SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF SCOTTISH INDEPENDENCE ON BUSINESS
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SCOTLAND THE
BRAVE? AN
OVERVIEW OF
THE IMPACT OF
SCOTTISH
INDEPENDENCE
ON BUSINESS
JULY 2021
SCOTLAND THE BRAVE? AN OVERVIEW OF
THE IMPACT OF SCOTTISH INDEPENDENCE
ON BUSINESS
Scottish independence remains very much a live issue, as First
Minister, Nicola Sturgeon, continues to push for a second
referendum, but the prospect of possible independence raises a
host of legal issues. In this overview, we examine how Scotland
might achieve independence; the effect of independence on
Scotland's international status, laws, people and companies;
what currency Scotland might use; the implications for tax,
pensions and financial services; and the consequences if
Scotland were to join the EU.
The Treaty of Union between England of pro-independence MSPs to 72; more,
(which included Wales) and Scotland even, than in 2011.
provided that the two Kingdoms "shall
upon the first day of May [1707] and Independence, should it happen, will
forever after be United into one Kingdom affect anyone who does business in or
by the Name of Great Britain." Forever is with Scotland. Scotland can be part of
a long time. Similar provisions in the Irish the United Kingdom or it can be an
treaty of 1800 have only survived for six independent country, but moving from
out of the 32 Irish counties, and Scotland the former status to the latter is highly
has already had one referendum on complex both for the Governments
whether to dissolve the union. In that concerned and for everyone else. The
vote, in 2014, the electorate of Scotland rest of the United Kingdom (rUK) could
decided by 55% to 45% to remain within not ignore Scotland's democratic will, but
the union, but Brexit and the electoral nor could Scotland dictate the terms on
success of the SNP mean that Scottish which it seceded from the union. The
independence remains very firmly on negotiations between representatives of
the agenda. rUK and of Scotland to establish the
terms upon which Scotland should
The 2014 referendum followed the SNP's become an independent country would
winning 69 of the Scottish Parliament's unquestionably affect the way business is
129 seats at the election in 2011. This carried on both north and south of the
majority in favour of a party whose raison border, as would the choices made by
d'être is independence persuaded the Scotland as an independent country.
UK's Prime Minister that he could not
deny Scotland the opportunity to decide Now might not be the time for full-scale
whether or not it wished to remain within contingency planning for Scottish
the UK. independence, but it is certainly the time
to consider how a (second) Scottish
The SNP might have lost the ensuing referendum, followed by independence,
referendum, but it regards Brexit (which might affect the organisation and conduct
62% of the Scottish electorate opposed) of business. If independence were to
as having changed everything, and it occur, the planning horizons could be
continues to enjoy enviable electoral uncomfortably short, still more so the
success. The SNP won 64 Scottish time to execute any plans.
parliamentary seats in the elections of
May 2021, but the Green Party, which This briefing explores some of the legal
also supports independence, won a issues that will arise, including the
further eight seats, bringing the number potential impact of separation
on businesses.
2 CLIFFORD CHANCE
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESS
Summary
• Scotland is likely to require independent Scotland. A Commission
Westminster legislation to hold a valid established by the SNP recommended
referendum, which may come down to the continued use of sterling for an
politics, rather than law. The SNP extended period, but an SNP
wants a referendum in 2023 and, if conference rejected that in favour of
successful, is then likely to want preparing immediately after any
independence before the next Scottish independence vote for a currency of
elections in 2026. its own.
• An independent Scotland would be a • Contracts with Scottish parties will
new player on the international stage. likely continue as before, but there
A conundrum is how Scotland can may be, for example, currency risks if
enter into agreements with other a contract requires payment
states before it has legal status in in Scotland.
public international law as an
• For tax purposes, Scotland will need
independent nation.
to enter into double taxation treaties
• Scotland will inherit a complete legal with other states, including rUK, to
framework, but will need to amend its prevent multiple taxes. There is a
laws in the same way that the UK did possibility of competition in tax rates
(and continues to do) as a result of between Scotland and rUK and
Brexit, as well as establishing other states.
regulators and such like to take the
• Pension schemes that use Scottish
place of UK-wide ones.
limited partnerships may need to
• Scotland will need to establish restructure. Schemes with Scottish
citizenship rules, and rUK will have to members may also need to ensure
consider which of those who obtain, that assets and obligations are
or can obtain, Scottish citizenship matched if Scotland adopts a
should be able also to hold rUK new currency.
citizenship. The SNP wants a common
• At independence, Scotland may face
travel area with the UK, but that might
its own hard Brexit unless it is able to
be difficult if and when Scotland joins
assume the rights and obligations of
the EU.
the UK under the Trade and
• Scottish companies will continue to be Cooperation Agreement between the
recognised, but legislation may be UK and the EU. Longer term, the SNP
needed to allow companies on one wants Scotland to join the EU, which
side or other of the border to migrate, could lead to a hard border – for
should they wish to do so, to the other goods, services and people – between
side. rUK and Scotland in order to protect
the EU's single market.
• The UK's assets and liabilities will
need to be divided between Scotland • Scotland would need to establish its
and rUK. rUK would likely retain the own financial services regulator, and
whole of the UK's current national rUK and Scotland would need to
debt, but receive an IOU from decide how to treat firms providing
Scotland in respect its proportionate cross-border services, whether
share of that debt. Scotland's largest through mutual recognition or
creditor would, initially at least, be rUK. otherwise (though that might not assist
non-rUK firms).
