What Would a Brexit Mean for UK SMEs?

The upcoming referendum on whether the UK should stay in the EU or leave is a hot topic, with many people feeling strongly about the future of the UK. Aside from the political effect, how would it affect small and medium business owners in the UK? We have a look...

What is the European Union?

The EU was created at the end of World War Two to help promote economic co-operation between member countries as it was though countries which depended on trade with each other were less likely to go to war.

Made up of 28 countries, it acts as a “single market”, allowing both people and goods to move freely, as though all member states were one country. This led to the development of the Euro, the European Parliament and it is involved in setting rules across the EU in areas like the transport, consumer rights and the environment.

Why do people want to stay?

Pro-EU campaigners, including the official campaign Britain Stronger in Europe, argue that although Britain could try to negotiate favourable leaving terms, other leading EU countries like Germany and France wouldn’t allow Britain to choose what rules it wants to abide by. They also point towards Norway and Switzerland who, although they have left the EU, both now have no influence on EU rules despite having to abide by them. They both also have to pay to access the single market.

Those opposed to a Brexit believe that Britain gets many benefits from being a member state, including the ease of trading with other EU members and the advantages of a flow of young, working immigrants who help to fuel economic growth. They also believe Britain’s status in the world depends in part on its integration with the rest of Europe.

The Britain Stronger in Europe campaign also cites that completely leaving the EU would cause lengthy negotiations on the terms of leaving, and that any British exports would have tariffs paid on them, harming UK businesses.

In general The Labour Party, SNP, Plaid Cymru and the Liberal Democrats – as well as approximately 38% of Brits – are also in favour of staying in.

Why do people want to leave?

The Better off Out campaign, which has two competing parties, believes leaving the EU would give the UK freedom to make stronger trade deals with other nations, control British borders and make changes to the UK legal system, amongst other things. It’s thought that about 40% of the British public would like to see Britain’s exit – Brexit - from the EU.

Were the UK to do so they wouldn’t be the first country to leave the EU, with several European countries having negotiated terms about their departure:

• Norway – although not a member of the EU, Norway is a part of the European Economic Area, and this gives it access to most of the single market. This leave it free from EU rules on home affairs, fisheries, justice and agriculture.
• Switzerland – Switzerland is also not a part of the EU, and thus negotiates trade treaties sector-by-sector.
• Turkey – Turkey entered into a customs union with the EU which allows it access to the single market for manufactured goods, but not financial services

In addition to trade, there’s also concern over the rise in immigration. This is a result of the open borders policy, and a level of resistance to the creation of a ‘United States of Europe’ that would result in the abdication of much of Britain’s sovereign power to a higher authority.

What are the options?

If Britain does elect to leave the EU, it won’t be an overnight change. There will have to be lengthy negotiations on a new trading relationship with the rest of the organisation. This would hopefully enable British firms to sell goods and services to EU countries without encountering excessively high tariffs or other restrictions. Those campaigning for an exit claim this could be like an ‘amicable divorce’.

There are precedents for this kind of halfway house; Norway, Switzerland and Turkey all have their own workarounds. While Norway isn’t part of the EU, it is part of the European Economic Area which allows the country access to the single market but without EU rules on agriculture, fisheries and justice. Switzerland negotiates trade treaties on a sector basis, while Turkey has a customs union with the EU on manufactured goods. Alternatively, the UK could break with the EU altogether, instead using its membership of the World Trade Organisation (WTO) as a basis for trade.

Pro-EU campaigners believe that there is no chance of an ‘amicable divorce’, arguing that other EU nations would never agree to Britain picking and choosing those parts of the EU that best suit their needs. It’s argued that Norway and Switzerland actually have the worst of both worlds: agreeing to abide by EU rules without any influence over their creation, while paying to access the single market.

The pro-EU groups believe that negotiations could take years, without any guarantee of an advantageous result for Britain and that a so-called clean break could actually harm the competitiveness of British businesses as its exports would attract tariffs.

What would happen to jobs?

This is likely to be one of the most contentious areas of discussion. It’s impossible to predict the outcome with any degree of accuracy, as much would depend on whether or not large corporations make good on their threats to scale back UK operations following a split - or if new jobs would be created under a new post-exit economy.

Pro-exit campaigners believe there would actually be an employment boom as businesses – especially SMEs who don’t trade much with the EU – reap the rewards of deregulation and a reduction of red tape. They also claim that the UK labour market would adapt quickly to its changed status with the EU and would benefit in the long run.

On the other side of the coin, it’s argued that millions of jobs would be lost as global producers moved to EU countries with a lower cost base – in particular, Britain's foreign-owned car industry would be put at risk. A report by business consultancy KPMG last year said that the ‘attractiveness’ of the UK as a place for automotive businesses was ‘clearly underpinned by the UK’s influential membership of the EU’. Other sectors – including financial services – have also voiced concerns about a possible Brexit, whilst companies that rely on skilled foreign workers could also be hit.

