Brexit for SMEs

Prime Minister David Cameron recently returned from renegotiation deals for Britain’s membership of the European Union. It was a policy set out in his Conservative manifesto, and something people have been waiting a long time for; as can be seen with the rise of UKIP in recent years and their success (in terms of number of votes) at the recent election. With the referendum date set for 23rd June 2016, campaigning has begun for both the “in” and “out” camps. Below we look at the impact a Brexit could have on British SMEs, who provide a combined annual turnover of £1.8 trillion to the UK.

The UK are champions of the single market, but a Brexit would limit their advocacy for further liberalisation. Many EU regulations allow for the platform that a single market requires, and by leaving Britain would lose the influence to shape EU policy and regulation in this market. Some argue that EU processes can be opaque and hard to influence, particularly when it comes to trying to shape policy for SMEs, and so losing what they see as limited influence isn’t such a bad thing.

However, the UK do still have one of the heaviest influences within the EU as they can veto in a number of policy areas. Around 74% of firms believe that the UK can continue to be influential over EU policy, and also that a Brexit will have a “negative” or “very negative” impact on SMEs (see more details here).

Some of these firms, such as EasyJet and Shell, have a signed a letter in support of the UK remaining as a member of the EU. They write that the Brexit would “deter investment and threaten jobs”. However, the opinion from SME executives remains less clear. The Forum of Private Business has refused to announce which side they support and simply urged for a reasoned and informed debate. Mike Cherry, the Policy Director at the Federation of Small Businesses, shared this approach when he said “Our research shows small business owners want both official campaigns to focus on the practical impact that remaining within or leaving the EU would have on their firms.”

As for the small business owners themselves, The Europe Business Review recently stated that 82% of SMEs regard the EU as important to their future growth. Markets in China and Brazil appear to be slowing down, seemingly making our dependency on the EU even greater. A Brexit could result in a recession, which SMEs are much more vulnerable to than larger businesses. It is likely that trade negotiations would be quickly renegotiated to stem any fallout from a Brexit, but it can’t be guaranteed how quickly this will happen and how SMEs will survive in the meantime.

As a member of the EU we are also part of the free movement policy, which allows for a large pool of highly-educated and highly-skilled potential employees to pass freely into Britain, perfect for SMEs. A Brexit could change this, halting free movement, increasing the battle between businesses for employees and an increase in wages as the cheaper influx of labour from outside of Britain is cut down. While this is good news for employees on potentially all spectrums on the wage scale, SMEs typically rely on cheaper labour.

Britain may however get the opportunity to better regulate social and employment policy, as well as trade and immigration policy if they leave the EU. Although only 12% of SMEs with 0-49 employees are actively engaged in international trade, all are affected by EU legislation, for better or for worse. Allowing British leaders to decide policy with British SMEs in mind could have many positives.

In the event of a Brexit, trade would continue with the EU and it is likely that an EU-UK Free Trade Agreement (FTA) would be reached due to the benefits of this for all EU member states. The UK would be free to negotiate this FTA on their own terms. However, it is worth remembering that the EU is the main trading partner for the UK, where we trade in excess of £400bn a year, and so we need them just as much as they need us. It will take awhile to renegotiate these deals and overseas clients might be hesitant to trade with British SMEs while uncertainty is still rife, so relying on more robust deals after a Brexit is not a secure or safe option.

We also assemble in the UK, but rarely manufacture, and so a Brexit could affect imports and exports negatively. Daniel Todaro, the Managing Director of Gekko, has said that “Ultimately, the single EU market has, and continues to be, absolutely crucial to emerging SMEs looking to expand operations overseas; and Europe is the first port of call.”

SMEs currently get support from the EU, such as with grants and loans, and this would most likely cease if a Brexit occurred. However, the UK does operate its own support organisations for SMEs such as Innovate UK, and upon leaving the EU the UK would save a sizeable amount in EU contributions, which a portion of can then be used to pump back into the funding of SMEs.

It is likely that in the short term a Brexit would cause disruption for SMEs. The uncertainty leading up to the referendum will leave the market shaky and may even devalue the Sterling, and setting up any treaties or agreements post-Brexit will take time, a commodity that SMEs don’t always have. However, in the longer term the effects would potentially become more beneficial to Britain, as British politicians gain greater sovereignty over British policy. They should still keep a good relationship with the EU, especially as we are their third highest contributor with approximately €4.7bn net contribution per annum, and so it is unlikely that a Brexit would be disastrous for Britain in the long term.

Written by Anna Lemos