• Currency is perhaps the most difficult
issue that would face a newly
CLIFFORD CHANCE 3
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESS
Achieving independence 2026 election could offer opposing
parties the opportunity to reverse the
As mentioned above, the Scottish
initial decision, particularly if the
independence referendum of 2014
preparations for independence, including
followed the SNP's triumph in the 2011
negotiations with rUK, were not going
Scottish elections. This persuaded the
well. At the time of the first referendum,
UK's then Prime Minister, David Cameron,
the SNP anticipated that it would take 18
that he could not, consistently with
months of negotiations between Scotland
democratic principles, resist an
and rUK after a vote in favour of
independence referendum in Scotland. As
independence to put in place
a result, the Edinburgh Agreement of 15
arrangements sufficient for independence
October 2012 between the Governments
(though many regarded that as a very
of Scotland and the UK provided for the
optimistic timetable). Given that a
transfer to Scotland of the power to hold
referendum and its campaign will also
a referendum. This was done formally by
take time, this indicates that the First
an order in council under section 30 of
Minister does not have long before she
the Scotland Act 1998. The object of the
must push the issue, though the timing is
referendum was, according to the
complicated by the COVID-19 pandemic.
Edinburgh Agreement, to "deliver a fair
test and a decisive expression of views of
Prime Minister Boris Johnson has said
people in Scotland and a result that
that he will refuse any request for a
everyone will respect".
section 30 order, but he would need to
consider the politics of refusal at the
These steps put the legality – and the
relevant time. If he were to refuse, the
binding nature – of the 2014 referendum
Scottish Parliament could contemplate
beyond doubt. The outcome of the
itself legislating for a new referendum,
referendum was not the one the SNP had
though First Minister Nicola Surgeon has
hoped for. In 2017, following the Brexit
generally been reluctant to take legally
vote, Scotland's First Minister, Nicola
doubtful steps towards independence. As
Sturgeon, asked the UK Prime Minister,
explained below, it is unlikely that the
Theresa May, for another section 30
Scottish Parliament currently has the
order giving the Scottish Parliament
necessary powers to call a referendum.
power to call a second referendum. That
request was refused on the basis that the
UK's impending withdrawal from the EU The Scottish
gave the UK and its Government more Parliament's powers
than enough to occupy its time without The Scottish Parliament was established
also contemplating another Scottish by the UK Parliament's Scotland Act
independence referendum. 1998. It has limited legislative
competence, and anything done outside
The success of the SNP and the Green that competence is not law (section
Party in the May 2021 Scottish elections 29(1)). A measure is outside the Scottish
makes it inevitable that the First Minister Parliament's competence if it "relates to"
will again demand a section 30 order to a reserved matter (section 29(2)(b)).
enable a second referendum to take Reserved matters include "the Union of
place. A White Paper from the Scottish the Kingdoms of England and Scotland"
Government before the elections said that (paragraph 1(b) of Schedule 5). Measures
a referendum should take place in the first can be taken under section 30 to enlarge
half of the current Scottish Parliament's the powers of the Scottish Parliament.
term of office, which runs to May 2026, This was done in order to enable the
suggesting a referendum before the end Scottish Parliament to call the 2014
of 2023. referendum, but that enlargement of the
Scottish Parliament's powers was time-
The SNP Government in Scotland will, in
limited and has now expired.
practice, want to ensure that
independence formally occurs at the very Would a referendum on Scottish
latest before the next Scottish independence called by the Scottish
parliamentary election. If it did not, the Parliament, without a section 30 order,
4 CLIFFORD CHANCE
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESS
"relate to" the union of England and must also get the timing right. Will its
Scotland? The predominant view is that it electoral dominance continue? Even if it
would, not least in the light of the draft did, to lose one referendum may be
Scottish legislation published in March regarded as a misfortune; to lose two in
2021 in which the Scottish Government relatively quick succession would surely
proposed that a second referendum bar the issue for at least a generation.
should pose exactly the same question
as in the first referendum ("Should One compromise possibility that has been
Scotland be an independent country?"). raised is that a section 30 order could be
Some argue, however, that there is conditional on varying the electorate to
nothing to stop the Scottish Parliament include not only all UK voters resident in
legislating for an advisory, or consultative, Scotland but, in addition, Scots resident
referendum which, unlike the 2014 in rUK. This would be controversial (if To lose one referendum may
referendum, would not be accepted by Scots in rUK, why not Scots outside rUK be regarded as a misfortune;
the UK Government as binding. This is too?), novel and time-consuming. Who is
not convincing. A referendum asking a Scot? Is it necessary to be born in
to lose two in quick
whether Scotland should be an Scotland, to have one or both parents succession would surely bar
independent country relates to the union born in Scotland, or perhaps a single the issue.
of Scotland and England whatever the grandparent (enough to qualify to
legal or political status of the outcome. represent the Scotland football team)? Or
should the SNP's definition of Scottish
If the Scottish Parliament were to seek to citizenship in the event of independence
legislate for an independence referendum (see below) be adopted? Further, there is
without securing a section 30 order, the no register of such "Scots." A register
question of the Scottish Parliament's would therefore have to be created,
competence to do so would have to be which would be time consuming and
resolved by the UK Supreme Court. There expensive, as well as raising still more
are various means by which a challenge issues. For example, what proof would be
to Scottish legislation could reach the required, and what political or other
Supreme Court, including a direct consequences would follow if these
reference by a UK or Scottish law officer expatriate Scots were enough to swing
or through the normal litigation process, the vote one way or the other?
