Comment: Firm answers on independence needed

Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford
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SCOTTISH business will be confronted with a massive challenge in the new year: how to plan ahead with the independence referendum looming in September.

What allowance should be made for the consequences of a Yes vote? How might recruitment be affected should two sets of PAYE, National Insurance and pension supervision be required? Should investment plans proceed or be put on ice?

It is on the shoulders of thousands of companies that the burden of transition would fall – financial, regulatory and administrative. Little consideration is being given to the problems they face. This is particularly so for smaller firms and for those where the bulk of their customers are outwith Scotland.

Wrestling with the daily problems of business survival, many must be wishing this heap of convoluted spaghetti would just go away. But deal with it they must. Royal Bank of Scotland and Lloyds Banking Group are already undertaking internal reviews into the impact of independence. How long these can remain “internal” is moot: a recent public meeting with private shareholders in Edinburgh saw chief executive Ross McEwan and senior independent director Sir Sandy Crombie closely questioned as to RBS’s assessment of the regulatory costs and whether it intended to retain the group’s headquarters in Scotland.

Now there are reports that the UK’s biggest companies are under pressure from corporate lawyers to include in their annual report risk assessments an update on the impact that a Yes vote would have on operations.

Companies in the financial services sector are likely to find themselves in the front line of demands for guidance, particularly if independence may result in the adoption of a separate currency. Banks, life assurers, fund managers, pension companies and financial intermediaries will be particularly concerned to maintain customer confidence. The independence White Paper said a separate Scotland would ditch the FCA and set up its own conduct regulator, as well as its own Financial Ombudsman Service, Money Advice Service and Financial Services Compensation Scheme.

The Scottish Government is quick to stress the “dynamic effects” that independence would bring via a lowering of Corporation Tax by “up to” three percentage points. However, independent assessments of the beneficial effects are mixed at best, and few firms have warmed publicly to the prospect.

Investors are less concerned about whether business is for or against independence than about the impact on costs, revenue and investment. And it is here that business will need to be more explicit than now as to the implications.

Ewan Brown, chairman of Scottish Financial Enterprise (SFE), has cautioned that separating Scotland from the rest of the UK could add on a new layer of financial regulation and lead to “operational challenges” on currency for many member companies. “Since financial products and services are tailored to tax, consumer protection and regulatory regimes, any divergence from the rest of the UK would undermine the single market and create uncertainty over the competitive position of Scottish-based providers.”

Fund manager Hargreaves Lansdown warned last month that the cost of setting up a separate Scottish financial regulator and pensions body could mean lower returns for pensioners and bank customers because of higher regulatory costs.

The oil and gas sector will also be keenly affected. But here, too, impact assessment is thin. A recent report by the Aberdeen and Grampian Chamber of Commerce (AGCC) found industry executives concerned about a lack of clarity on issues such as tax, regulation and EU membership in the event of an independence vote. The survey said that while investment in the region this year is set to total £13.5 billion, this lack of information was now hampering members’ ability to plan beyond 2014.

With the rare exception of Aggreko chief executive Rupert Soames, company chiefs have been markedly reluctant to make any public statements on the referendum issue. This has been a source of considerable frustration to pro-Union campaigners, even though they enjoy a comfortable lead in the polls.

This reticence may reflect lack of clarity on the consequences of a Yes vote, or concern not to repeat the misreading of public opinion in the 1979 referendum on devolution to which many leading companies were opposed. And it may also stem from fears that they may put their working relationships with the Scottish Government at risk.

But this may change if companies are obliged to publish their assessments in the risk sections of annual reports sent out to shareholders. And while that may present problems in itself, there will be pressure on a related front – not so much for companies to declare whether they are pro or against independence per se, but to reveal their own cost assessment and Plan B.

A key concern will be the impact of independence on business location. For RBS and Lloyds Banking Group this has already fuelled speculation over a switch in head office domicile south of the Border while leaving the HQs of the smaller Scottish operations in Edinburgh.

Pressure to move would be marked in the event of Scotland adopting a separate currency – the major Plan B – and an outcome that has given particular concern at Scottish Financial Enterprise, the body that speaks for the sector. Ronnie Ludwig, partner at one of the Top 20 Scottish accountancy firms, Saffery Champness, says the lack of real economic detail about what independence means would affect the decisions of potential investors and their attitude towards Scotland. He said: “At best [they] will wait until there is more clarity, and at worst will invest elsewhere. The lack of detail is also likely to make a number of entrepreneurs consider a move south of the Border as a pre-emptive precaution.”

The tax residence of a company, he points out, is determined not by where it is located but by where its central management and control are exercised. “This lack of detail may well see a number of companies take the decision to move central management and control south of the Border, so that they will then trade with, rather than in, Scotland.”

Many companies may be holding back on any pronouncements until the last minute. But the legal requirements on risk statements are such that “the last minute” is looming closer than most now realise.

Twitter: @Bill_Jamieson