally I spoke to J Scott Marcus, a senior fellow at Bruegel, a Brussels-based economics think tank, who first came to Europe on secondment from the Federal Communications Commission, the US telecoms regulator. “Most of the issues could be individually manageable,” he says. “Collectively, however, it is quite another question. This is a mess. In terms of the time remaining, the UK has nearly run out of road.”