but there would need to be a definitive
legal answer. Another suggestion is that a vote for
independence should require a higher
If the Scottish Government did not want majority (whether of those voting or of the
to legislate unilaterally for a referendum, electorate) than 50%+1. In a referendum
there could still be legal challenges, for in 1979, Scottish devolution was
example to the refusal by the UK supported by 51.6% of those voting but
Government to grant a section 30 order, was not implemented because the
but the key is likely to lie in politics, rather legislation required, in addition, that at
than the law. The first referendum was least 40% of the electorate as a whole
said by the SNP's leaders to be a "once should vote in favour. The 51.6% majority
in a generation" opportunity for amongst those who voted represented
independence, and that generation has only 32.9% of the electorate. This option
yet to pass. But since the first of entrenching the union against a
referendum, Brexit has taken place, temporary bare majority is, however,
against the wishes of the Scottish unlikely to commend itself to a
electorate, and the SNP continues to Government that was content for Brexit
dominate Scottish politics. Can a UK to occur when supported by only a little
Government refuse a second referendum over a bare majority of those voting.
without significantly exacerbating
resentment in Scotland towards rUK If Scotland were to vote for
(generally referred to derogatorily as independence, what then? In the
"London" or "Westminster") and remainder of this briefing, we look at
strengthening the SNP's hand? An some of the issues that would arise
enhanced sense of bitterness towards following a successful (from the SNP's
rUK might help the SNP, but the SNP point of view) second referendum.
CLIFFORD CHANCE 5
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESS
The timing of Scottish MPs who sit in the House of
Commons (e.g. at the 2010 general
independence
election, the Conservatives would have
If the SNP had won the first referendum, secured an absolute majority but for the
it wanted Scotland to become Scottish MPs), though the large
independent on 24 March 2016, the Conservative majority resulting from the
anniversary of the union of the crowns of 2019 UK general election perhaps makes
England and Scotland in 1603 (i.e. the this less likely than at the time of the
date of the death of Queen Elizabeth I of first referendum.
England and on which King James VI of
Scotland became also King James I of Although Scotland will remain part of the
England). That timetable gave 18 months United Kingdom until independence,
from the referendum for completion of the some have questioned the continuing
negotiations with rUK, though many position of Scottish MPs in the House of
expressed scepticism as to whether that Commons in the intervening period or, at
was long enough to unpick over three the least, whether they should be able to
hundred years of intimate union. It would vote on legislation only affecting England,
not be necessary for all issues between Wales and Northern Ireland or relating to
Scotland and rUK to be finalised by Scotland's independence (the House of
independence day, but a sufficient Commons already has some procedures
number of such issues would need to be providing for English votes for English
resolved for Scotland to function as an laws – EVEL). If Scottish MPs do affect
independent country. The UK and the identity of the UK Government in
Scottish Governments may, for example, 2024, their departure on independence
want to enter into a separation agreement day may not only reflect the creation of a
(akin to the UK's Withdrawal Agreement new country, but it could also bring about
with the EU) initially to provide for a change of Government in the old one.
independence, perhaps with (time-limited)
transitional provisions, to be followed by
The old and new countries
one or more agreements between
Scotland and rUK dealing with more On Scotland's independence, rUK will be
detailed issues. The Czech Republic and the "continuator" state as a matter of
Slovakia were still negotiating almost a public international law, i.e. it will be the
decade after their "velvet divorce" same legal entity as the UK, with all the
took effect. UK's existing rights and obligations (such
as membership of the UN and NATO) but
The Scottish Government would, having lost a little over 8% of its
presumably, conduct the negotiations for population, slightly under 8% of its
Scotland, though it has been suggested economic output, as well as 32% of its
that others could be invited to participate land mass. The rest of the United
(the UK Parliament may also need to Kingdom continued in this way when the
transfer powers to the Scottish Irish Free State was formed out of the
Government to enable it to prepare fully (then) United Kingdom of Great Britain
for independence), but who should and Ireland in 1922 and, similarly, Russia
negotiate for rUK? In practice, it would be was treated as the continuator on the
the UK Government, but it could be a breakup of the Soviet Union. rUK may
group representing all the political factions need to consider its name, since it will no
in rUK. longer include all of Great Britain – the
United Kingdom of England, Northern
The position of the UK Government is Ireland and Wales?
complicated by the fact that there will be
a general election in the United Kingdom In contrast, Scotland will be a wholly new
on 2 May 2024 at the latest, which is state, probably not even the revival of the
likely to be before Scotland could achieve state that existed before the union with
independence even on an optimistic England in 1707. As such, Scotland
timetable. The election could result in a must make its entrance on the
change of UK Government and therefore international stage.
of negotiating position. Indeed, the
identity of the UK Government could even For many purposes, this debut will be
be determined by the (currently) 59 straightforward. Numerous
6 CLIFFORD CHANCE
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESS
uncontroversial international The need to change its laws would not
arrangements (postal services, flights and be confined to Scotland. rUK would need
so on) will require Scotland to do little to pass laws to modify UK statutes which
more than to announce that it will treat apply throughout the UK to reflect their
itself as bound in the same way as the reduced territorial scope (e.g. the
UK by the previous arrangements or Constitutional Reform Act 2005 alone has
simply to sign up in its own name. But in over 100 references to Scotland), and its
some cases, accession to existing continuing regulators would need to
treaties could prove more difficult. adapt their rules to reflect their reduced
Scotland will have to apply to join some remit. rUK regulators may also need to
multilateral organisations, such as the UN, reconsider the scope of ongoing
NATO and the IMF. investigations that relate to
Scottish businesses.
