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Knowledge Base » Business » Brexit’s effect on the UK economy

Brexit’s effect on the UK economy

On 1st January 1973 the United Kingdom, along with Ireland and Demark, joined the original six members, that is Belgium, France, Italy, Luxembourg, the Netherlands and West Germany, of the European Economic Community (EEC), also known as the Common Market.

The establishment of a “Common Market” was to enable the national trade markets of Europe to become more competitive; independently they were no match for the giant market enjoyed by the United States of America, as they were isolated from each other by archaic trade laws.

Over the next 43 years the European Community worked towards ever closer trade, monetary and political union.

It became known as the European Union and had expanded by the date of the UK Brexit referendum to a membership of 28 member states:

  • Austria.
  • Belgium.
  • Bulgaria.
  • Croatia.
  • Czech Republic also known as Czechia.
  • Denmark.
  • Estonia.
  • Finland.
  • France.
  • Germany.
  • Greece.
  • Hungary.
  • Ireland.
  • Italy.
  • Latvia.
  • Lithuania.
  • Luxembourg.
  • Malta.
  • Netherlands.
  • Poland.
  • Portugal.
  • Republic of Cyprus.
  • Romania.
  • Slovakia.
  • Slovenia.
  • Spain.
  • Sweden.
  • United Kingdom.

On 23rd June 2016, the UK electorate voted to leave the European Union by a margin of 51.9% in favour to 48.1% against. This historic vote led to the UK triggering Article 50 of the Lisbon Treaty on European Union (TEU) to begin the process to become the first member state to leave the European Union (EU).

The campaign to leave and the subsequent departure actions of the UK to withdraw from the EU have become known as Britain’s Exit, or combined to form the more popular term Brexit.

Politicians shaking hands

What is Brexit?

When the then Prime Minister Theresa May activated the official mechanism for the UK to leave the EU by triggering Article 50 of the Lisbon Treaty on 29th March 2017, the UK was officially on its way out of the EU – Britain was Brexiting. Talks got underway with EU officials to negotiate a withdrawal agreement.

Under Article 50 the timeframe allowed for an agreement to be reached is two years and these negotiations should have been concluded by 29th March 2019; however, as an agreement was not reached by that date, the timeframe and the complex, sometimes bitter negotiations were extended. The UK and the EU finally agreed a deal and the UK officially left the EU trading bloc on 31st January 2020.

Both sides agreed to keep many things the same until 31st December 2020, to allow enough time to agree to the terms of new deals including a new trade deal.

The EU and the UK have set out the terms of these deals in three agreements:

  • The Trade and Cooperation Agreement.
  • The Information Security Agreement.
  • The Nuclear Cooperation Agreement.

On 1st January 2021 the rules set out in these agreements came into force – the UK had Brexited. The deals contain new rules for how the UK and EU will live, work and trade together.

Now that it is no longer in the EU, the UK is free to set its own trade policy and can negotiate deals with other countries. Talks are being held with, for example, the US, Australia and New Zealand – these are countries that currently do not have free trade deals with the EU.

Northern Ireland, however, continues to follow many of the EU’s rules in order to avoid a hardening of its border with the Republic of Ireland. This has meant that new checks have been introduced on goods entering Northern Ireland from the rest of the UK.

Freedom to work and live between the UK and the EU also came to an end, and from 2021, UK nationals now need a visa if they want to stay in the EU for more than 90 days in a 180-day period.

How is Brexit affecting us now?

It is difficult to fully understand the consequences of Brexit right now because the impact of Brexit is being overshadowed by the fallout of the COVID pandemic. However, there are a number of areas where we are noticing the effects of Brexit.

Property

In November 2018, the Bank of England made headlines with a report warning that in a worst-case scenario, a no-deal Brexit could lead to the economy shrinking and house prices falling by close to 30%. These predictions changed once the withdrawal deal was agreed and a more orderly Brexit process emerged.

In the COVID pandemic the Government announced a stamp duty holiday to ease the impact on the housing market. The result of this was to see property prices rise by 7.6% over the past year’s housing market.

However, whether the stamp duty cut has actually been of benefit is debatable; many vendors may have taken the opportunity to raise their asking prices in the knowledge that the buyers did not have to pay stamp duty.

