Let’s get technical: how will Brexit shape the UK’s tech sector?

The UK has long had a reputation as a hub of innovation, and despite Brexit, the country does not seem to have lost its appeal for startups and investors in the tech market. The UK is the third largest digital sector in the world and, in 2020, technology companies attracted £14 billion in venture capital, raising more than France and Germany combined.

However, the end of the Brexit transition period is set to alter the way UK technology firms operate in the EU, and how EU firms do business in the UK. We spoke to a tech policy expert and a specialist lawyer to see how Brexit will impact the UK’s thriving tech sector—and how companies can navigate the post-Brexit market.

What has changed for tech companies?

In December 2020, the UK and EU finally agreed on a Trade and Cooperation Agreement that came into force on January 1, 2021. The agreement regulates the trade of goods and services and comprises a strong digital trade chapter that contains a multitude of changes for the tech sector. Here are some of the most important:

1. More paperwork

Brexit has created regulatory difficulties and extra paperwork for UK companies that do business with the EU. “If a company has a distribution arrangement from the UK to the EU, they need to comply with custom declarations and VAT arrangements, which means additional bureaucracy and administrative overhead,” said Roger Bickerstaff, a tech lawyer at Bird & Bird.

To export goods and services, a UK company needs to check specific duties, rules, and restrictions in the destination country and might need to obtain licenses or certificates to sell certain items. “We are already seeing parallel distribution mechanisms being set up. Instead of satisfying their customers in the EU from the UK, some companies have opted to set up a distribution center or a branch in the EU and continue the distribution from an EU location,” said Bickerstaff.

Neil Ross is head of policy at techUK, the technology trade association involved in Brexit trade negotiations for the sector. According to Ross, it was hugely disappointing that the UK and the EU didn’t agree on an implementation period for the deal. “This de facto meant that companies had to get used to new rules live, rather than having six months or so to prepare,” he said.

End of free movement

Brexit put an end to the free movement of people and the UK now has a points-based immigration system. “Tech workers are still in an advantageous position, and I believe that most skilled workers will satisfy the immigration requirements of their destination country, whether they’re migrating from the UK to the EU or vice versa. But there’s just going to be more bureaucracy and paperwork,” said Bickerstaff.

Skilled workers from the European Economic Area, which includes the countries of the European Union, Iceland, Liechtenstein, and Norway, as well as Switzerland, now need to apply for a visa in advance. A Skilled Worker visa requires sponsorship from a company, a high level of English and a salary of £25,600 or the going rate for your job. UK workers looking to move to Europe will need to check each country’s specific requirements.

Business travel will also be disrupted: from 2022, British citizens need to get European Travel Information and Authorisation System (ETIAS) travel authorization every three years to travel to the Member States, and ensure their passport is valid for at least six months.

Scientific collaborations challenged

The tech industry relies on scientific innovation. There was some relief from scientists when the trade deal reached in December 2020 established that the UK would become an ‘associate’ member of Horizon Europe, the €85 billion flagship research program. This means that UK scientists can still win EU grants and cross-border scientific projects will be easier to continue.

At the same time, the UK decided to withdraw from the EU study program Erasmus+. Ross points out that Erasmus wasn’t greatly used in the UK. “Ultimately, the UK will have its Turing Scheme that should be more global. The challenge is to get it up and running as soon as possible,” said Ross.

“Moreover, we need the UK Government to zero in on the issue of visas for researchers and students. We need to make it easy for students and doctoral candidates to move into and stay in the UK, because a lot of them end up setting up their [tech] companies here. We need to make sure that pipeline of talent stays firmly protected.”

How will this impact the growth of the tech sector?

The UK has always prided itself on being a country where it is easy to start a business, grow it, and engage in the market.

Bickerstaff believes it is likely that Brexit might hold back the UK’s tech sector development. “It might be that the companies find a somewhat more business-friendly legal environment in the UK than in the EU. But the UK is still a relatively small market, and for companies wanting to do business around Europe, it might make more sense to set up their business in the EU now,” he said.

Ross, however, believes that Brexit is an opportunity for the country’s tech sector. “This is an opportunity for the UK Government to take certain actions for the country to become a more dynamic and more attractive market,” he said. “We’ve recommended a change to the visa rules to attract talent from across the world. Also, we’d like to improve regulations to make it much easier for digital companies to sell and test new types of services in the UK so that we are a more attractive place to come and try new ideas.”

What lies ahead?

The EU-UK trade deal comprises a lot of review clauses that cut across different chapters of the deal, which are going to be revisited and fine-tuned in the years to come. Moreover, there are still some open questions that are yet to be agreed on, including the following:

Data flow regulation

Free flow of data between the EU/EEA space and the UK is particularly important for tech companies. The current EU-UK Trade and Cooperation Agreement enables the continued free flow of personal data until adequacy decisions come into effect. “The EU has to assess the UK’s data protection system, and decide if the protection offered to EU citizens’ data in the UK is adequate,” said Ross. “I believe we will get a data adequacy agreement because the UK has the same rules as the EU. We’ve just adopted GDPR, and there are no significant plans to change that in the future.”

Enforceability of contracts

There is a great deal of uncertainty when it comes to the enforceability of contracts: can a decision made in a UK court be reinforced in an EU court? “There are still a lot of details related to the applicable laws and jurisdictions applying to the contracts agreed after the end of the implementation period that need to be discussed,” said Bickerstaff.

Conformity assessment of products

Many businesses are also confused by the future of the CE marking, which signifies that a product conforms with health, safety, and environmental protection standards within the European Economic Area.

“The EU and the UK will have two versions of CE markings, and we need to make sure that the two systems integrate well together. But we’ve got a delay on the integration until 2023, so we just want to make sure that these systems are set up and easy to run from that point onwards,” said Ross.

The importance of keeping up to speed

For tech companies, these open questions and regulation reviews mean they should continue to monitor relevant key information sources, and engage with tech trade unions and associations. “The companies that have been doing well in the transition are those making links with the relevant trade associations and getting advice from a wide variety of sources. Companies struggling are those trying to do everything on their own,” said Bickerstaff.

As Ross points out, both the UK and the EU are on the same page when it comes to growing their digital sectors. “Unfortunately, no free trade agreement was ever going to be as smooth as membership in the single market, but the tech sector is pretty flexible. Both the UK and the EU are ambitious about wanting to grow their digital sectors, so the gap between the free trade agreement and the single market is lesser here.”

Ross believes that the digital trade chapter, which has a review clause in three years, will only be as good as the relationship and cooperation between the UK and the EU. “One thing that has been present in the negotiations and will continue to be important is the need to be attractive and to encourage people from the EU—and from around the world—to come to the UK and set up their companies there,” he said.

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