Scotland could, however, face a logical
conundrum. Until Scotland is Both Scotland and rUK would need to
independent, it has no separate decide how to treat matters which are
personality in public international law and, currently wholly internal domestic issues
therefore, no standing to enter into and to address this through appropriate
treaties or such like, even with rUK. legislation (e.g. enforcement of judgments Until Scotland is
Scotland and rUK should be able to and insolvency recognition), which may independent, it has no
overcome this issue internally, but to require additional agreements between separate personality and,
avoid a gap in its induction into the rUK and Scotland. In some cases, turning
international order, Scotland may, for internal domestic issues into cross-border
therefore, no standing to
example, have to rely on foreign states issues could have a significant financial enter into treaties
agreeing to enter into agreements with impact, such as tax and pensions,
the Scottish Government (which may discussed below.
require a transfer of powers from the UK
Parliament for this purpose) to take effect Businesses would need to track legal
with Scotland on independence or changes, in Scotland and rUK, that could
accepting the application to Scotland of affect them, particularly where they result
existing arrangements immediately in additional compliance requirements.
on independence. These may include obligations for a
business to inform its customers and
Laws counterparties of how the new legal
regime affects its relationship with them
Laws applicable in Scotland before
(e.g. new deposit or investor protection
independence would presumably
arrangements for financial services firms).
continue to apply after independence, but
(as with EU law in the UK on Brexit)
Scotland would need to decide what, if People
any, adaptation to its new circumstances The Scottish Government set out wide
was appropriate (e.g. companies and criteria for Scottish citizenship at the time
insolvency legislation), including of the first referendum. So, for example,
transitional provisions. The UK Parliament British citizens habitually resident in
would need to amend the Scotland Act Scotland on the day of independence
1998 to enable the Scottish Parliament to would automatically have become
pass laws that will take effect on Scottish citizens, as would British citizens
independence but that currently fall born in Scotland but living outside
outside the Scottish Parliament's powers. Scotland on the day of independence
and children born in Scotland to at least
Scotland would also need to create one parent with Scottish citizenship.
regulatory bodies to replace existing UK
institutions that serve the whole UK (e.g. rUK would also have to decide upon the
the Financial Conduct Authority, the national fate of Britons who acquired
Competition and Markets Authority and Scottish citizenship (no one should be left
the industry bodies), which may stateless). For example, should everyone
themselves need to adopt new rules for habitually resident in Scotland cease to
the entities that they regulate. be British (i.e. rUK) citizens on
independence or should they be entitled
to retain British citizenship if they so wish
CLIFFORD CHANCE 7
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESS
or if they meet certain criteria, such as business impact of independence on
birth or parental birth in rUK? What about people issues. Employees who are
those living in rUK (or, indeed, elsewhere) Scottish or rUK citizens would retain the
but born in Scotland? right to reside in either Scotland or rUK
and to travel freely between them,
Dual British and Scottish citizenship – if although their employment rights may in
allowed by rUK, as it currently is for other the future depend on the jurisdiction in
nationalities – could have advantages for which they live and work. However, other
British citizens. This would be particularly nationals, including family members of
so if Scotland were to become a member Scottish or rUK nationals, resident in
of the EU because a Scottish passport Scotland or rUK would not necessarily
would grant British citizens free have the same freedom of movement,
movement within the EU. Many British and this could have adverse impacts on
citizens with Irish connections obtained employees even if their existing rights of
Irish passports after the UK's Brexit residence in either Scotland or rUK were
referendum for that reason. preserved. For example, other nationals
resident in Scotland may not be able to
At a more practical level, many who move their residence or travel to rUK on
would become Scottish citizens will business or for holidays without work
already hold British (i.e. rUK) passports, permits or visas (or vice versa for non-UK
which could have up to 10 years to run nationals resident in rUK).
before expiry. It would probably be
impracticable to replace all of these with These issues may also affect EU nationals
Scottish passports before or at resident in Scotland or rUK and currently
independence, even if that was what the benefiting from citizens' rights under the
holders wanted. Will British passports EU-UK Withdrawal Agreement unless
held by Scots still be valid, whether as Scotland and rUK agree to continue to
British passports, Scottish passports, or apply the provisions of the Withdrawal
at all? Agreement on citizens' rights as if
Scotland remained part of the UK. The
The SNP said at the first referendum that risk of disruption to employees is much
it would look to agree a common travel greater if there is no common travel area
area with rUK, like that between the as all employees may have to make
Republic of Ireland and the UK and, as a irrevocable choices as to where they wish
result, that Scotland would not participate to reside or work.
in the Schengen borderless travel area if
and when an independent Scotland Companies
joined the EU (see below). All new
UK companies can currently have their
members of the EU since 1997 have
registered offices in Scotland or in
been required to commit to join the
another part of the UK. On
Schengen area, though Bulgaria, Croatia,
independence, companies registered in
Cyprus and Romania have yet, in fact, to
Scotland would become, as far as rUK is
join. Scotland's negotiating position with
concerned, foreign companies. In
the EU might also be perceived to be
principle, that would not cause a
weak, since the SNP has such a clear
problem. Scottish companies would be
desire – perhaps even need – to join the
recognised and accorded legal
EU, though Ireland retains a common
personality in rUK on the same basis as
travel area with the UK and is outside
companies incorporated under the laws
Schengen. Membership of Schengen
of Germany, Delaware or Russia. It may
would typically require checks on all
be that Scottish companies that carry on
individuals entering Scotland from rUK
business within rUK would be required to
and passport stamps, as well as
register a branch in the same way that
restrictions on the ability of rUK citizens to
foreign companies must do so, but that is
work in Scotland and even to go to
not in itself a heavy burden.
Scotland (the normal Schengen maximum
is 90 out of any 180 days).
