How will the December election affect financial markets?

 

A deeper look into IR35 and Brexit.

 

The December 12th election has the potential to disrupt the financial markets in a range of different areas from IR35 to Brexit. The sections below will cover the potential effects in detail:  

#1: IR35

The December 12th election could cause complications for the 6th April IR35 deadline. Elections have a history of causing havoc to parliament’s schedule even with high priority topics, and it is looking likely that the December election will be no different. A strong example of this is the fact that Boris Johnson has already moved his Brexit bill back until after the election dates were agreed upon.

IR35 is a tax legislation which basically looks to differentiate between genuine businesses contractors and ‘disguised employees’, who operate like an employee but pay less tax than they would as an employee. IR35 is a cause of worry for many contractors who work in the financial sector as it may damage their bottom line if banks act in uniform and move all contractors onto a PAYE (pay as you earn) system regardless of individual working practices.  At the same time contractors will still have no protections that permanent employees receive such as sick pay, holiday pay and employment rights. As it currently stands many banks that operate in the UK such as Barclays, Lloyds and HSBC have stated that contractors will all need to be moved onto a PAYE basis once the bill is passed.

However, in October it was announced by Sajid Javid, the chancellor of the exchequer, that the government budget would be delayed until after the election. This has led many to question how the bill will go ahead without the approved budget as the IR35 rules are set out in the current (draft) Finance Bill. Despite this speculation the Treasury has stated that they are committed to the 6th April deadline, although only time will tell how strong, or how possible that commitment is.

One potential problem IR35 could cause for the UK is brain drain. Brain drain is the phenomena in which highly trained or qualified people emigrate away from one country to another. Santander have already stated that the in UK brain drain is already affecting financial services as there is a significant lack of highly qualified tech talent. IR35 could make this worse by incentivising top UK contractors to work abroad as the changes brought in by the controversial policy will only affect UK banks, making them less competitive in comparison to those operating in Europe.

In addition, a change in government has often brought about a change in policy preference, leaving some polices abandoned or pushed back to a later date. However, it is unlikely that labour, the most likely opponent, would drop IR35 if they secured a majority as they have a history of being the least business-friendly out of the two major parties, but they will certainly have different preferences over parliaments timetable meaning the bill could be pushed back. Even if the current government gain a majority there is already large debate about the government’s ability to meet the IR35 April deadline so as it currently stands only time will tell when IR35 will come into effect.

#2: Brexit

An additional hot topic coming into the December election will be Brexit. The UK’s exit from the European Union has been debated since 2015 and some progress has finally been made with Boris Johnson’s recent advancements. However, the election could bring the UK’s exit into question as Labour, the main opposition party, are now focusing on a second referendum which will allow the public to decide if they are happy with the conservatives deal or not. In addition to this the ‘third party’ option, the liberal democrats, have been very strong on showing that they believe an additional referendum must be held to see if the UK public still wishes to leave EU or not. They have been focusing on this as they argue that the original Brexit proposed in 2015 is nothing like the one proposed four years later.

Uncertainty such as this is never good for the financial markets and Brexit has already caused significant worry for banks over the last few years. If Labour were to secure a majority, there would likely be a very different Brexit strategy in comparison to the one proposed by the government. Furthermore, if a coalition is made between either party and the liberal democrats a second referendum is not out of the question. Therefore, the current uncertainty across the markets are unlikely to settle until the outcome of the election is clear.

  One defining feature of the European Union is the free movement of people. This is something which is extremely unlikely to continue after the UK officially leaves the EU. In an opposite effect to brain drain, this could significantly reduce the talent pool of financial contractors willing working in the UK, whilst simultaneously IR35 could push more UK contractors to work abroad. 

In addition, although it seems unlikely that a no-deal Brexit will occur it remains unclear what regulations and institutions the UK will follow if it happened. Whilst policies such as Basel III are internationally followed, institutions such as the EBA (European Banking Authority) may be dropped. These changes could bring even further uncertainty to the financial markets until a new government is secured and we have a definitive Brexit plan.

In sum, the deadline for IR35 is set for 6th April and the treasury has re-affirmed their commitment to meeting it. However, the December election and the delayed draft Financial Bill have brought into question their ability to meet this target. Brexit is also likely to cause some disruption, affecting the competitiveness of the UK for contractors working in Europe and causing uncertainty across the markets. It is also unclear which regulations and institutions the UK will follow when it finally separates from the EU.      

The cumulative effect of all of this uncertainty is likely to paralyse or delay decision making and activity in the Financial sector which may unfortunately impact negatively on the growth of the UK economy.

By Richard Mills

 

 

 

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