Archives For EU

By Manj Kalar, ACCA’s Head of Public Sector

The momentous decision that was taken by the UK on 23 June to leave the EU will no doubt reverberate for a number of years. Dismantling all the legislation, government funding frameworks developed over 40 years will take quite some time to fully unravel.

It will call for the public sector to use all their expertise and skills and develop many new ones to achieve a successful transition. Some of the key areas where there will be an impact are outlined below:

Change in focus?

Over the last 6 years the key focus has been austerity so that a public spending surplus would be achieved by 2020. A tough Spending Review settlement was agreed by the public sector, providing certainty over funding over the next 4 years continuing the efficiency agenda to 2020.

Many leading economists including the influential Institute for Fiscal Studies were questioning whether the ongoing scale of cuts to government spending could be achieved before the result under two weeks ago. After the result it became a whole lot more difficult: Government lost its triple A rating. Why does this matter? Although the UK government has net liabilities over £2 trillion per the latest UK Whole of Government Accounts; it has, by and large, maintained the triple A rating which has translated to lowest level of interest payable on government borrowing. The Office for Budget Responsibility’s ready reckoner suggests that in general a 1 percentage point increase in both gilt rates and short rates in each of the next five years would increase central government debt interest spending in 2019–20 by £5.3 billion (in 2019–20 terms). This will make achieving the agreed public sector spending reductions even more difficult.

EU funding

In 2015 the UK Government paid £13bn to the EU budget which is net £5bn of the instant rebate; the EU spending in the UK was £4.5bn; so the net contribution was £8.5bn. Therefore, in theory, there will be additional funding available for the many demands including:

Cost of dismantling EU legislation and Regulation

EU funding has been channelled to support many areas of spend across the UK. For example support for agriculture through DEFRA. Farmers receive funding through the Common Agricultural Policy (CAP), In 2015, UK farmers received almost €3.1bn (£2.4bn) in direct payments, according to the NFU. There is no doubt that similar levels of funding or potentially more will be sought to supplement what they will no longer receive from the EU. It may surprise some to note that one of the biggest recipients of the CAP funding is the National Trust (almost £12 million in 2015). Similarly those receiving support as a result of the Common Fisheries Policy will be seeking the same assurances and/or relaxation on fishing quotas. UK has 16% of total EU fish processing jobs, the highest of any EU country. These may be easier to identify and potential solution for a way forward. However, there are many other areas where unravelling the web of EU funding may not be so easy.

Take for instance the significant sums provided for regional development funding and infrastructure investment such as road networks and rail. European Investment Bank loan investments in the UK economy came to €29 billion over the 5 year period 2011-2015. This was €7.8 billion in 2015:  energy projects accounted for 24% of total investments, while transport and water claimed 22% and 21% respectively. In Northern Ireland funding has been negotiated to support the development of the road network. The Northern Powerhouse was going to receive funding to supplement government investment in bringing the high speed 3 rail network and in London the cross rail project (£1bn) linking the west of London to the east of the UK. Some of these are underway and funding has been committed and others negotiated. A departure from the EU will require all of these to be assessed. Will the projects underway continue? One would assume so. But what does this mean for those in the discussion phase? Given changes in interest rates payable this will change the original business cases for the infrastructure investment.

Another significant area is the cost of dismantling the legislation. The number of Acts of parliament and statutory instruments over the last 43 or 44 years that refer to EU legislation will all need to be reviewed and potentially amended.  This raises potential capacity issues as it will require more legal experts to consider what elements of EU directives and regulations should be retained in UK law. The number of lawyers across government have fallen as the public sector has contracted by 15% since 2010 as a result of civil service reform and meeting the spending review efficiency targets. The civil service is now smaller than at any time since the end of WW2 and stands at 406,140 according to the latest figures available. This is before the Parliamentary timetable to considered legislative changes is considered. This will impact on the timing of legislative changes and the impact on Parliament’s capacity to consider and debate issues unrelated to the impact of the EU referendum.

Passports

Linked to foreign travel is the EU passport. Questions that will need to be addressed include will a new UK passport be required? What about the EU passports in circulation? Will there be a period of grace before these are withdrawn or will there be a cliff edge cut off point? One has only to think back to the summer 2014 when there were significant backlogs to processing passport applications. Of the 56.1 million usually resident population of England and Wales in 2011, 76 percent (42.5 million) held a UK passport. Any change to the current approach therefore has the potential to be significant

Not all these decisions can be made unilaterally and in devising policies around this will require interaction with the EU as well as making practical changes, requiring upfront investment by the UK Passport Service into technology as well as staffing to manage the transition.

