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Brexit and the UK tech sector

As we steadfastly approach the inevitable Brexit deadline on the 29th of March 2019, the uncertainty is greater than ever. Recently we saw contradicting views at the annual Labour conference, and whilst the official stance is still to proceed with Brexit, there also seemed to be a significant support for a new vote on the future relationship with the EU.

In the Conservative Party Conference this past weekend, the message was more unified, but there too, there’s an increasing support for a new referendum. According to a senior Conservative, “A “significant” number of Tory MPs would be prepared to back a second referendum on Theresa May’s Brexit deal”.

Regardless of what will transpire in the end, the fact of the matter is that UK Plc is severely affected by the uncertainty that the current situation brings with it, never mind the prospect of a hard Brexit. Few people will have escaped the fact that virtually all car manufacturers with production in the UK have flagged, Nissan being the latest to speak out.

The two main issues that seem to affect the car industry relates to manufacturing and exporting. The UK produces some 1.75 million cars annually, and of those, 800,000 are destined for Europe. With Britain crashing out of Brexit without a deal, the prospective tariffs on cars exported to the UK pose a serious threat to the UK-based manufacturers. The other major issue is the just-in-time supply chain that feeds the plants with parts. If the chain is disrupted, the ramifications are serious and threaten to halt production.

When it comes Brexit and the UK tech sector, it’s clear that it doesn’t have the same issues. It’s not reliant on material inputs in the same way and doesn’t typically export products. It does, however, rely heavily on human capital, whose supply will be under threat under any of the possible deals.

Recruitment and human capital

The tech sector is already experiencing severe shortages in some areas, and a no-deal Brexit will put even more pressure on human resources departments and their recruiting partners. Not only will immigration be restricted, but many of the EU-citizens already living in the U. K. will consider their options.

About 8 percent of the workers in the tech sector hail from EU-countries, and with the current Tier 2 visa restrictions limiting the immigration of skilled workers from outside of the U. K. to 20,700 annually, it’s not difficult to see how talent is set to become even scarcer.

Recently, the Prime Minister has also announced that under a no-deal scenario, EU-citizens who would want to immigrate into the U. K. after Brexit will not be given special treatment over non-EU workers. Without lifting the quotas currently in place under the Tier 2 visa restrictions, it’s difficult to see how the U. K. tech industry will be able to sustain a healthy talent pipeline.

In the event of a no-deal scenario, there could, of course, be fewer new technology jobs being created in the U. K. which would mean less pressure on the talent supply. –An economic impact study commissioned by London Mayor, Sadiq Khan, suggests that even in the case of continued access to the Single Market, there could be as many as 36,000 fewer science and technology jobs in the U. K.

Trade

The nature of the technology industry means it is more flexible than others, which means that it’s potentially more resilient to the negative effects of a no-deal Brexit. Tech firms are also found to be more positive than other sectors in such a scenario, according to a report released by PwC.

Tech companies are also, by their very nature, used to facing disruption, and are more agile than more traditional industries.

Innovation

The uncertainty in the sector means that many tech firms are holding off making investments in new projects, as they fear that their access to people and capital may be restricted.

Larger, multinational firms may be less affected, but a large number of small to medium tech firms don’t have the resources or financial flexibility to invest in the unknown. Additionally, these firms also have to allocate resources to contingency planning, which means there’s even less room for investment.

The U. K. Fintech sector is arguably under even more pressure than other sub-sectors too, as they face losing passporting rights to the EU market post-Brexit, which could spell the end for many of them.

Funding

Funding is tightly linked with innovation, and UK tech firms have lost out on significant amounts of capital since the referendum. In 2017, investment from the European Investment Fund (EIF) fell by 91 percent, from €708.8m in 2016 to just €61.1m in 2017.

In contrast, however, venture capital has increased since the triggering of Article 50, according to research by former Index Ventures partner Gil Dibner. Dibner found an average of 69 deals per quarter post-Brexit, compared to 45 deals per quarter pre-Brexit. Startups also raised more, at more than $1 billion (£739 million) per quarter post-Brexit, versus $819 million (£605 million) pre-Brexit. In fact, U. K. managed to attract more than £5bn in venture capital funding since the referendum, more than three times more than any other EU country.

Data

An area that is getting less coverage in the press, but is arguably as important as many other areas is how data will be handled post-Brexit. Number 10 announced in March that the U. K. will leave the Digital Single Market by 2019.

In 2016 alone, EU services reliant on data exported to the UK, such as finance, telecoms, and entertainment, were worth approximately €36bn. Data flows from the UK to the EU constitute as much as three-quarters of all data from the UK.

The Government proposed a new Data Protection Bill in 2017 which, if passed into law, could cover much of the future arrangement. However, if the U. K. leaves the EU without a deal, as a third country, the EU will have to unilaterally recognise the framework, rather than it being subject to negotiations. Given that the U. K. is currently aligned with GDPR, this issue may end up having a simple solution, but again, the uncertainty may well give tech firms the jitters, before a deal is done.

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