The shortage of property is a far more likely reason for the rise in property prices, due to basic supply and demand. Once the stamp duty holiday ends on 1st October 2021, COVID’s long-term impact on people’s jobs and incomes and any Brexit effects are fully known, the impact on the property market will become clearer.

There may still be a downward shift in property prices as predicted by the Bank of England in 2018, however, it would be difficult to assign blame to any one of the causes – Brexit, COVID or the property shortage – as they may all have a future impact on whether property prices rise or fall.

Brexit has caused more problems to the UK economy regarding property value

Mortgage, loan and savings rates

Following the EU referendum in 2016 and after a number of years of no change to the base rate, the official borrowing rate, the Bank of England lowered the rate to 0.25%. Over the next few years, the base rate rose again but only up to 0.75%. Due to COVID the base rate is now at its lowest rate in history at just 0.1%.

There has also been some talk of the risk of negative interest rates. This doesn’t mean that high street banks will pass them on to savers or borrowers; however, low interest rates do have an impact on people’s savings and particularly for those who rely on savings interest for their income such as pensions. Brexit may have fed into this change although COVID has probably been the main cause.

Travel to the EU

The impact of the COVID pandemic on travel this year has been massive, however, Brexit undeniably means big changes. Before Brexit and during the transition period, UK citizens could travel, live, holiday and work anywhere in the EU without any special permits, but that is no longer the case.

From late 2022, you may have to buy a £6 visa-waiver known as the ‘European Travel Information and Authorisation System’ (ETIAS) for European holidays and visits if you are a UK passport holder, and you may face stricter border checks.

At present most travel to Europe is seriously disrupted anyway as a result of COVID; the rules on travel vary by country and the UK is currently operating a traffic light system for all international travel.

But once those restrictions are lifted, there are a number of changes to travel to Europe which will apply now the Brexit transition period has ended:

  • Stricter border checks – UK nationals have been warned they may need to show a return or onward ticket on arrival, show they have enough money to stay and use separate lanes from citizens of the EU, Iceland, Liechtenstein, Norway and Switzerland when queuing.
  • Time limit on stay – As a tourist, you can now only visit most EU countries for up to 90 days in a 180-day period. Slightly different rules apply to Bulgaria, Croatia, Cyprus and Romania, though. If you visit these countries, visits to other EU countries will not count towards the 90-day total.
  • Extra documents to work or study, or for trips longer than 90 days – This will depend on what you are doing and where you are going, so you will have to check with the embassy of the country where you plan to travel for what type of documents, if any, you will need. The exception to this is if you are going to Ireland; you won’t need extra documents when travelling there, even for work or study, and you will continue to be able to visit in the same way as you can now.
  • There are limits on what you can bring back to the UK from the EU – Previously, you could bring an unlimited amount of most goods to the UK from the EU without paying taxes, known as “customs duties”, as long as they were for your personal use. Since 1st January 2021, this tax-free limit fell to goods worth up to £390 for most. There are also separate limits – On the amount of alcohol or cigarettes you can bring in without paying tax. For example, you can only bring back four litres of spirits. VAT at 20% will also be due on all imports. You are able to check your allowances, make a declaration and pay any tax using a new online service for passengers.
  • Return to the blue UK passport – If you hold a UK passport at present it will be burgundy with the words “European Union” stamped on the front. Following Brexit, all new or renewed passports issued are now blue and “European Union” has been removed. You don’t need to get a new passport straight away – you can continue to use your current passport as normal until six months before its expiry date. Pre-Brexit – You could travel to EU countries on your passport right up to the point it expires. However, the rules have changed. These changes were announced prior to the trade deal but they haven’t changed following the deal being agreed upon.
    Under the new rules, when you visit most EU countries and also non-EU countries Iceland, Liechtenstein, Norway and Switzerland, your passport will need to both:
    – Have at least six months left on it until expiry.
    – Be less than 10 years old on the day you travel.
    This won’t apply if you are visiting the Republic of Ireland. These changes mean that you will get a shorter validity time for your passport than before Brexit.
  • European Health Insurance Card (EHIC) – If you have an existing EHIC, it will remain valid until the expiry date on the card. You can apply for a new card up to 6 months before your current card expires. When your card expires or if you have never had an EHIC, following Brexit there are two types of healthcare cover available to apply for.
    You can apply for either:
    – A UK Global Health Insurance Card (UK GHIC); or
    – A UK European Health Insurance Card (UK EHIC), if you have rights under the Withdrawal Agreement.
    For most people, the UK Global Health Insurance Card (UK GHIC) replaces the existing European Health Insurance Card (EHIC) for new applications; you will need to check the EHIC link above for individual circumstances. Neither card is a replacement for travel insurance.
  • Mobile telephone roaming charges – In 2017, “Roam Like at Home” rules were introduced by the European Union across the EU (plus Iceland, Liechtenstein and Norway). Since 31st December 2020, the EU rules on roaming charges no longer apply in the UK. This means that, like other destinations, the amount your mobile provider can charge you for using your mobile phone in EU countries, Norway, Iceland or Liechtenstein is no longer capped. OFCOM provides general guidance on roaming, however, you will need to check your charges with your own service provider for specific details.
  • Driving in the EU – Prior to Brexit, if you had a UK driving licence you could drive in the EU, Iceland, Liechtenstein, Norway and Switzerland without any extra documents. Post-Brexit the Government has warned international driving permits (IDP) could be widely required by Britons driving in the EU.
Travel to EU is more difficult due to Brexit

