What an independent Scotland could mean for your business

What an independent Scotland could mean for your business

Published:

Author: Karen Harvie

The 24 March 2016 is the proposed date for independence from the parliamentary union of 1707 if Scotland votes 'Yes' in the referendum in two months' time.

We look at what it could mean for UK businesses if Scotland decides to become an independent country.

What will the future hold?

The future of an independent Scotland would be determined by how Scotland votes in elections, following a positive referendum result and on the outcome of legal debates and negotiations in the transitionary period in various contexts, such as EU membership and currency. It is difficult to know what will happen and how it will affect UK businesses but the current Scottish government has declared its priorities for action should it be re-elected which give us some indication of what might come to pass.

1. Groats, Merks or Unicorns*: what will you pay your employees in?

One of the key issues in the current debate is what the currency would be in an independent Scotland. The current Scottish government's position is that the pound is Scotland's currency just as much as it is the rest of the UK's (rUK) and proposes simply to retain the pound. Pro union spokespersons in all three major UK parties have said that would not be in the interests of rUK and they wouldn't recommend entering into a currency union. Other options include an independent currency pegged to the pound.

One further complication is Scotland's future membership of the EU and the process whereby Scotland might transition from a region of a member state to a member state in its own right. The Scottish government has made clear its intention not to join the European single currency. However, member states who have come into the EU since the Euro was created have been required as part of their accession negotiations to accept a binding obligation to adopt the Euro once they meet the qualifying criteria. Would Scotland lose the UK's opt-out from joining the Euro or might it be able to negotiate a similar opt out arrangement?

In a worst case scenario, businesses with employees in Scotland could face problems adapting payroll systems to accommodate a different currency and could end up with dual systems in place.

*Scottish denominations pre 1707

2. How will your employees in Scotland pay tax?

An independent Scotland would be able to make changes to the tax system and might well introduce different tax regimes and laws. There are already indications that minimum wage rates would rise alongside the cost of living and different rates of income tax, personal tax allowances, national insurance contributions and corporation tax are likely to apply, again requiring an overhaul of payroll systems.

Furthermore, in order to avoid the potential of double taxation, a tax treaty would have to be agreed with the UK prior to any independence day.

3. What pension provisions would you need to put in place?

Pension legislation is a matter currently reserved to Westminster. On independence, this would pass to the Scottish government. The current Scottish government proposes amending the existing law so that over time the two regimes may well diverge.

Employers currently operating UK final salary schemes may find themselves operating cross-border schemes, namely schemes which are located in one member state (i.e rUK) but which have members working in another member state (assuming Scotland becomes one). There is an EU requirement for such schemes to be fully funded at all times and employers will be faced with having to meet funding gaps. Transitional arrangements such as grace periods are currently proposed. Alternatively employers might look at splitting their schemes instead although this would be no mean task.

Auto-enrolment will continue with some small adjustments such as setting up a Scottish Employment Savings Trust.

Different interest rates, currency (potentially) and tax regimes are also likely to complicate pension provision for cross-border employers.

4. What employment rights and obligations would apply to your Scottish employees?

Employment, industrial relations and health and safety are currently reserved to Westminster. On independence, these would pass to the Scottish government. The new Scottish parliament would amend the legislation currently applying to Scottish employees so whilst these are currently similar in Scotland to the rest of the UK, post independence there is likely to be a rapid divergence. The current Scottish government if re-elected would increase the national minimum wage 'at the very least' in line with inflation, encourage greater trade union participation, consult on employee representation on boards, consult on a target for female representation on boards and legislate as appropriate and, in general, strengthen employment protection (examples include restoring the 90 day consultation period and abolition of the recently introduced employee shareholder provisions). Key issues for review are zero-hour contracts and access to employment tribunals.

The current Scottish government also proposes establishing a written constitution setting out the rights of its citizens which is also likely to impact on Scottish employment rights. Businesses and trade unions would have a role in shaping the constitution.

The employment legislation derived from the EU would, assuming Scotland becomes a member state, require to be implemented by a Scottish government just as in rUK although there may be a divergence in terms of opt-outs. There is nothing however to prevent variations in how the directives are implemented or the extent to which Scotland might go further than strictly required. There is also the matter of whether rUK will remain a member of the EU.

5. How would your staff cross the border?

For companies operating across England and Scotland, maintaining fluid movement of goods and labour is likely to be a key issue. The Common Travel Area currently allows people to travel freely between the UK, Ireland, the Isle of Man and the Channel Islands. The UK has opted out of the Schengen Agreement which abolishes all internal borders within the EU and imposes a common border policy on EU members. The UK and Ireland are the only countries in the EU which are not signatories to the Schengen Agreement. Membership of both the Common Travel Area and the Schengen Agreement is incompatible. Therefore unless Scotland negotiates to opt-out of the Schengen Agreement, certain border controls may become necessary between Scotland and rUK. This could restrict the movement of goods and people between England and Scotland causing logistical problems for businesses.

The current Scottish government's position is that an independent Scotland will become part of the Common Travel Area and therefore labour and goods will be able to move between Scotland and rUK without being subjected to passport control or border checks.

However others have expressed concern that an independent Scotland would be unable to negotiate EU membership unless they apply the Schengen rules as this is required of every new entrant to the EU. In this case, certain border controls may become necessary, unless a novel solution can be found or rUK also submits to the Schengen Agreement.

Conclusion

The referendum is due to take place on 18 September. Are you ready for such a fundamental change?

About the Author

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Karen Harvie

Partner

03700 86 8105

Karen is head of the Edinburgh employment team. She has wide experience acting for employers, particularly in the social housing and charity sectors. She has substantial project management expertise, supporting employers through mergers, redundancy & reorganisation. Karen also has considerable experience representing clients at tribunal, employment appeal tribunal and in court.

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