A number of companies registered in
Scotland indicated during the first
A common travel area between rUK and
referendum that a vote for independence
Scotland would significantly mitigate the
would lead them to move to rUK their
8 CLIFFORD CHANCE
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESS
places of registration or the companies that fixed or immovable assets (such as
through which they carry on some or all Government or military buildings) would
of their business. This may have been for automatically become assets of the
regulatory reasons, reasons of public state in which they were located. Other,
confidence, the uncertainty over moveable assets (such as military
Scotland's currency (see below) or just equipment) would become subject to
convenience but, in the financial sector in apportionment through negotiations –
particular, regulatory considerations are with the only applicable legal principle
likely to have been, and to continue to be, being that the apportionment should be
a key driver. Some companies registered equitable. Liabilities would be similarly
in England and Wales or Northern Ireland subject to apportionment
may also wish to move their seat of through negotiations."
registration to Scotland, whether for tax
or other reasons. The prevalent view was that
apportionment should be on the basis of
The most straightforward way to move population, rather than, say, spending or
seat would be for the UK to pass tax revenue. The purpose of
legislation immediately following an independence is not to perpetuate or
independence vote allowing a move on, undo fiscal transfers that have already
say, a company's shareholders passing a taken place between Scotland and rUK,
resolution to that effect. If there is no but to separate the two populations for
legislation to ease the process, the future.
companies would need to consider how
best to migrate, a matter that would need The Scottish Government identified
to be the subject of contingency planning. certain of the United Kingdom's assets
What is required will vary from company that it would like, such as military
to company and with how each business hardware and foreign embassies. The
wants to be structured in the future. assets that must be split between
Scotland and rUK encompass property of
What is done and how it is done will every kind, including gold and foreign
determine the effect of any migration on currency reserves, intellectual property,
contracts (e.g. whether it gives a right of staff, software and computer systems,
termination) and on counterparties. A works of art, shareholdings, contracts,
legislative change of registered office from and the seabed.
Scotland to England may affect, for
example, the insolvency regime that This last aspect (the seabed) could prove
governs a company, but in practice the particularly contentious because of the oil
immediate consequences for and gas below it. There are, however,
counterparties of a move are likely to be reasonably well-established, if not easy to
minimal, except in regulated industries apply, principles of public international
where the place of incorporation may law upon which the seabed is divided
affect whether an entity holds Scottish or between neighbouring states. If Scotland
rUK licences and its ability to operate in and rUK cannot reach agreement, it may
the other jurisdiction. be that this issue could be resolved
through arbitration or other legal means.
The UK's assets Indeed, many issues that might arise
between Scotland and rUK could
and liabilities ultimately be referred to a third party for
Scottish independence would require the resolution. For example, the Anglo-Irish
assets and liabilities of the United Treaty of 1921 establishing the Irish Free
Kingdom to be split between rUK and State provided for the Irish Free State to
Scotland. The House of Lords Select assume part of the United Kingdom's
Committee on the Constitution explained, public debt, the amount to be determined
prior to the first referendum, that: by arbitration in default of agreement.
"The key principle governing the The major, but not the only, liability of the
apportionment of assets and liabilities is United Kingdom that must be divided
that they should be shared equitably between Scotland and rUK is the UK's
between the continuator and the national debt (other debt includes, for
successor states. It is a legal principle
CLIFFORD CHANCE 9
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESS
example, long-term pension liabilities and The UK Government and most
the UK's obligations to the EU under the commentators dismissed this argument,
Withdrawal Agreement). The UK and all major UK national political parties
Government said at the time of the first stated that they would not support rUK's
referendum that there would be no formal entering into a currency union with
transfer to Scotland of any part of the Scotland. A currency is a medium of
national debt; rUK would remain liable but exchange, a store of value and a unit of
Scotland would indemnify rUK in respect account, not an asset that appears on a
of a certain proportion of the debt. This balance sheet and that can be divided.
would involve discussion of what amount The Bank of England is one of the
Scotland should take, what maturities institutions of the UK's Government
should be allocated to Scotland, what which, by opting out of the UK, Scotland
interest rates, what currencies and so on. would have foresworn. For example,
rUK may even consider seeking security Scotland might be entitled to some of the
for Scotland's obligations (e.g. gold UK's foreign embassies, but it would not
reserves allocated to Scotland could be entitled to use in perpetuity the
continue to be held by, and pledged to, services of the Foreign, Commonwealth
the Bank of England, though these would and Development Office.
only secure a fraction of Scotland's likely
debt to rUK). As a result, the SNP's position appears to
have changed. It set up a Sustainable
How assets and liabilities are divided Growth Commission to look at economic
affects business in different ways. The issues arising on independence, including
UK's commitment to continue as the currency, which reported in May 2018.
obligor on existing UK Government debt The SGC took a very cautious approach
may reassure creditors, although as regards currency, determined not to
independence could have some impact alarm investors, holders of accounts at
on the credit standing of the rUK Scottish banks or others.
Government and of rUK businesses
whose credit is linked to their sovereign's The SGC recommended that Scotland
credit. The split of assets and, more should continue unilaterally to use sterling
importantly, liabilities and the impact on for "a possibly extended transition period"
the credit standing of the Scottish after independence, only moving to a
Government will be more critical for Scottish currency when six tests were
current and future creditors of the met The SGC considered that it was
Scottish Government – and at least some unlikely that its tests would be met until
Scottish businesses – in international towards the end of the first decade
capital markets. following an independence vote. The
chair of the SGC was quoted as saying
Currency that rushing into a new currency would
be "short-term risky, politically difficult,
"... by laying sole claim as the continuing
and it would make the cost of
state to the public asset of the Bank of
Government borrowing much more
England, it would see [rUK] take full
expensive… The monetary policy
responsibility for the £1.6 trillion national
situation that we have should continue
debt." So said Alex Salmond, Scotland's
until such a time that it's no longer in
First Minister at the time of the 2014
our interests."
referendum, linking Scotland's willingness
to accept a share of the UK's debt to
The SGC's six tests included: fiscal
rUK's agreeing to enter into a formal
sustainability, including credible budget
currency union with Scotland (the debt is
deficit and debt levels; a credible Scottish
now well over £2 trillion). His argument
central bank and stability in the price of
that rUK was obliged to enter into a
Governmental debt issuances; sufficient
currency union with Scotland rested on
foreign exchange and financial reserves to
the assertion that the Bank of England,
allow currency management; and
as the issuer of sterling, is an asset of the
Scotland's economic cycle moving away
United Kingdom, not of rUK alone. As
from rUK's such that an independent
such, Scotland would be entitled to the
monetary policy was feasible
continued use of this asset,
and desirable.
namely sterling.