Currency

The pound has been consistently on the decline since the results of the referendum became clear on 23rd June 2016. An initial sharp drop has been followed by several slumps and a persistent overall decline. This leaves the pound sterling to euro exchange rate 15% lower than pre-referendum levels. The pound declined immediately against the US dollar and the Australian dollar, with rates plunging by 17% after the vote.

This means that people wanting to exchange pounds into other currencies are getting significantly less. Anyone buying pounds will find the current exchange rates particularly profitable. The pound to euro rate before Brexit in June 2016 was approximately €1.32 = £1; in September 2021 it is currently €1.17 = £1.

If the United Kingdom is in a strong position after COVID and Brexit, the pound could jump. This could happen if companies continue to hire and invest in Britain instead of relocating overseas.

Passports are now going to return to be blue

Consumer rights

Much of the UK’s financial services legislation comes from EU directives, as does the Consumer Rights Act, which provides protection when you buy goods online and in store, although you may be charged extra in tax and customs duty.

There is likely to be little change to this legislation or regulations in future, regardless of Brexit; however, if anyone experiences difficulties when purchasing goods from the EU following Brexit, the Government says that you should contact the UK European Consumer Centre for help with any problems.

Impact on EU citizens living in the UK

The most immediate direct impact of Brexit is on the 3 million+ people living and working in the UK who are citizens of other EU countries; they needed to apply to the EU Settlement Scheme by the 30th June 2021. Should a majority of these workers choose to leave the UK as a result of Brexit the impact on the UK economy will be vast, as according to the Independent newspaper, EU workers each contribute £2,300 more per year to the UK economy than the average British citizen.

Businesses suffering financial issues

How will Brexit affect UK businesses?

The UK now has customs borders with the EU operating at crossing locations such as Dover and Holyhead, and a separate VAT system. The UK and EU legislatures ratified a free trade agreement. This means that 100% of trade between the UK and EU countries receives preferential treatment, meaning there are no customs tariffs, and no quotas providing “rules of origin” conditions are met. However, there is now a requirement for customs documentation, and VAT accounting requirements have changed.

Under the Northern Ireland Protocol, Northern Ireland remains part of the EU customs area in respect of goods, in order to retain an open border with the Republic of Ireland. There is free movement of goods between the UK and Northern Ireland with some conditions as part of the Northern Ireland Protocol. Services are excluded from the Northern Ireland Protocol, so sales of services between Northern Ireland and Ireland / EU from 1st January 2021 are treated like third country supplies. This results in very little change from a VAT perspective.

Similarly, nothing has changed for supplies of services between Great Britain and Northern Ireland, and they continue to be considered domestic supplies.

