Scotland independence vote raises questions for businesses
Scotland is at a crossroads. On September 18th, the nation will vote in a referendum that could see it separate from the United Kingdom, ending a union that has lasted more than 300 years.
It’s a matter of vital importance to every business north of the England-Scotland border and those trading into Scotland, but it is also a source of deep uncertainty for those firms. Planning for the long-term effects of the vote is a challenge, and not just in the event of a vote for independence.
One critical point is that fundamental aspects of an independent Scotland are unknown and will not be decided until long after the vote has taken place. If Scotland were to vote for independence, it would take time – perhaps years – for some of the most important issues to be settled.
Which currency Scotland would use and whether the country would gain EU membership are the two biggest unknowns. But there are reams of finer details around the legislation and tax rules that businesses would need to adhere to in an independent Scotland.
Clarification still required
A few likely outlines have emerged in the debate that began months ago and culminated at the end of August in two televised debates between Alex Salmond, the Scottish National Party (SNP) leader and first minister of Scotland, and Alistair Darling, the former UK chancellor of the Exchequer and leader of the “Better Together” campaign, which opposes separation from the UK.
An independent Scotland would most likely take on a share of UK debt in exchange for the two countries agreeing on a “fair share” of the UK’s resources. A new Scottish government promises to be business-friendly, pledging corporation tax at three percentage points below the UK rate if Scotland becomes independent.
According to estimates by the London-based National Institute of Economic and Social Research (NIESR), an independent Scotland would have less debt per person than the remainder of the UK. But an independent Scotland would face higher borrowing costs – as much as 1.65 percentage points more, the NIESR reports.
There are also questions about the source of revenues for an independent Scotland. The extent of Scotland’s dependence on oil and gas is one of the other big unknowns surrounding the strength and resilience of a stand-alone Scottish economy.
Oil and gas would be significant contributors to the Scottish government’s coffers, but the extent of remaining recoverable reserves and the settlement that would determine Scotland’s share of those reserves and thus the value of them and the revenues expected from them are hotly contested on both sides.
Beyond this, there is also some debate as to who will collect Scottish taxes – the UK’s HMRC or a yet-to-be-determined Scottish equivalent.
Debate over EU membership
Another unanswered question is whether Scotland will adopt EU law or retain UK-based rules. On what basis will its businesses trade with the rest of the EU and, indeed, the wider world?
The EU has not yet said whether Scotland will automatically accede to the EU or whether it will have to apply for membership, and if it does have to apply, how long the process would take.
These are just the tip of the iceberg as to which laws and bodies Scottish-based businesses will have to work with in the event of independence. According to the UK government, Scotland would need to create 200 new governmental bodies to replace the UK’s governmental and quasi-governmental institutions.
“Businesses are troubled by the risks and costs involved,” said Iain McMillan, director of the Confederation of British Industry (CBI) Scotland, a UK business-lobbying organisation that represents employers nationally and internationally.
Even amidst such uncertainty, businesses in Scotland need to be prepared. David Watt, executive director of the Institute of Directors in Scotland, says firms should develop plans for various scenarios in the run-up to the vote and in the period after it. “In my view, people need to be getting as much information as they can and start doing scenario planning,” he said.
In the event of a pro-independence vote, there is plenty of time to plot out possible scenarios, Watt believes. “It’s not going to happen tomorrow,” he said. “March 2016 is the earliest we would witness change. In the two-year interim period, there will not be much effect, and companies will have time to react appropriately.
“Some companies have already taken action by opening shell companies around the UK in preparation of a move if they have to, but how much would have to move any way I’m not sure.”
Scenario planning
The main changes likely would be concentrated in certain sectors, notably financial services companies, which would need to look to restructuring if an independent Scotland decided to adopt the euro.
The Royal Bank of Scotland (RBS), for instance, said Thursday that a number of material uncertainties arising from the vote could affect the bank’s credit ratings. The Edinburgh-based company on Thursday revealed a contingency plan to move its main operating entity to England in the event of an independence vote.
“RBS believes that this is the responsible and prudent thing to do and something that its customers, staff, and shareholders would expect it to do,” the company said in a statement, adding that it “intends to retain a significant level of its operations and employment in Scotland to support its customers there.”
Oil companies might also find themselves having to make changes depending on how the North Sea oil and gas fields are divided. Given the proposed expulsion of the UK’s nuclear submarines from Faslane in the west of Scotland and the end of a UK defence presence in Scotland, the sector is also going to be heavily affected.
Outside these areas, Watt believes the impact on Scottish businesses is not likely to be as great as some have suggested, given Scotland’s economic solidity and the ties to the rest of the UK that will remain in place: “There is a lot of inward investment coming into Scotland already. It is second only to London, so the country is a positive place to do business regardless.”
Even the currency issue poses less of a conundrum than some suggest, Watt argues. After an independence vote, “any settlement would include a currency agreement,” he said. “We would see Scotland continuing to use the pound or in some way track it. There are ways around that particular issue.”
The question of EU membership is, however, one of the most significant issues, says Watt. “The impact will be felt most by fishing and agriculture businesses,” he said. “Some people think that membership will not be granted, and that is the concern. There is likely to be a long period of negotiation over a range of areas, not least employment legislation.
“The size of a company is also relevant. If a business is carrying out cross-border trade, it is an important issue, as are the question marks over EU status, currency, and financial services regulation,” Watt added.
Impact on SMEs in Scotland
Smaller businesses arguably have less to worry about. They certainly seem unfazed, according to a recent UK-wide survey from the British Chambers of Commerce reporting that only a small number of businesses believe the referendum is having an effect on them.
Members of the Forum of Private Business (FPB) echo this feeling. “We definitely have some members who will relocate out of Scotland if it becomes independent,” said Alexander Jackman, the FPB’s head of policy. “That said, it may well be that others see opportunities to invest there.
“Overall, they just don’t believe independence is likely and have not done much in terms of contingency planning.”
Jackman explains that FPB members are struggling with a lack of information on what a vote for independence would mean. For instance, they feel there is as yet no clarity around Scotland’s membership in the EU and on the currency issue.
“These are very important issues,” Jackman added. “If Scotland did have to apply for EU membership, then it would face trade barriers for whisky exports, for example. I would imagine some of our larger members are holding off investment until the vote is decided.”
Outcomes after the referendum
It may be a mistake to assume that nothing will change in the event of a vote to retain the union with the UK. David Watt says that even if Scotland votes against independence, further devolution has been promised: “It could still impact income tax levels and welfare payments,” he said. “It’s not as dramatic as independence would be, but there will be changes.”
Another key point for businesses to consider, and plan for where possible, is continuing uncertainty that will remain in the political sphere north and south of the border after the Scottish vote, Watt said.
“There are UK [general] elections in May 2015 with the Scottish parliamentary elections in May 2016, and 2017 will see the possibility of an in/out referendum on the EU for the UK,” Watt said. “It’s going to be an intense period, which will have an impact on business.”
So with continuing political uncertainty being the only constant over the next three years, whatever the outcome of the Scottish referendum, beyond sensible contingency planning, it may make sense to stop waiting for clarity and simply get on with work, Watt said.
“Once the referendum is put to bed, whatever happens, Scotland will be a place worth investing in,” he said. “The economy is on the up, and unemployment is dropping. I am optimistic that it is time to invest in Scotland after September 2014 and across the UK. Businesses should just get on with their plans.”