How would this affect SMEs?

It’s difficult to say – employers who rely on foreign workers could be impacted as it may be harder to bring in European workers. Some say that UK industry and manufacturing jobs could also be heavily hit, as employers move out of the UK to cheaper countries like Romania and Bulgaria.

What would happen to trade?

Those in favour of leaving the EU say it’s simply not as important to British trade as it once was, and that the recent problems within the Eurozone are symptomatic of deeper problems; so even if it weren’t able to negotiate a trading partnership with the organisation, it wouldn’t be the end of the world – after all, plenty of other countries export to the EU without problems.

However, it’s fair to say that the EU is the UK’s main trading partner at the moment, accounting for over half its trade in goods and services. If we were to renounce membership, trade barriers would add tariffs to both imports and exports and the UK, which would affect SMEs far more than it would larger companies.

How would this affect SMEs?

SMEs who trade with Europe would be hit with tariffs on both imports and exports, making trade more expensive. This could lead to a reduction in trade in the long term. However some people, including the Graeme MacDonald, who runs JCB, argues that there would be less red tape and bureaucracy surrounding exports.

What would happen to British borders?

One of the main points of contention, the borders are one area which will have particular attention paid to it. Pro-exit campaigners are anxious about the high levels of immigration from EU partners, with annual numbers in the hundreds of thousands despite the Conservatives’ attempts to reduce them. If Britain were to pull out of the EU, migrants from other member states would encounter the same visa restrictions as those from outside Europe, which, it is posited, would create new opportunities for British workers and increase wages, as well as easing the burden on public services.

Pro-EU campaigners believe it isn’t as simple. Britain may be required to continue to allow free movement of EU migrants if they want access to the free market. It also could be argued that far from constricting the local market, EU immigration has actually been good for Britain’s economy. Many of the current growth forecasts assume high levels of net migration, with reliance on migrant labour and on the taxes paid by immigrants to help fund public services.

How would this affect SMEs?

It depends on the outcome of negotiations, but it could prove worse for SMEs who rely on European workers as visas could be required for people entering the country.

What would happen to the freedom of movement?

We often think of immigration in terms of inward movement to the UK but any Brexit would also have a big impact on Brits’ freedom to travel or move abroad. More than a million Brits live in Spain, with other EU countries home to many thousands of ex-UK residents in search of warmer climes. Were we to secede from the EU, the likelihood is that travel across the continent would be hampered by the need for visas, and businesses would need to engage in even more paperwork in order to engage in cross-border trading.

This increased difficulty in movement is something the Better off Out campaign cites as a good thing, as it would make it more difficult for EU citizens to move into the UK. It’s unlikely though that any EU citizens currently working in the UK would be removed.

How would this affect SMEs?

For SMEs who don’t hire EU nationals, not much would change. For SMEs who do hire employees from European countries, it could become much harder were the UK to leave. For anyone who travels to the EU for business reasons – be it to negotiate trade, visit different offices or for any other reason – it could slow down the process, as ease of movement could be restricted.

What would happen to the UK’s political influence?

Whatever happens with regard to Britain’s EU membership, there seems little doubt that the UK would remain a key part of NATO and the UN Security Council, with a powerful voice on the global stage. In some ways, it could be argued that Britain might benefit from stepping back as a kind of ‘transatlantic mediator’ between the US and the rest of Europe, instead developing a greater sense of self-reliance and being in a position to consider its own priorities, separate from the concerns of the rest of the continent.

No-one can really predict how the political situation might play out, though. Pro-EU supporters worry that a pared-back Britain may wield less influence, not more, stripped of its voice in Europe and possibly sidelined on some of the bigger issues like international security and trade. It’s no secret that both the US and Germany favours continued UK membership of the EU; if Britain secedes from Europe it risks become increasingly irrelevant as a political power.

How would this affect SMEs?

It’s unlikely that a reduced or heightened political influence would affect SMEs, however a reduced political influence could result in the UK having little to no say over laws or taxes which it then has to abide by, as is the case with other countries which are no longer part of the EU.

What happens next?

The outcome of the referendum is unclear, but it’s likely to be hotly contested, with campaigners from both sides arguing the benefits of staying in versus making a clean Brexit. It’s a complex picture but the stakes are high – especially for British businesses who want the best outcome for trade and the economy. Will the British public vote to more actively pursue the country’s own sovereign path or will concerns over isolating the UK from the EU’s reach be a step too far?

SMEs who don’t trade with Europe or hire European workers won’t see as much change as those who do, and the change is still yet to be realised. Pro-exit campaigners believe that leaving the EU will allow the UK to reduce red tape and make imports and exports easier, whilst those in favour of staying say the UK will become more isolated and will be worse off for leaving.

A lot depends on the outcome of the current ongoing negotiations. If the UK can negotiate favourable terms, the UK is more likely to vote to stay, however many have said that unless this is reached, a vote to leave will be their only option. One thing is for sure though – not everybody will be happy.