10 CLIFFORD CHANCE
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESSThe SGC recommended that any new take steps to ensure that sterling assets
currency be pegged at 1:1 with sterling in remained as such and could not be
the short and possibly medium term, that converted into the Scottish currency (e.g.
the currency used in private contracts by mandatory conversion of all bank
should not be changed retrospectively by balances) or trapped in Scotland (e.g. by
Scottish legislation (i.e. contracts, such as capital controls). Deposits at banks in
loans and bank deposits, in sterling Scotland might, for example, be moved
should continue in sterling), and that to banks or branches in rUK or
individuals and companies should be free elsewhere, potentially creating an
to continue to use sterling in Scotland if immediate liquidity crisis at banks in
they so wished. The SGC concluded that Scotland, as well as a shortage of foreign
it would be impractical to impose capital currency reserves. The formal currency
controls to protect a Scottish currency. union between the Czech Republic and
Slovakia in 1993 survived only five weeks, Parties could face a risk of
The SGC's approach would leave as monies flowed from Slovakia to the
Scotland without any influence over rUK's
their assets and liabilities
Czech Republic, which was regarded as
(and therefore Scotland's) monetary the economically stronger of the two. no longer matching in
policy, without its own central bank and currency terms.
without any access for its financial In any event, the introduction of a new
institutions to the Bank of England as currency is likely to give rise to issues for
lender of last resort for a significant period some businesses or individuals, whether
of time. A foreign currency is used or not Scotland mandates the
domestically in this way by, for example, redenomination into the new Scottish
Montenegro, which uses the euro, and currency of obligations under some or all
Panama, which uses the US dollar. Even existing contracts. Some will end up
some larger countries, such as Ecuador, facing mismatches between the currency
use the US dollar, issuing only local coins. of assets and liabilities or future income
and outgoings that will be difficult or
The SGC's proposal was rejected at the expensive (even, perhaps, impossible) to
SNP's conference in April 2019. The hedge. These impacts are likely to be
conference passed a resolution to most significant for businesses that are
"authorise the preparation of a Scottish highly leveraged (such as banks), operate
currency as soon as practicable after a in both Scotland and rUK or have assets
vote for independence." This, or liabilities that are governed by both
presumably, contemplates replacing Scottish and English or other laws. These
sterling with a new currency at, or shortly issues are reduced by a long transition
after, independence. period with a 1:1 peg as shorter term
contracts can be run-off and parties can
The success, or otherwise, of the SNP's readjust their positions but are increased
conference policy would depend upon if there is a more rapid transition.
the perception of a new Scottish
currency. If it was perceived that the new Currency is one of the hardest issues an
currency would be strong (at least, independent Scotland would face. It is
stronger than sterling), there would be understandable – indeed, it is to be
fewer problems. Parties would, in general, expected – that a new country would
be content to move sterling assets, want its own monetary policy, rather than
including bank accounts, into the Scottish be beholden to the state it has rejected.
currency, and creditors would be This requires a currency, but launching a
positively keen for contracts to be new currency into the global financial
redenominated. But even in this situation, markets involves considerable risks, as
parties could face a risk that does not the SGC recognised, not least in the light
now exist if their assets and liabilities no of the current deficit in Scotland's public
longer matched in currency terms. finances and the (post COVID-19
pandemic) debt it would inherit from
If, however, the perception was that a the UK.
Scottish currency would devalue against
sterling, individuals and enterprises may
CLIFFORD CHANCE 11
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESSContracts contract has a Scottish element, can
Scotland take the benefit of the contract
Scotland already has its own laws and
or any part of it should it wish to do so?
legal system. Contracts expressed to be
Will renegotiation be required? Can rUK,
governed by Scottish law would continue
Scotland, or both, make use of software
to be governed by Scottish law, and
licences for systems each wishes to
contracts expressed to be governed by
continue to use?
English law would continue to be
governed by English law, even if the
Other cross-border elements may also
counterparty is Scottish. Subject to any
create issues. For example, if the contract
legislation that Scotland may introduce in
provides for the delivery of goods or
respect of contracts governed by Scottish
provision of services between Scotland
law and that rUK may introduce in
and rUK, the contract may not anticipate
respect of English law contracts, pre-
the impact of new tariff or non-tariff
independence contracts would remain as
barriers to cross-border trade that come
binding after independence as they
into effect after independence.
were before.
The uncertainty over Scotland's currency Tax
may, however, introduce performance or Independence raises difficult questions of
execution risks for contractual tax policy, as well as numerous practical
counterparties. For example, if issues for individuals and companies with
performance of a contract must take interests and business cross-border.
place in Scotland, a Scottish overriding
mandatory law could affect, say, the The Scottish Government proposed at
ability to pay in sterling. Similarly, Scottish the time of the first referendum to cut
laws could determine the exchange rate corporation tax to 3% below rUK's rate
at which a debt due in sterling was and to introduce a series of tax
converted for enforcement or other incentives. This raises the spectre of tax
purposes in Scotland. If sterling is the competition between the two countries.