Foreign and Commonwealth Office is another department that has seen a significant reduction in embassy staff. This was part of the efficiency drive under austerity and was possible due to sharing these duties and support from other government departments (DFID, NCA and BIS). This will need to be reversed to meet the growing need to ensure the embassy network is fully functioning.

Health

There are many practical questions around health ranging from staffing to travel. Currently, there is the E111 to guarantee medical health care provision if UK citizens fall ill when in an EU country. Will this still service still be available? Will UK citizens need to take out travel insurance to cover any medical bills? Or will government be required to pay this back? What will the service look like, and how will it work, will need to be developed. Presently, the Department for Health reported £434m payable for UK travellers requiring medical treatment in the EEA and received £50m for EEA travellers requiring medical treatment in the UK. Will they need increased administrative support to invoice and chase non-payment?  This will potentially (inevitably?) create an additional overhead.

Education

There has been EU funding for teaching hospitals and the ERAMUS programme, an exchange programme that fosters mobility for talent flows. Higher education institutions will be seeking assurances to ensure new rules allow for such cultural exchange and talent transition to continue.

There are many demands on the £8.5 bn funding that ‘would have gone to the EU’ and more will be required to consider the impact on trade negotiations. As noted in the newly created Brexit unit, ‘bringing together the brightest and best’ across the civil service to be headed by Olly Robbins, a significant proportion of resources will need to develop policies and procedures to ensure the UK has the trading relationship it seeks from the EU and other countries. Given the time taken to negotiate TTIP and other trade agreements (e.g. the EU-Canada Comprehensive Economic and Trade Agreement has taken almost 8 years to agree) any changes will undoubtedly require time and expert negotiation skills.

The risk is that government spirals into inertia as the focus is on the impact of Brexit. But service improvement, continued public service delivery and savings delivery plans need to remain in focus if public services are to be delivered effectively, efficiently and economically to meet plans to meet the public spending reductions.

Therein is the challenge how to focus on ensuring a successful transition and extraction from the EU and maintain government finances which are likely to come under severe pressure. The Governor of the Bank of England has already allocated £250bn to support the banks if there is another repeat of the 2008 situation. The level of government support is £1,174.5bn (short term £235.2bn and long term £939.3bn) in the 2014 Whole of Government Accounts (an increase of £78.4 billion on the previous year.) This will come at a cost – increased interest payments.

As Gus O’Donnell remarked this is what the civil service does best and will manage but based on the projected costs it will be a number of years before the benefit of the ‘additional’ £8.5bn is going to be felt if at all if there is a cost associated with keeping access to the EU.

This article first appeared on Politics Home.

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By Sarah Hathaway, head of ACCA UK

We teamed up with the New Statesman to discuss this subject matter at the three party conferences – see a link to the report at the bottom of this blog, but here is my takeaway.

I think you would be hard pressed to find someone who does not think business cares about politics; politicians set the framework in which business operates, a working relationship is paramount. But do politicians care about business; does it only care about a certain type of business? This was the broader theme for the discussion.

The last few years have been difficult; the pressure on the public purse was always going to lead to trade-offs and some issues taking prevalence. And our members support austerity (mild or severe) if imposed at the right pace.

However if recovery is to continue, access to finance is key. As an organisation that supports members from small to large businesses, we recognise that their needs are distinct but that they are also intertwined; businesses do not operate in silos, they are party of a larger supply chain. We are keen to push all three of the parties to continue to champion alternative forms of finance and access to it. We know from our members that this is crucial and the small business bill has taken steps to improve this. There is some evidence that all parties recognise the importance of it but it’s about making sure the practical regulation works for business.

The issue of Europe was unsurprisingly part of the debate at Conservatives; as a global organisation we recognise the need for stability, that’s what our members want and that’s what is needed for businesses to attract long-term sustainable investment. Why would we cut ties with our biggest trading partner? That’s not to say reform isn’t needed, but reform from within not from the outside.

Of course discussing Europe involves a debate around immigration; that debate must be an honest one. We have a skills gap and so while we are working to plug that over the medium-term, we still need to fill it in the short-term. We believe all parties need to recognise that and taking students out of the net migration figure and treating them as a talent pipeline for business will help achieve that.

Ultimately politics involves trade-offs and risks, much in the way business does, but it is about calculated risk, evidence and taking a long-term view.

Politics is at its best when it recognises that it doesn’t have all the answers and that it shouldn’t try to. Instead as with any good relationship, the success comes through hard work, collaboration and concession on both sides.

To download a copy of the report click here.

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By Petros Fassoulas, head of policy and public affairs – Europe, ACCA

It is this time again in the political circle when we are asked to step up and elect Members of the European Parliament (MEPs). Some view these elections as having little relevance to their everyday life, but that could not be further from the truth.

