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Will the Brexit Break UK Small Businesses?

Written by on June 09, 2016

On June 23, the UK will go to the polls to decide whether to stay or leave the European Union. It’s a topic that can cause some seriously heated debate, with many politicians throwing their hats in the Remain or Leave camps.

There are many reasons for either one, from national sovereignty to concerns about holidays, but how will a Brexit impact small businesses?

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It’s been estimated that 99% of UK businesses are small and medium enterprises (SMEs) that employ 15.6 million people (or 50% of private sector workers). So determining if it will be an advantage or disadvantage for small and medium businesses will have a huge impact.

Here we’ll look at some of the possible effects in the three most important categories.

Financing & Loans

Brexit will be bad for small business loans

Because loans are generally made by local bank retailers, there’s no real reason why it should decrease the amount of loans available for SMEs. European banks are also not that familiar or involved in the UK lending business anyways, so the effect on the amount of loans shouldn’t be so strong.

However, UK leaving the EU would probably cause the banks to view SMEs more skeptically, as smaller businesses are often seen as more risky than the larger ones. What this means it that there could potentially be increases in the interest rates for loans given to SMEs, making it more volatile and difficult for them to survive in an already competitive market.

There will also be some big changes immediately following a Brexit, with the Bank of England claiming that the pound will weaken, that there’ll be inflation, and that the cost of imported goods will go up.

Big businesses will be able to weather the storm. Small businesses won’t be so lucky. 

What’s important to remember is that big businesses can weather the storms, and they have systems already in place for that. Small businesses are not so lucky. They respond much more quickly and violently to even small changes in the market.

This will also probably affect the export businesses, and SMEs in the UK—and the entire EU for that matter—export to other countries in the EU. It could be that customers on the continent will look more skeptically towards the UK market, the price of importing UK goods will go up, and exports will be negatively affected.

So unfortunately this means that even a short-term 3-month adjustment period can be too much for many small businesses to bear, and they will find it hard to survive.

Brexit is bad for small business


Slightly fewer EU regulations

This one is the biggie—small businesses are tired of all the red tape they have to work through just to sell to the EU. Those supporting a Brexit believe that regulation should be done by the UK, not the EU, and that it will lead to lower cumbersome regulations overall.

They’re not exactly wrong, and not exactly right.

One recent EU regulation that’s fired up the Brexiters is the VAT MOSS (Mini One Stop Shop), which was passed in early 2015. In this complex scheme, those companies selling digital services such as apps, ebooks or online courses can’t use VAT based on their location, but instead they’ll need to use the VAT based on the buyer’s location.

There might be some small adjustments in the origin, name and extent of the regulation, but the regulations will continue to exist.

What that means is that for every country that a small business sells to, they have to have documentation and a lot of data.

Others such as the agency worker’s directive (equal treatment for agency workers) and the working time directive (minimum standards for annual leave, working time and breaks) have caused a lot of headaches.

Furthermore, with the UK now in the EU, it’s difficult to make deals that are beneficial for the UK.  The EU has many competing agendas, so any possible deals, such as with South American countries, are impossible because a country like France sees Argentinean meat and dairy as threatening to its own products.

A Brexit could help ease these regulations, depending on what kind of negotiations the UK will have with the EU.  It’s hard to make rules for a lot of countries that will be effective for each, and so regulations by the UK government will be more applicable and logical for UK businesses.

Nonetheless, it’s also very likely that VAT and other regulations will just shift from the EU to the UK, and although there will be small adjustments in the origin, name and extent of the regulation, the regulations will still continue to exist in some way.

Brexit will have no good or bad effect on regulations

Hiring Employees

Brexit will affect the number of available employees

It’s important to know that after a Brexit, there’ll be a two-year minimum processing period in which no changes will happen to current UK immigration policies.

However, after that period (or while the period is counting down), there will be a time of potentially huge changes.

At the moment, there is a free movement of workers and capital, equal treatment and social security coordination for those countries in the EU. This is what’s known as the Single Market, and this means that it’s fairly easy for Polish or Spanish migrants to work in the UK.

But what this also means is that it’s relatively harder for UK companies to hire non-EU people, such as Americans or Chinese or Peruvians.  At the moment it’s heavily favored towards EU citizens, which can be seen as a disadvantage for non-EU member citizens.

If the UK leaves the EU, with no terms agreed, there’ll be a more equal playing field for all international workers to be treated exactly the same.

However, it’s difficult to see this as being very beneficial for most small businesses that may not see much benefit from hiring an American over a German, or a Guatemalan over a Polish worker.

The big question is what kind of deal will be negotiated by the governments if the British decide to head for the exit.

If there’s no negotiation after Brexit, small businesses will find it much harder—and more expensive—to hire the right people. 

The UK could negotiate what’s known as the Norway option, where everything will largely remain the same except for possible extra document requirements like healthcare, insurance and worker registration.

Another alternative is the Swiss option which will have more limited worker movement and fewer benefits for the employees.

For these reasons, it’s tough to say whether a Brexit would be good or bad for small business in terms of immigration and employment, as there may not be many huge changes at all.

If there’s no negotiation, however, small businesses will find it much harder—and more expensive—to hire the right people.

Brexit is bad for small business

So what you’re saying is…

Overall, in each of these categories there are some positives and negatives. However, the negatives largely outweigh the positives, and although a Brexit won’t necessarily break all small businesses in the UK, it will impact them in serious ways.

What do you think? Will a Brexit be good for small businesses in the UK? Are you a Leaver or a Remainer? Let us know in the comments below!

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