currency of account in a contract with The long-term consequences are
strong links to Scotland, a new Scottish unpredictable, but in the short term some
currency could lead to an argument that may wish to take advantage of lower
this new currency, rather than sterling, rates and migrate entities to Scotland
becomes the unit of account. prior to independence. Others will be
concerned about uncertainty (whether
To consider these risks, parties would tax, legal or economic) and therefore
need to look at the terms of their existing migrate in the other direction. In both
contracts (e.g. Where is payment due? Is cases there would likely be questions as
there a definition of sterling?). They may to whether the migration is tax-effective;
also need to consider the drafting of however, in principle, migration before
future contracts to ensure, for example, independence would be considerably
that sterling is adequately defined and more straightforward than migration has
that payments are to be made outside historically been (e.g. to Ireland), with no
Scotland. Similarly, although the mere exit taxes and few other frictional costs.
fact of the creation of an independent This prospect may alarm HM Treasury,
Scotland is unlikely, of itself, to trigger a colour other aspects of negotiations,
contractual default (absent any specifically and perhaps prompt new
drafted provision), parties may want to anti-avoidance rules.
review covenants, undertakings and
events of default in commercial contracts, A tax treaty between rUK and Scotland
bonds, loans and swaps. would need to be in effect by
independence to prevent double taxation
In addition, anyone with a contract with of Scottish and rUK businesses and to
the UK Government or a public sector prevent payments to/from Scotland
institution needs to consider how the becoming subject to withholding tax.
contract will be affected by Scottish However, the terms of that treaty might
independence. If the contract relates only be contentious (particularly given
to services in England, the contract will Scotland's intention to capture business
probably continue as before. But if the from rUK).
12 CLIFFORD CHANCE
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESSrUK would, as the continuator state, would be consistent with the UK's
retain the benefit of the UK's historic WTO obligations. Similarly, that kind of
network of around 120 tax treaties. special treatment for residents of one
Scotland would not – and on the face of other country (and nowhere else) would
it that would present considerable seem to be incompatible with a future
difficulties to Scottish companies Scottish membership of the EU. These
investing and operating in other countries two issues would likely prevent
and to companies from other countries straightforward solutions to this or the
investing/operating in Scotland. other complexities we identify.
Negotiating a new treaty network would
• Groups containing rUK and Scottish
take time, likely many years. There is,
entities would be broken for tax
however, precedent for Scotland simply
purposes. This could have a number of
to agree bilaterally with other countries
complex effects. Going forward, cross-
that they each consider themselves
border groups would in practice lose
subject to the relevant UK treaty –
the ability to move assets tax-free and
certainly not an instant process, but
to surrender losses within the group.
considerably faster than a full
treaty negotiation. • Scottish companies would only be
required to operate PAYE for employees
In terms of domestic legislation, it seems in rUK if they have a taxable "presence"
likely that Scotland would choose to in rUK. If they didn't, they would not
inherit UK tax legislation as at have to operate PAYE, and rUK
independence, save for the specific areas employees would have to pay any
which have been the subject of political income tax due to HMRC through self-
focus (such as tax rates, incentives and assessment. Similarly, companies
anti-avoidance rules). Any more based outside Scotland may no longer
fundamental change would seem have to operate PAYE for employees
impractical (as well as highly risky). Over in Scotland.
time, the two systems could be expected
• A large number of rUK residents could
to diverge, as happened with, for
claim domicile in Scotland, and, as
example, Ireland and Hong Kong.
"non-doms", be taxable on foreign
income/gains only when remitted to
On a practical level, the most likely overall
rUK. Presumably, rUK rules around
outcome is that rUK would treat Scottish
domicile would need to be changed to
individuals and companies in the same
avoid a material loss to the Exchequer
way as it treats any other country's
(and Scotland would face similar
individuals and companies (and vice
concerns). Again, creating special rules
versa). Given the history of being the
targeting one country could raise
same country, that would have a host of
complex questions of compatibility with
complex consequences, including:
WTO trade rules and (for Scotland)
EU law.
• rUK companies' Scottish operations
would be treated as permanent • Similarly, the ease by which many
establishments, separately taxable in individuals could shift their residence
Scotland, and vice versa. from rUK to Scotland, or vice versa,
would likely concern both
• Arrangements and transactions
tax authorities.
between rUK and Scottish entities/
permanent establishments would then • Various tax rules impose exit charges
be subject to transfer pricing, creating a on companies that cease to be resident
significant compliance burden (and the in the UK. So, for example, an rUK
potential for arguments between the company holding real estate or another
rUK and Scottish authorities as to who capital asset would, on ceasing to be
has the taxing right). It has been an rUK resident, be subject to rUK CGT
suggested that this could be avoided on its unrealised capital gain – and
by creating a formulary apportionment similar rules would apply to intangible
system between Scotland and rUK. property, loan relationships and
However, as that would give Scotland derivatives. Any unrealised losses
more favourable treatment than any would also crystallise for tax purposes,
other country, it is unclear whether it but in many cases an emigrating
CLIFFORD CHANCE 13
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESScompany would have no use for the effective due to a quirk in the
losses. Under current UK tax legislation, legislation. This quirk depends on the
these exit charges may be triggered vehicles being located in the United
upon independence – and unless new Kingdom. This may not survive
reliefs and/or exemptions were created, independence, leading to a potential
this could amount to a considerable need to restructure. In the majority of
windfall for the UK Treasury and a cases, it may be possible to get
considerable tax burden on affected comfortable that structures can be
companies. It therefore seems likely continued, but detailed consideration
that some form of deferral arrangement will be needed.
would have to be put in place (and that
• Regarding regulation, the UK pensions
should be possible within the WTO and
market is governed by a number of key
EU frameworks).
institutions, such as the Pensions
Regulator and the Pension Protection
Pensions Fund. Decisions will need to be taken
Pension schemes would not be immune as to whether these bodies' functions
from the effects of Scottish will be split between new regulators
independence, although one of the key and, if so, on what basis.