The European Parliament is, together with the Council of Ministers where member state governments are represented, the main decision-making body of the European Union. Its members decide on the rules and regulations that govern significant parts of the European economy.

The Single Market Committee, chaired by Malcom Harbour MEP, a British Conservative, has been instrumental in the design and adoption of many of the laws that govern the biggest common market in the world, where about 50% of British exports go, worth about £200 billion a year.

The Economic and Monetary Affairs Committee, chaired by another Brit, the Liberal Democrat Sharon Bowles MEP, played a key role in the decisions that re-engineered supervision of the banking and financial services sector in the EU.

The audit reform dossier was spearheaded in the European Parliament by Sajjad Karim, you guessed it, yet another British MEP, who was the rapporteur (the person who held the pen) while the EP’s Legal Affairs Committee scrutinised and amended the European Commission’s proposals.

So the European Parliament and its members play a crucial role and most British MEPs are usually at the core of the decisions made, decisions that affect British business. This is why the choice of who we send to Brussels is crucial. ACCA works closely with British MEPs on all the policy areas that affect our profession, so we know first-hand how important it is that our MEPs are influential, involved, active and constructive, prepared to engage, build alliances, lead, write reports, vote and be part of the decisions that affect us all.

The European Parliament Elections are not a mid-term assessment of the government or an opportunity to give mainstream parties a kicking. They produce the MEPs that represent us and our interests. It is imperative that we engage by showing up to vote so we can ensure that the people we elect are able and willing to do the job.

Voting for the European Elections takes place in the UK on Thursday 22 May and polls are open from 7am until 10pm.

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By Sarah Hathaway, head of ACCA UK

Membership of the European Union has been an issue the accountancy profession has made little noise about and it’s viewed as a political issue. However, EU membership is an economic matter which is why here at ACCA we feel an obligation to take a view on membership.

The Deputy Prime Minister Nick Clegg MP described leaving the EU as “economic suicide.” He is right. But why do we care? Because accountants, perhaps now more than ever as we emerge from a global recession, have an important role to play in the recovery, future growth and in guarding against future risk to the UK’s economy.

Accountants traditionally look at the numbers, and they paint a convincing picture of why the UK should not back out of the EU. However, the profession is seeing its role and remit broadening into a much more strategic, forward-looking role in business and from that perspective too, giving up on the economic European Union would be bad news for UK plc.

ACCA sees staying in Europe as a no-brainer, and we aren’t alone. Nissan’s chief operating officer Toshiyuki Shiga has pointed to the major benefits for foreign investors in the UK being part of the EU. As Nissan owns the biggest car factory in Sunderland, employing 6,100 people, and is supported by UK supply chains that employ even more, Shiga’s comments should not be ignored.

Leaving the EU is also bad for the smaller businesses further down the supply chain. SMEs would actually benefit greatly from an even more integrated European Union. SMEs could increase export trade by 45 per cent if the remaining barriers in the Union are lifted.

But this issue isn’t just about trade. It’s about people.

Chief finance officers tell us that overseas experience will be a vital skill for tomorrow’s finance leaders. That sentiment fits with ACCA’s qualification – an exportable asset. You can study it in the UK and take the qualification to the Czech Republic or other markets (and vice-versa). In the EU, that mobility is made easier by free movement of people laws.

The UK benefits from being able to access talent from across Europe – employees bring with them market knowledge and close links with clients, customers and other stakeholders. This cultural connection is vital in a global business world.

The EU is also a vehicle for social mobility. ACCA is guilty of repeating the same messages around social mobility, but can you blame us? Since our infancy in 1904, social mobility has been the central principle of our qualification. Who you are and where you come from is no obstacle to the ACCA Qualification. That social mobility principle also applies in the EU.

Social mobility can include upward progression across Europe in finance and beyond, as well as within the UK? Cutting that continental option off and confining social mobility to within the UK’s shores is strangling that upward mobility.

This isn’t just about the current workforce either. Opportunities for Britain’s younger generation won’t be there if major employers have to leave the UK. Where will they get work – Europe? That won’t be so easy if the UK throws in the towel with the Union.

And if jobs and social mobility aren’t concerns for some, perhaps the numbers – more familiar territory for the accountancy profession – can paint a more convincing picture as to why a UK out of Europe is a bleak place.

The EU is the largest economy in world, worth £11 trillion, ahead of the US (£10.3 trillion) and China (£5.4 trillion). Nearly 34 per cent of world trade originates in Europe, worth around £3.5 trillion annually. The EU is also the top trading partner for 80 countries.

UK companies benefit by £500m a year, while 50 per cent of foreign direct investment to the UK comes from other EU member states. Over 40 per cent of UK exports go to the EU and they are tariff-free. More than 300,000 UK companies operate in the EU.

