Brexit: UK dependencies to be affected

Jersey, Guernsey and the Isle of Man – the UK’s self-governing dependencies - would be affected by a vote to leave the EU even though they are already outside the bloc for most purposes.

The dependencies have special arrangements for access to the EU for fish, agriculture and manufactured goods, which would fall away after a Leave vote.

S&P, the rating agency, has warned of “further downside risks” for Jersey and Guernsey if Britain chooses to leave the EU. It argued that there would be a negative impact on the UK’s financial services sector, with which the economies of Jersey and Guernsey were “closely linked”.

But the islanders hope that Brexit would have a relatively modest impact. Jonathan Le Tocq, a Guernsey politician in charge of its external affairs, says: "The potential change for Guernsey will be less substantial than the potential change for the UK."

Jo Reeve, Guernsey’s director of international relations and constitutional affairs says the mood is very different from Gibraltar, a territory where voters have strong views on the outcome. Few people can vote in the dependencies and most are watching from the sidelines. He says any changes are expected to be “more subtle” than in the UK.

What is the current relationship with the EU?

When Britain joined the European Community, the dependencies asked it to negotiate special terms for them. The resulting protocol made them part of the customs area, permitting free movement of manufactured goods and agricultural products.

Some advocates of Brexit view this relationship as a model for the UK. Daniel Hannan, the Conservative MEP, has argued that the UK should “look to Guernsey for a model of post-EU Britain”.

But many economists say Britain is unlikely to want to join the customs union. While that would give it straightforward access to Europe’s goods markets, it would not allow the UK to benefit from other deals the bloc strikes. The asymmetry has become a growing issue for Turkey, which has been in a customs union since 1995.

But the deal is valuable to the dependencies, even though their fishing, agricultural and manufacturing industries are small. They are particularly anxious about the small fishing fleets that land most of their crab and lobster in France.

The island’s financial services industry has grown up outside the EU although it has built up ‘third party’ relationships with big EU countries allowing some access to their markets.

What will happen to its relationship?

The dependencies are anxious to renegotiate their special arrangement with the EU that will automatically fall away if the UK leaves the bloc.

They recognise there would be constraints. The Isle of Man recently published a report that said it was difficult to see how it could negotiate “a deeper or more extensive relationship between the Isle of Man and the EU than it has at present”.

But the dependencies are hopeful they will be able to preserve the status quo.

Senator Sir Philip Bailhache, Jersey’s external relations minister, describes the goal of maintaining the movement of goods as realistic, adding that he “would be surprised if we experienced any great difficulty”.

Would their tax status be affected?

The Isle of Man, unlike the Channel Islands, has an agreement with the UK that means it is treated as if it were part of the EU for value added tax purposes. This has led to a thriving VAT planning industry for superyachts and corporate jets. This would probably move away – most likely to Malta – if the UK left the EU.

More broadly, losing the UK’s voice in Brussels might make the dependencies more exposed to attack from hostile European countries, some of which view them as tax havens because of their zero corporate tax rate.

The Manx government’s recent report said the UK’s withdrawal would remove “a voice which can be employed to speak in support of the Crown Dependencies and Overseas Territories”.

But Geoff Cook, chief executive of Jersey Finance, an industry body, says the relationship with Britain is less important than the islands' record on issues such as combating money laundering. "If we are meeting or exceeding international standards, it is difficult to justify discrimination."

He is optimistic about the future of the financial sector but says general uncertainty would be likely to take a toll: “We are more insulated than Britain but not immune.”

– Copyright The Financial Times Limited 2016