What Are The Post Brexit Legal Implications For UK Start-Ups And Small Businesses?

About Jonathan Lea

Jonathan is a specialist corporate and commercial solicitor who has over 11 years of experience at both large international City firms and smaller practices. For the last two years he has worked on a self-employed basis with a network of other freelance lawyers focused on entrepreneur-led businesses. If you'd like a competitive quote for any legal work please send an email to the address on the home page. You can also follow him on Twitter @jonathanlea

On the 29th March 2017 Theresa May finally triggered Article 50 of the Treaty of Lisbon, thereby starting the process of the UK’s exit from the EU. Article 50 allows for a 2-year period of negotiation with the 27 EU member states in order to agree and finalise the terms of the separation.

That means that by April 2019 the UK should have left the EU. But this is new territory for the EU (an extension is possible with the unanimous consent of the European Council) and with all states having a right of veto over the conditions of the UK’s exit, the enormity of the task ahead cannot be underestimated.

So nearly a year on, while there has been some measure of clarification, the exact fate of the UK still remains up for debate with many options possible. Retaining membership of the EEA only, joining the EFTA or having a customs-only arrangement with the EU are all possibilities. The negotiating road ahead may be long and unknown but the position and climate for start-ups is not all bad news and there still continue to be some clear advantages to being based in the UK.

Jonathan Lea Brexit

The Great Repeal Bill

In March the government also announced proposals for the Great Repeal Bill. In effect this will mean that the entirety of EU law will be transposed into English law. That includes the 12,000 EU regulations currently in force. The bill will then provide powers for MPs to change EU laws once the UK has left the EU.

In short, the Great Repeal Bill is designed to avoid a black hole of uncertainty about whether and to what extent EU law applies during and immediately after the Brexit process. But it also allows the government to cherry pick those laws that they want to keep and those they wish to discard in due course.

David Davis (Brexit Secretary) has said there are “no plans” to pull the UK out of the European Convention on Human Rights, but the government’s White Paper stated that the EU’s Charter of Fundamental Rights will not be converted into UK law.

English corporate law

The majority of English corporate law is not derived from EU legislation. The Companies Act 2006 is the core legislation affecting the incorporation and operation of UK companies.

That said, some parts of the Companies Act 2006 have been derived from EU Directives. These include provisions relating to accounts, disclosure of information and shareholder rights. The most significant provisions apply to UK companies with shares listed on a regulated market such as the Main Market of the London Stock Exchange. The Government may review these during the Brexit process but significant changes are unlikely.

The UK equity capital markets are in part governed by EU Directives implemented in the UK, including in relation to the requirements to prepare a prospectus, obligations of disclosure and transparency and provisions to prevent market abuse. These provisions provide a uniform legal framework for the operation of EU capital markets. Changes to these provisions are not expected to be a high priority. The Financial Conduct Authority and the London Stock Exchange are also likely to want to see obligations of this type remain in force.

Commercial contracts

On the face of it, many commercial contracts should be unaffected by the UK leaving the EU. They are less heavily regulated than many other areas of law and as the name suggests, tend to be based on a commercial bargain between the parties.

In general, contracts will remain in full force and the parties’ rights and obligations will be largely unaffected. In general, contracts will remain in full force and effect, the parties’ rights and obligations will be largely unaffected and specific Brexit related provisions in new contracts are unlikely to be needed.

Neither should Brexit affect the approach to English governing law and jurisdiction clauses in contracts. However, some contracts (such as IP licences and distribution or franchise agreements) may contain territorial restrictions that refer to the EU. These will probably require amendment following Brexit.

Intellectual property law

IP laws are harmonised to a large extent across Europe, and much of the UK legislative framework in this field is currently composed of directly effective EU Regulations and transposed EU Directives. That means that at the moment, you can rely on your EU trade mark to protect your brand in the UK. However, this may change and the position in respect of some IP rights derived from EU law remains unclear especially if the UK decides not to remain in the EEA.

What’s more, the Court of Justice of the European Union (CJEU) authority is likely to cease being binding and become simply persuasive after Brexit adding yet more uncertainty. The result is that the EU trade mark holders may be vulnerable post Brexit and in light of this, it is highly recommended that businesses should seek trade mark registrations at both EU and national UK levels in order to have certainty in the post-Brexit future.

Another area of concern has been the impact of Brexit in respect of the lengthy negotiations regarding the Unified Patent and the Unified Patent Court (UPC) which have taken decades (a single approach to patent registration and litigation across 25 European Member States). An “in” vote would have probably meant that the system would have been implemented earlier this year.

However, according to law firm Bristows, “The UK IPO has confirmed that the government’s preparations for ratification of the Unified Patent Court (UPC) Agreement are “fully on track” to allow the provisional application phase to start in May and the Court to open in December 2017 (as per the Preparatory Committee’s timetable).  This confirmation follows recent speculation about the UK’s UPC plans in the light of Brexit, because it had not ratified the UPC Agreement before it triggered Article 50 on 29 March.  The UK’s role in the UPC after Brexit in two years’ time is not yet clear and will form part of the Brexit negotiations.