The EU-US trade deal is expected to generate €80bn (£67.7bn) worth of benefits for the EU and create 2m jobs. The EU-South Korea Free Trade Agreement saves EU exporters £1.35bn annually in tariffs.

Amidst the emotional scaremongering about the EU’s threat to British culture, the figures paint a clear picture that big business, overseas investors, small business and UK employment stand to lose if we drop out of the EU.

It’s difficult to ignore the arguments for staying in Europe. The consequences of leaving will hit the UK hard.

This first featured in City AM, October 2013

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By Chas Roy-Chowdhury, head of taxation, ACCA

The news about the proposed Financial Transaction Tax, for the 11 EU member states that have signed up to adopt it under the procedure of “enhanced cooperation”, being potentially illegal, has created a lot of debate.

The tax, although to make sure that the financial sector makes a fair and substantial contribution to public finances and pays back at least part of what the European taxpayers had to  pre-finance during bank rescue operations, could have quite the opposite effect.

The legislative proposal – should it ever come into effect, as  the timeline foreseen for adoption of this controversial proposal by 2014 is not likely to be met – suggests to levy the tax on all financial transactions, provided that one of the parties is domiciled in one of the 11 participating countries. If one of the parties concerned is outside the FTT system, the taxing country – an FTT participant – would collect the tax to be paid by the institution as well as the tax paid on its own territory. The result could be that member states willing to adopt the measure will essentially be limiting their trade with countries which have not adopted it

A global approach needs to be agreed on to implement some form of FTT that would work for all, and help economic recovery by encouraging global trade.

The tax in its current form, as proposed by the European Commission, , while up to each participating country, would need to be tightly ring-fenced to be within their own territories and not extra-territorially as currently proposed, otherwise, according to the Council’s legal service opinion dating 6 September, this situation would be “discriminatory” in certain respects, and could result in “a distortion of capital movements” as well as in the unjustified exercise by participating countries of their jurisdiction “over entities outside the area concerned by the legislation.

In addition, the FTT as it stands, could risk being footed by the consumer rather than the banks it was intended to levy.

In a Financial Times article last week, it came up with some points on the legal debate of the implications in introducing an FTT:

  1. This is an unusually clear, blunt and damning legal opinion on a flagship European Commission proposal. Most Council legal service opinions are a model of equivocation. To be as forthright as this, the service needs to be absolutely confident about the legal argument, or enjoy a permissive political backdrop to make the case (i.e. important finance ministries either agree or are not displeased to see the opinion published).
  2. It is non-binding. This is not formally the end of the FTT — the talks go on. The Commission legal service completely disagrees with the Council’s viewpoint and will likely respond. Such differences are not unusual, far from it. What is rare is for the differences to be put to paper so starkly. This is not a happy moment for the Commission, especially given the political capital it spent on promoting this proposal.
  3. The politics was already moving against the most ambitious models for a Eurozone FTT. Many of the 11 euro area states looking to agree an FTT have been public about their reservations — France, Italy, Spain and (to a degree) even Germany. This opinion will likely accelerate the process of scaling back the original Commission proposal. That applies to its reach beyond the Eurozone, the range of transactions it covers and the rate that is applied.
  4. This may well be the death-knell for the so-called “residence principle”. This Commission-designed provision basically meant that financial institutions were taxed according to where their headquarters are based, rather than where the trade is executed. It was the crucial anti-avoidance provision that meant the FTT covered trades in London, Singapore and New York. The Council legal service basically argues that one of the core parts of that provision is unlawful because of its impact on states outside the FTT zone.
  5. An FTT could still emerge, albeit in far less ambitious form. The legal attack on the residence principle naturally gives a boost to those countries that are happier to see a stamp duty style tax. That imposes a levy depending on where the instruments are issued, rather than where the people trading it are based. The trouble is that it is much harder to design a stamp duty for derivatives — the instruments the FTT was primarily intended to target.
  6. This is a big win for the UK, which has long been making the case that the FTT is illegal and extraterritorial. That said, the legal challenge lodged by the UK strictly addressed a different issue — the process by which the 11 Eurozone states decided to move ahead as a vanguard to agree a tax that other EU states rejected. Nevertheless it is almost certain that the UK would sue over the residence principle as well, if it ever emerged in practice.

This tax was always going to be difficult to agree and implement. The Commission will now have to present solid arguments to member states and may potentially have to narrow the scope of its proposal. FTT should ideally only be implemented after global agreement otherwise it may cause those member states adopting the tax to lose financial sector businesses and jobs. In addition the Commissions own calculations showed that if FTT were introduced across the EU it would reduce growth by 0.3%. If such a growth reduction were to occur across only eleven member states then the negative growth could be even greater for the adopters.