Theresa May has made ‘The Big Speech’ on Brexit today – although negotiation is a long process and the government’s position is likely to change and evolve over the next two years. Yet this is an important first step towards what the final deal may look like.
But what does it mean for charities? Here is my analysis:
Exiting Single Market helps charities on key financial policy issues…
‘Clean’ Brexit (i.e. exiting the Single Market) could impact on the economy and therefore on the conditions that the charity sector has to operate within. This could have damaging consequences for the charity sector (or if it improves the economy, benefit for the charity sector).
However on financial policy issues (such as irrecoverable VAT, state aid and public sector contracting) exiting from the Single Market means that (in theory) there will be significant scope for the government to tailor policy in interests of the charity sector.
‘Unclean’ Brexit – i.e. trading away sovereignty for access to Single Market – could leave the charity sector in the worst of both worlds, where we have to live with the current system but yet be unable to reform it to suit our needs because the UK is no longer a member of the European Union.
The complexity of the negotiation process means it is unlikely that charities are going to be specifically referenced in any Treaty with the EU and the complexity of the whole process means that officials are going to want a settlement to last at least the next few decades, giving little option for future changes. As a consequence, for charities, ‘taking back control’ is likely to be the only way that these issues are going to be solved.
Theresa May’s speech gives hope that these matters could be dealt with by a post-Brexit government in Westminster…although the desire to remain within the Customs Union could erode the flexibility for the UK government. If the EU decides that it wants harmonisation in tax or regulation in return for access to ensure that the UK does not gain an unfair competitive advantage, this could mean that potential room to solve VAT, state aid etc. could disappear.
…but a transition deal could leave us waiting
Of course, the UK government decide not to use its new powers to help charities and this should only be seen as the first step in achieving policy change in these areas.
However, the PM’s comments that there may be ‘transition agreements’ for specific areas for policy could delay the government’s ability to act on its new powers, if this impinge on the government’s ability to change regulation or tax rates.
EU regulations are not going to disappear overnight
The PM has already put forward a ‘Great Repeal Bill’ which is actually a ‘Great Maintaining EU Regulations Bill’ because in effect it will convert EU regulations into UK regulations. This also removes the nonsensical argument put forward by some that the UK Parliament would need to spend 10 years legislating for Brexit.
This is positive in that it gives charities certainty about the regulatory environment, whilst leaving room for reform. She has also said that workers’ rights are going to be protected, so that should give certainty to employers over the coming years – although this could change, if the UK decides that it needs to boost competitiveness.
The UK wants ‘right to remain’ but work permits for EU nationals could be the future
Unsurprisingly, the PM has said that immigration policy with the EU is going to change following Brexit.
On the positive side, her comments that the government favours the ‘right to remain’ for EU nationals (in return for guarantee from the EU) would give certainty to charity employers that have EU nationals as staff and ensure that there was not a significant labour shortage on leaving the EU.
However, the introductions of restrictions will create more bureaucracy for employers in hiring EU nationals in the future. The ‘points-based’ immigration system advocated by Vote Leave during the Brexit campaign appears to have been rejected by government and positive noises are being made about work permits. Charities would need to communicate their skills needs to the government to ensure that they had sufficient access to skilled labour and would need to factor in the cost (both in terms of time and money) of the new system.
Charities could still retain access to EU budget pots
The PM has left the option of the UK selectively contributing to EU funds which it believes that are ‘appropriate’ which could be good news for charities that receive funds from EU pots such as the ECHO.
The European Social Fund could be part of shared EU funding, although the government is likely to target those areas (International Development and Research budgets) where the UK is a net beneficiary. Although the compromise could also mean paying into other funds.
Either way, the government needs to start consulting on future of domestic EU funds (such as ESF) now in parallel with the negotiations so that charities can plan ahead for successor funds and there is now a significant gap between the end of ESF funding and the next version of these funds (or, if they are not to be replaced, charities can make financial plans accordingly).
What would ‘no deal’ mean for charities?
The PM’s speech has confirmed that there could be no deal reached by the EU following the negotiation. This is a necessary bargaining position, but what would no deal really mean for charities?
It would guarantee freedom the government to act on those charity finance policies referenced above, but would mean that EU funding pots would probably disappear. As immigration policy is going to be UK controlled, the nature of the deal seems unlikely to impact on employment. This will be decided domestically regardless of what the UK seeks to achieve economically.
No deal could create significant economic uncertainty, as the markets appear to be pricing in some kind of deal with the EU, even it isn’t exactly what businesses want. This could bleed into the ‘real’ economy (i.e. business investment, jobs, wages and consumer confidence) that could impact on the charity sector. It could also further weaken the pound, further increasing inflation.
We are only in a better position to speculate
Ultimately, as you can see from the tone of this blog post so far, we are only in a better position to speculate what the likely outcomes for charities could be, we won’t know the final deal until it is agreed in two years’ time.
However, healthy speculation (reasonable and considered) is an important part of preparation. If we don’t speculate and make informed guesses, we could be left on our heels when the final deal is agreed with significant financial impacts. The charity sector also needs to get ready to take advantage of any opportunities that may be on the table.
CFG will be continuing to watch Brexit developments and make sure that charities are prepared for the operational impacts of Brexit on their work.