In broad terms, and outside of certain industries such as farming or medical research, businesses need to examine and revise the following areas of their business:

  • Import and export of goods to and from EU countries, including associated VAT payments, VAT refund claims and any custom and excise duties for items outside the free trade agreement, or for which businesses opt to apply customs duties.
  • Import and export of goods to and from Northern Ireland, which has its own rules under the Northern Ireland Protocol. This affects both goods from and to Great Britain, as well as the EU.
  • State aid, including grants and block exemptions.
  • Transport and logistics, including fulfilment.
  • Product safety, conformity or eco-compliance, including packaging and labelling that references EU licensing.
  • Copyright, trademarks and patents.
  • Environmental industrial standards, including emissions.
  • Transfer of personal data between the EU and UK that is covered by GDPR.
  • Mutual recognition of qualifications and relevant licences (including audit, banking and insurance licences).

Employers are still able to employ EU citizens after Brexit, however, there are conditions on new immigrants coming into the UK to work for you, regardless of whether that is from the EU/European Economic Area (EEA)/Switzerland or elsewhere in the world.

The new rules introduced on 1st January 2021, state that non-UK citizens arriving in the UK for work require a visa. This includes those from the EU/EEA/Switzerland. To get a visa, the individual needs to show that they have a job offer from an approved employer sponsor. Therefore, if your business recruits from the EU then you should apply to become an approved sponsor. This lasts for four years.

Covid-19 and Brexit both have affected the UK economy

What have we noticed from the Brexit effect on the UK economy?

Since the UK finally Brexited in January 2021, the impact has been felt by both people and businesses, although it has sometimes been hard to distinguish the Brexit effect from the overwhelming impact of COVID.

The UK economy is currently around the same size as it was in early 2015, after COVID and possibly Brexit wiped out five years of economic growth in little more than a year.

Some of the main Brexit effects include:

  • British imports from and exports to the EU have been hardest hit by new border formalities. Although some sectors report improvements since the early chaos in January, they also say the problems run deeper than “teething troubles”.
  • British manufacturers reported a near-record increase in supply chain disruption which appears to be continuing, and rising costs, attributed to Brexit and COVID.
  • The Brexit deal contained only vague commitments on services and left financial services to a separate process. The UK and the EU have now reached a “memorandum of understanding on future cooperation. It is thought it could help City of London firms regain some access to the EU that was lost when the UK left the EU’s single market.

Official UK figures from the Office of National Statistics (ONS) in July showed the UK recorded a record fall in trade with the EU in January 2021, as the economy struggled with post-Brexit rules and the COVID pandemic; they were still lower in July 2021 compared with pre-Brexit figures. However, trade with non-EU countries showed an increase as the UK completes new trade deals with non-EU countries, for example with Australia and Japan.

Will the economy go back to how it was before Brexit?

According to the news agency Reuters, the UK economy is gearing up for recovery and has grown more than expected; however, the latest ONS report states that the economy grew by only 0.1% in July 2021, as services saw no growth and construction contracted for a fourth consecutive month with output down 1.6% in July 2021.

Most forecasters appear to believe that the economy should complete its recovery by the second quarter of 2022, however, these forecasts are overshadowed by the uncertainty of COVID.

In conclusion

It is very difficult to disentangle the Brexit effect from the effects of COVID.

Some of the economic and financial effects that we are currently experiencing are, for example:

  • Shortages in some goods and raw materials.
  • Shortages of HGV drivers and other workers.
  • Travel delays and difficulties.
  • Higher property prices.
  • More job vacancies, some are harder to fill.
  • Less ability to freely travel and work in Europe.
  • Customs charges.
  • Visa charges.
  • Import taxes.
  • Additional mobile phone charges.

Some of the above effects may not be blamed entirely on Brexit. We will not be able to clearly see the effect of Brexit on us personally, financially and on the UK economy as a whole until we have recovered from the effects of COVID. Even then, a pre- and post-Brexit comparison may not be fully possible because of the effects left by COVID.

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About the author

Evie Lee

Evie Lee

Evie has worked at CPD Online College since August 2021. She is currently doing an apprenticeship in Level 3 Business Administration. Evie's main roles are to upload blog articles and courses to the website. Outside of work, Evie loves horse riding and spending time with her family.



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