Some thoughts on the effect of Brexit on SMEs

Posted: Wednesday, 20 July 2016 @ 12:24

All SMEs want to know what effects the Brexit vote and the change in Prime Minister will have on them. However, there is so much uncertainty that it is impossible to predict. All that can be done at the moment is to look at what factors will be of particular importance to SMEs over the coming years.

Effects on the economy as a whole

I think the most important factor will be how the economy performs over the next few years and there were already some danger signs appearing before the Brexit decision.

Growth – most forecasters expect growth to drop from around 2% this year to around 0.5% in 2017. The economic models expect domestic demand to drop as people reduce spending due to worry about the uncertainty caused by Brexit. However, so far, this hasn’t materialised and, at least for now, consumer spending seems to have remained buoyant.

Inflation – this is likely to rise to just over 2% as a result of the falling pound. Given that inflation has fallen short of the government’s inflation target for some considerable time, this may be no bad thing. Although, it may lead to some reductions in spending, it also has the effects of reducing debt, and that is a considerable positive given the amount of household and government debt at the moment.

Interest rates – despite George Osborne’s prediction that interest rates would rise in the event of a Brexit vote, the opposite seems more likely. Nearly all economic commentators expected the Bank of England to reduce interest rates this month but they were kept on hold. I suspect that, given their low levels at the moment, they will not change much over the next year or so.

Direct effects on SMEs

The direct effects of Brexit on SMEs will largely depend on the outcome of negotiations with the EU.

I have for a long time argued for a reduction in red tape which largely comes from the EU and disproportionately harms SMEs. EU red tape comes in two flavours: Regulations and Directives.

Regulations are EU laws that directly affect the UK and would simply disappear when we finally leave the EU. However, I suspect that the government will want to keep many in force and will pass an Act of Parliament listing those which will automatically be incorporated into UK law.

Directives mean that the UK Parliament has passed domestic legislation to put them into effect, and these will remain on the statute books unless they are specifically repealed.

I sincerely hope that the government takes this opportunity to look properly into what Regulations hamper SMEs and are inappropriate, and makes sure they are removed. My fear is that the government will leave more regulation in place than is necessary as that would be the easiest thing to do, especially with a government that has got its work cut out in negotiating new terms of trade with the EU and the rest of the world.

Another concern to many SMEs, as well as larger businesses, is free movement of people. In the lead up to the referendum, much of this debate focussed on cheap labour, in particular coming in from Eastern Europe and undercutting domestic wages. Because of the minimum wage, I don’t believe this is the main issue as far as SMEs are concerned. We have, however, suffered from a skills gap for some time which has hampered growth. We need to attract specialist skilled labour from not only Europe but across the globe and I hope that the government will do all it can with its post-Brexit immigration policy to help plug this skills gap.

Perhaps the biggest unknown at the moment is how trade will be affected. Will we be able to trade with the EU free of tariffs and, if not, what levels will they be set at? What will happen to the pound and will it fall to a level that would largely reduce or eliminate any tariff consequences?

At the moment, SMEs that export can enjoy the benefits of the lower price of sterling. However, even if the pound stays at a new lower level, there would still be a shock if tariffs were imposed in 2 or 3 years’ time, even if they were set at a rate lower than the amount the pound fell.

Of course, a real positive about Brexit is the UK's ability to negotiate trade deals with the rest of the world. If these deals are done quickly, then the benefits of this are likely to exceed any trade restrictions we may end up with as far as the EU is concerned.

There are pros and cons as far as foreign investment opportunities are concerned. A pro is that the lower level of the pound means that UK investment opportunities look more attractive. The con, however, is that some of those thinking of investing in UK companies were doing so at least partly as a way into the EU market, and some of these investments could fall away.

The new Prime Minister, Theresa May, has outlined some new approaches to corporate governance. Much will depend on the actual detailed policies and, as someone who is passionate about corporate governance issues, I will be following the development of her ideas with much interest. However, I suspect that what she has outlined so far (worker representatives on Boards and shareholders having power over executive pay) are unlikely to affect SMEs.

What do you think? Will your business be effected by Brexit and, if so, in what way?   

Blog by Gary Cousins
Gary has been providing legal advice to shareholders, directors and business owners for over 25 years. Specialising in dispute resolution Gary is based in Birmingham with clients throughout the UK and overseas. View profile
Call Gary on +44 (0)121 778 3212 or by email
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

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