concerns raised by potential
• The PPF's position in particular is likely
independence following the 2014 vote
to be a point for negotiation. The PPF
has receded due to Brexit.
acts as a statutory "lifeboat", providing
a proportion of benefits of schemes
That concern was that a scheme with a
whose employers have become
mix of Scottish and rUK employees could
insolvent, and it is already responsible
be classed as a "cross-border scheme"
for a number of schemes previously
following independence and would have
operated north of the border. For
to meet various conditions, including
example, a Scottish PPF, split on the
seeking authorisation from the Pensions
basis of population, would be
Regulator and, crucially, complying with
significantly smaller than the existing
much more onerous funding requirements
UK-wide body – there are bound to be
than usually apply. In the absence of
questions as to how sustainable it
exemptions or transitional provisions
would be and whether levies would
being agreed, this would likely have
rise. Many employers have put in place
resulted in schemes taking steps to
arrangements designed to reduce the
segregate Scottish pension liabilities from
levy they pay to the PPF – would these
rUK pension liabilities in order to avoid
continue to be recognised?
having to meet these onerous obligations.
However, following Brexit, the legislation • Pension schemes are also particularly
governing cross-border schemes ceased exposed to currency issues if
to apply, with no detailed regime independence results in mismatches
replacing it; the immediate authorisation between the currency of the scheme's
and funding requirements are no longer a assets and liabilities. Pensioners may
concern (although such concern could be also be adversely affected where the
revived if Scotland joins the EU and is currency in which pensions are paid
required to apply the same rules to depreciates against the currency of
existing schemes). their country of residence. There have
been proposals in Scotland for the
In terms of other pensions-related Scottish Government to protect
implications: Scottish pensioners under UK schemes
against this risk.
• Over recent years, a number of
employers have given their pension Other implications will come to light,
schemes assets instead of cash as part particularly if different income tax levels
of their funding. In many cases, these are introduced, as was suggested at the
contributions have been structured time of the first referendum (given that
using a Scottish Limited Partnership in contributions to registered pension
order to overcome some technical schemes are normally tax deductible). It
concerns under employer-related remains to be seen how all these issues
investment legislation. SLPs have been will be resolved.
14 CLIFFORD CHANCE
SCOTLAND THE BRAVE? AN OVERVIEW OF THE IMPACT OF
SCOTTISH INDEPENDENCE ON BUSINESSThe European Union each EU member state of the accession
treaty with Scotland through each
The EU will still be a day one issue on
member state's national legal and political
Scottish independence but for different
procedures – but it would only take one
reasons than it would have been following
member state to refuse to do so or to
the first referendum, when independence
encounter problems in the process in
would have left rUK within the EU and
order to delay Scotland's accession. The
Scotland outside it.
quickest time in which the process of
The day one issue will be whether an joining the EU has been completed is two
independent Scotland will be allowed by years and nine months, for Finland.
the EU to assume some or all of the UK's
Whatever the merits of Scotland's
rights and obligations under the Trade
membership of the EU, its application
and Cooperation Agreement between the
risks becoming a pawn in unrelated
UK and the EU. If not, then Scotland will
national and international politics. The
be faced with its own "hard Brexit",
example of Spain, with its Catalonian
trading with the EU on WTO terms rather
separatist movement, was much cited at
than those in the TCA. The EU may also
the time of the first referendum
wish to bind Scotland to at least some of
(subsequently, in 2017, there was an
the obligations of the UK under the
independence referendum that was
EU-UK Withdrawal Agreement, such as
unlawful under Spanish law and that led
the UK's obligations with respect to EU
to the gaoling of some pro-independence
citizens' rights and the separation
politicians), but other member states may
provisions dealing with protections for EU
also have an interest in discouraging any
intellectual property and other rights. But
popular disposition towards division. For
it may not be possible to continue the
example, Cyprus, Greece, Romania and
same treatment for goods traded
Slovakia, along with Spain, have not
between Northern Ireland and Scotland
recognised the independence of Kosovo,
as apply today under the Northern Ireland
each for its own historical and cultural
Protocol as this may be inconsistent with
reasons. States with separatist
Scotland's new status. These issues, like
movements might not oppose Scottish
Scotland's membership of the EU, could
accession outright if done legally and with
become a political pawn.
the agreement of the UK, but they will
In the longer term, securing Scotland's appreciate that the position of Scotland
membership of the EU will not necessarily could set a precedent for subsequent
be a quick process. Until it is formally secessions. They will have every incentive
independent, it is hard to see how to make the accession process visibly
Scotland could apply for, negotiate, sign arduous and costly. Scotland is setting a
or ratify an accession treaty. Similarly, all course across unknown, and quite
the EU's members would have had to possibly treacherous, terrain.
recognise Scotland's independence
before a treaty could be signed. Whether Duties and VAT
Scotland becomes a member by As an independent country, Scotland
amendment to the EU's existing treaties would be free to reach such agreement
under article 48 of the Treaty on European as it saw fit with rUK (within the bounds
Union (the Scottish Government's of international rules) on import duties
preferred route during the first and VAT, and to legislate as it wished.
referendum) or by the more probable The goal of potential membership of the
route of a separate treaty of accession EU could, however, restrict Scotland's
under article 49, Scotland must negotiate freedom of action in this area.
and reach agreement with all the current
members of the EU, which agreement The EU would be unlikely to allow
must then be brought into legal force. Scotland to inherit the opt-outs and
These two stages could each easily take special provisions enjoyed by the UK
at least 18 months. when it was a member of the EU, such
as the opt-outs from the requirement to
Some, perhaps most, EU member states join the euro and from the Schengen
may be prepared to rush the first stage borderless travel area. In particular, the
and the second stage – the ratification by border between rUK and a Scotland
CLIFFORD CHANCE 15
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