The effect of a brexit on small businesses

It is extremely difficult to predict what the outcome will be if the UK votes to leave the EU on 23 June 2016. If the “no” vote wins, it will not simply be the case of walking away from Europe, instead a lengthy and complex process of negotiation will begin. Under Article 50 of the Lisbon Treaty the UK will have up to two years to negotiate an exit settlement and a number of commentators anticipate that it could take this long for any deal to be reached. Employment Lee Ashwood, an employment law solicitor at law firm Eversheds, says that European law has had quite an impact on employers in terms of paid holidays, emergency time off, hours worked and discrimination. He says: “Whether those restrictions on employers will disappear in the event of a Brexit (British exit) will depend on the UK’s ongoing relationship with the EU and the political will of the UK’s government at the time.” It is impossible to predict the immediate changes if the UK were able to free itself of EU influence on its employment laws. Lee points out that, for example, it would require a very brave government to remove the right to paid holiday or make it lawful to discriminate. But we could see changes where there is conflict. Here Lee looks to the confusion over how to calculate holiday pay when someone earns commission or works overtime – “these issues could be eradicated by the UK deciding the answer.”  And of course, there is also the issue of whether or not the UK would have to agree to continue to provide the unconditional right to work in the UK that Europeans have at the moment, but again this would be subject to the terms of the exit agreement. Lee warns on this though: “Should the terms of Brexit prevent free movement of people, it could cause firms who have previously looked to the wider EU to fill skills gaps in the UK difficulty in terms of recruitment due to requirements to overcome immigration restrictions.” Regulation Moving on, there are clearly some areas of UK domestic legislation that will worry some in relation to a Brexit. But David Roberts, a principal associate at Eversheds, says that in the short term there are unlikely to be any discernible changes to many of the areas of corporate regulation which have originated from Europe. Many EU directives will have already been implemented into domestic legislation such as those setting out requirements in respect of health and safety for example.” He also says that the legislation will not automatically fall away on Brexit, and it is questionable whether there is likely to be any appetite to repeal such law which clearly set out high standards of practice. “Further,” says David, “even where EU legislation has direct effect there is domestic legislation which creates a domestic enforcement framework.” Taxation and accounting But what of tax? Paul Gilleran, a tax accountant at Roslyns, sees Brexit as possibly changing the way UK tax is administered. Take VAT for example, it’s an EU tax and a significant part of treasury annual tax income. According to Paul there are specific conditions on the rates that member states must charge under EU law. But for Gilleran, Brexit could be good: “If the UK leaves the EU then the government could decide to abolish VAT. However, given the large revenue generated it would be replaced with a similar tax on the sale of goods and services, but at a lower rate.” Gilleran sees little change to corporation tax and income tax as they are not controlled by the EU. However, as the UK has many overseas investors it would need to remain competitive with the rate of corporation tax charged.  Trade However, trade being the bedrock of the EU, the terms of any trade agreements which the UK is able to negotiate with the remaining member states could be significant to all firms. Any agreement would apply to all EU states and it would not be a case of separate deals being struck with individual members. And if a free trade agreement is not reached then not only could tariffs be applied by the EU on imports from the UK, but the UK could apply equivalent tariffs on imports from the EU. Firms could therefore in theory see the price of stock increase. It’s entirely possible that depending on the trade agreements we enter into with other countries around the world it may then be the case that UK finds itself importing products from other nations outside of the EU on more favourable trading terms.

• But while trade agreements are one part of the trade story, so the effect of Brexit on currency is another. David Johnson, director of Halo Financial says: “no country has ever left the EU, let alone the second largest member, so the stages of exit and the depth and breadth of the negotiations to allow it are all uncertain at this stage.” Johnson notes that there is a real risk to currency. Sterling may well slip to the bottom of its long term range against the euro. That, he says would take it to somewhere between €1.15 and €1.20. Against the US dollar, sterling is caught in a range between $1.40 and $1.45.

Britain exports less to Europe than it imports. “On average,” says Johnson, “the balance of trade gain that Europe makes from its business with the UK is roughly £8 to 9bn per month. That trade and contribution advantage of £105bn a year is far too lucrative for the EU to want to lock Britain out of the club, even if the UK votes to leave the EU.”

• Ultimately, the sterling – euro rate isn't a one-way bet even if the polls move towards Brexit and there follow volatile trading conditions in the pre and post referendum periods.
• So what does this all mean? Firms could find themselves paying more for imported products making razor thin margins more problematic.

In summary It is not possible to predict the true impact of the UK leaving the European Union. But one thing is clear - a separation will not be an easy process of negotiation and will take time. And if the UK were to enter into agreement with the EU based on the model adopted by Norway, the UK may actually find itself having to agree to continue with a number of the EU’s existing regulatory requirements.