The United Kingdom is one of the most service-driven economies in the world. As of 2020, the service industry accounts for more than 80% of the UK’s total economic output. It brings in billions of pounds in revenue each year and yielding a quarter of the UK’s corporation income tax.
There has been much talk about the impact of Brexit on the service industry. If you run a small-to-mid-sized service business, employing labourers from Europe at a lower cost than their UK counterparts, or if you run a slightly larger enterprise that imports or exports goods as part of its operation, you may naturally have some concerns.
Here are a number of ways in which Brexit could affect the services sector:
1. Field workers
The EU’s liberal immigration policy has encouraged significant movement of people from Europe into the UK. Many of these people are employed by local businesses and have helped to close gaps in skilled labour. Some of the most talented engineers and tradesmen have trained in Europe and work in the UK at comparatively lower costs to businesses than skilled UK workers. In this way, both EU workers and UK businesses have benefited from the free movement enabled by the UK’s membership to the EU.
Following the Brexit vote however, the UK has already seen a steady decline in immigration from the EU. Between June 2016 and June 2017, non-British EU immigration fell to 100,000 immigrants per annum. This decline will continue now that Brexit has occurred. The drop in EU immigration could mean that businesses will need to hire in the UK only. That means a much smaller, and therefore more expensive pool. This could help with UK employment rates, but conversely impact the wage brackets businesses operate within.
What about movement the other way? In the short term, EU members already living and working in the UK will be able to remain. The change will be gradual, but over time, we may see a gradual shortage of people in the construction trade and other service industries.
So what does this mean for businesses? It can go one of two ways. Businesses working exclusively with skilled UK workers can offer ‘higher quality’ work at a higher price point. Or, there will be an impact for businesses ‘priced out’ by these more expensive workers and by a shortage and may have to compromise the quality of services. Setting up business automation to relieve your workers as much as possible will help your business avoid such a pitfall.
2. Import and Export Markets
The service industry is responsible for 46% of UK exports. Around 41% of the UK’s service industry exports go to the European Union. The import and export markets will almost certainly be affected in some way by the UK’s departure from the EU. Although, the extent of the effect will vary with each specific industry.
Single market rules have allowed British businesses to trade with the rest of Europe with minimal restrictions. This, as well as geographical proximity, has made Europe the UK’s biggest trading partner. The benefits of this partnership will roll back once Brexit rules come into effect. Service businesses importing and exporting on the continent will now have to undergo the same sort of detailed sector-by-sector scrutiny that applies to countries outside the EU. Non-EU tariffs will also apply.
Import and export declarations will need to be submitted for goods moving between the UK and the EU, and new customs processes will be in place from 1st January 2021. There will also be changes to security filings. The official line on these standards has not yet been published. Early iterations withdrawn after the Brexit delays, so we advise you keep checking gov.uk for the latest updates.
3. Material costs
A possible 10-20% tariff on goods from the EU could be come into effect for UK businesses if there is no agreed plan that prevents this. In a post-Brexit world, British businesses may have to cast their nets farther afield to get the tools and machines they need to deliver their services. That’s one solution to the issue. But many raw materials used in construction, HVAC, gardening or roadwork, for example, are currently best sourced from Europe. This could impact your business because UK trade deals will no longer be covered by EU regulations. This could lead to a big increase in the cost of imported materials.
If there are costly tariffs on imported materials, businesses may have to consider raising their own prices to counterbalance the extra spend. There will even be an impact on everyday plumbing products such as pipes, fittings, valves, radiators and pumps. Perhaps this is why a major plumbing firm had some very strong views against the referendum result!
We expect that regulatory regimes will change across the board. EU rules will no longer directly apply to UK businesses. Plus, regulation of the various industries will pass back to domestic agencies. Companies will have to adapt to new laws, and they may have to incur costs in the process. It’s not clear at the moment which regulations will change and how.
Health & Safety regulations are very important to the services industry, where field workers are operating within uncontrolled environments each day. The UK has established itself as a world-leader when it comes to Health & Safety standards. So, it’s therefore unlikely any UK-specific regulations would be lower than Europe-wide standards as they stand. Beyond minor changes to some wording (removing references to the EU), Health & Safety regulations are not liable to change.
Bigger companies often have greater revenue exposure to the EU, as they are more likely to have significant operations in Europe. Sectors such as telecoms, power and utility, financials, and consumer services may see earnings fall due to Brexit and the subsequent changes to trade within the EU.
Thus far, telecommunications and utilities in the FTSE 100 have recorded big contractions in their share prices since the Brexit vote (-39% and -22% as at June 2019), an indication that investors don’t expect them to weather post-Brexit challenges particularly well. Tellingly, these firms also have the biggest revenue exposure to the EU. In this transitional time, bigger companies will need to lean on their financial teams for advice on how best to assuage Brexit uncertainty that investors and shareholders may have.
These are just some of the ways in which Brexit will affect the service industry when the new rules are established. Although it may seem like a lot to take in, the best plan of action is making sure you are informed and clear about what your business may need. Simplifying your everyday operations with Workever will free up more time for you to prepare for the changes that may affect your business.
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