“Classic” European patents protecting inventions in the UK will continue to be available through the European Patent Office (EPO) as before. The EPO provides a single patent grant procedure, but not a single patent from the point of view of enforcement. Hence the patents granted are not European Union patents or even Europe-wide patents, but a bundle of national patents.

It is likely that community rights, such as registered and unregistered community designs will no longer have effect in the UK although they would continue to cover the rest of the EU as before. It is expected that the UK government will provide rights holders to be granted an equivalent UK national registered trademark or design right preserving their priority rights so they would not lose out.

The key development in the IP field is the likely exclusion of the UK from pan-European rights systems. Separation presents the opportunity for the UK’s laws to diverge from those of Europe.

Employment law

Some areas of UK employment law such as the National Minimum Wage and the law relating to (unfair) dismissal are outside the scope of EU law and regulated by UK legislation. These are unlikely to be affected by Brexit.

Other areas, including unlawful discrimination, certain family-friendly rights, working time, collective redundancy consultation and business transfers have been heavily influenced by the EU, often having a basis in European Directives or case law.

The Great Repeal Bill confirms the general opinion that the Government is aiming to avoid significant legal and commercial changes and instead adopt a piecemeal approach.

What’s more, Mr Davis said in March that “the Great Repeal Bill will not give the European Court of Justice a “future role” in the interpretation of UK laws, and courts will not be obliged to consider cases decided by the ECJ after Brexit.”

But he went on to say that while EU-derived law is on the UK statute book, “it is essential that there is common understanding” of that legislation, so courts will refer to ECJ case law “as it exists on the day we leave the EU”.

Laws that are considered to impose the greatest burden on businesses, such as agency worker rights, collective consultation and working time rights are most likely to be subject to change. However, the general consensus is that the changes will be neither radical nor immediate, giving employers ample warning to prepare.

Immigration law

Immigration and freedom of movement continue to be controversial and headline grabbing. Theresa May has repeatedly expressed her commitment to significantly reduce immigration in the face of opposition from business and it seems the topic will be an integral part of the Brexit negotiations.

Following Brexit, EU citizens will no longer have the automatic right to reside and work in the UK, and vice versa unless they have already obtained permanent residency (if you obtain a ‘document certifying permanent residence’ in the UK you may be in a better position to remain in the UK).

However, earlier this month, the Financial Times reported that Theresa May has indicated that free movement of EU citizens would carry on during the negotiations and for a period of time afterwards “while new border systems and a trade deal are put in place”.

It is still anticipated, however, that the government will honour existing residence rights for EU citizens residing in the UK in return for the same treatment for UK citizens residing in other member states. If the UK were to join the EEA, the current rules would be required to largely remain the same whereas alternative models hold more uncertainty.

Business has been criticised in a report by the British Future think tank and Fragomen (a leading, global immigration firm) for persistently arguing the case that freedom of movement brings with it strong economic benefits and curtailing it will result in major skills shortages. The report has suggested business should adopt a more positive and creative approach to labour shortages within the existing (if sometimes inaccessible) UK labour force.

There has been significant press coverage about the prospect of extending the current Points-Based System to apply to EU nationals but this is not a foregone conclusion.

The climate for start-up investment

The European Investment Fund pools billions in financing from European governments, the EU and a number of private banks, to fund investments. The fund was created in 1994 to foster innovation and the growth of small and medium-sized businesses in the EU.

Historically, its contribution to UK based venture funds has been significant but post Brexit there has been much concern that this source of funding will be lost, which in turn could have a significant impact on the economy. However, it is considered unlikely that the EIF will stop supporting funds in the U.K. as they have a mandate to generate returns and increasingly back ventures in non-EU countries, although the position remains unconfirmed.

Generous tax advantages in the UK for start ups

The UK tax authority’s SEIS and EIS tax reliefs for individual investors continue to help generate a lot of start-up activity and there remains nothing like these schemes in other European countries, where entrepreneurs complain of a less favourable regulatory and tax environment for small businesses.

The SEIS and EIS schemes are designed to help smaller, higher-risk companies raise finance by offering attractive tax reliefs to individual investors on new shares in those companies that qualify.

SEIS is a more generous derivative of the longer established EIS scheme and was introduced in April 2012. Its aim is to encourage initial seed investment in early stage companies. Investors, including directors, can receive initial tax relief of 50% off their income tax on investments up to £100,000 and Capital Gains Tax exemption for any gains on the SEIS shares, as well as loss relief if the investment doesn’t succeed. The maximum amount that can be raised for each company is £150,000 pursuant to the SEIS reliefs, following which further investors will still qualify for the available EIS reliefs.

Conclusion

Although, there is much that remains unknown about the UK’s future, the outlook for start-ups and small businesses is certainly not as uncertain or as bleak as much of the UK press coverage sometimes conveys. There is a degree of clarity about legislation in the short term and the UK’s own existing tax and regulatory environment continues to make the UK an attractive place to do business and in this respect the future looks positive.

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