The Bulletin’s guide to Brexit for small businesses

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Steven-AvatarThis week, Cheryl Dyer-Ballard and Steven Parham look at the United Kingdom’s decision to leave the European Union: Brexit.  

Here, they examine the history of the Eurozone and some of the events leading up to the referendum in 2016.  They look at what happened to create the conditions for the decision to be made, what it means for Britain now, and in the future, the pound in your pocket,and how it will affect businesses both small and large.
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What does Brexit mean?

Before we start this article we need to look at exactly what Brexit means. When we speak about Brexit, we are talking about the decision made by the United Kingdom to separate themselves from the European Union (EU) – a portmanteau of the words ‘British’ and ‘exit‘.   The 23rd June 2016 was a historic day for the people of the United Kingdom, as this was the day when the vote was cast to leave the EU in the form of the Referendum. On this day, nearly 30 million people took part in this referendum or public vote.  The vote fell in favour of leaving the Eurozone by 52%.  The majority of the votes to leave were from both England and Wales; neither Scotland or Northern Ireland were particularly keen to leave the European Union.  It was a bitter pill to swallow for some people.

Needless to say, the vote was a catalyst for immediate as well as long term political change.  David Cameron, then Prime Minister, who had instigated the referendum, resigned from office.

A power struggle amongst the Vote Leave camp then ensued, with Boris Johnson putting his name forward for the top job, only to withdraw his name from the race once he was stabbed in the back politically by his Brexit ally Michael Gove, who then also put his name in the ring for leader of the Conservative party.

Nigel Farage, the leader of the UK Independence Party, declared the leave result a victory for Britain, and then promptly resigned from UKIP, giving the excuse that he wanted his life back.  Within the space of just over a month, the United Kingdom had a new Prime Minister, Theresa May.

Ironically, May was a remain campaigner, who now had the task of leading the country out of Europe, and instigating Article 50: The Treaty of Lisbon. The article lays down the ground rules for a member state leaving the European Union.  Until now, Greenland, which was a part of the Danish Realm, and Algeria, upon its separation from France have been the only countries to have left the EU.  No full member state has left until now.

What was behind Brexit?

Before we look at what was behind Brexit, let’s take a look at the European Union, and what it actually is.  It could be argued that it was started by France and Germany forming an economic alliance back in 1950 by French Foreign minister Robert Schuman. The Schuman Declaration as it became known, was an aim to make any future war between France and Germany impossible, as it would be economically disastrous for both countries.

The following year, the Treaty of Paris established the European Coal and Steel Community (ECSC), and joining France and Germany were the Benelux states and Italy.  Finally, the Treaty of Rome in 1957 was signed by those countries, and the ECSC became the European Economic Community (EEC), or Common Market as it was colloquially known.

Back in August 1961, Britain first applied to join the then European Economic Community. Prime Minister Harold Macmillan went before parliament to the Commons stating the Conservatives intention to lead the country into Europe, and was almost instantly attacked en masse by the opposition and some of his own party. Cries of “shame” were heard amid the cheers when Supermac announced the formal application to join the EEC.

In January 1963, Charles De Gaulle, the President of France, which was already a member state made the conditions for the United Kingdom’s entry into the EEC impossible.  De Gaulle mounted objections on the grounds that although the UK’s membership might enlarge the EEC, it also was first and foremost an Atlantic Power, heavily allied with the United States. In that instance, he argued Britain would put America before Europe. So he used his veto to stop the UK application.

A second attempt to apply for membership of the EEC in 1973, along with Denmark and Ireland was successful, but then delayed as Norway rejected its application as a result of a referendum on Norwegian membership. Because of that delay, Britain also held a referendum on whether it should join the EEC in 1975 – the result then was two to one in favour of Britain joining the European Economic Community.

Even so, in the mid 1970’s, conditions in Britain were economically harsh; the unions had a stranglehold on the country – some of the lowlights were the Three Day Week, an emergency measure introduced by Edward Heath’s Conservative government to conserve power, as the National Union of Miners went on strike. The measures were in place to counter the threat of economic instability and inflation.

The end result was that Heath called a snap general election, which resulted in a hung parliament and Harold Wilson coming into power for the next two years. It was Wilson’s coalition government that held the 1975 referendum, and much to his relief, the vote went in his favour.  Economic unrest in the United Kingdom was widespread, with strikes not just from the miners, but also hospital staff, binmen…the list went on, and so did the economic unrest.  Eventually in 1978, the Chancellor of the Exchequer Dennis Healey had to go cap in hand to the International Monetary Fund for a loan to prop up the country; deeply humiliating for a former imperial power such as Britain.

When Margaret Thatcher came to power in 1979, she was gunning for the unions and was determined to bring their influence to an end.  The 1980s were a period of economic twists and turns, which led finally to the stock market crash in 1987.  Britain’s role in the Common Market increased substantially, and so did the subsidies to it, and the rules governing it.  In 1990, just over a month before Thatcher resigned from office after 13 tumultuous years, the UK joined the European Exchange Rate Mechanism (ERM).   Its purpose was to create a Single European Currency by linking the currencies of all member states.  The Euro as a form of currency in its own right was then born.

However, in September 1992, economic circumstances dictated that the UK had to suspend its membership of the ERM, pushing it almost to the point of collapse on a day that became known as Black Wednesday. Over the years, more member states have joined and it has grown immensely.  With its headquarters, the European Parliament based in Brussels and occasionally Strasbourg, it has grown over the years, not just in terms of setting up economic policies, but also taking certain legal powers over from its member states, making decisions on trade, transportation and the environment.

To date, 28 European countries make up the European Union, the purpose of which is to serve as an economic and political alliance. As a result of this political union, 19 countries now used the Euro as their currency, and citizens from member countries can travel across other member states’ borders and settle in those neighbouring countries without a passport.

Being part of the EU still allows countries to function largely as a single entity.  The main purpose of its formation was to allow for people, goods, and money to move freely.  This went from being known as the ‘Common Market’ to the ‘Single Market’.

The argument for Brexit

The UK Independence Party (UKIP) were the main advocates behind the leave campaign. The then Prime Minister David Cameron did not support the desire to leave the EU. The reasons behind many people wanting the UK to leave the EU was that they felt the UK was becoming increasingly restricted in terms of trading and in making its own legislation.

The argument centred on the opportunity for the UK to reclaim its borders and business rights. UKIP also pressed home the notion that the membership fees that were being paid to the European Union were not in the United Kingdom’s interest.  It was suggested that the money spent by the UK on running costs to the EU – which average out at £250 million per week – could be better used to benefit people of the UK.  Even with a rebate from the EU coffers, the UK’s net contribution per annum is approximately £8.6 billion.

In fact there are many reasons why Britain would better better off outside the EU.  It would have the freedom to make stronger trade deals with other nations outside of the EU, such as Australia and India.  Resources that are currently given over to the Eurozone would be better spent on the UK, such as the National Health Service, schools, housing and our beleaguered agricultural industry.

Over the years, the European Court of Justice has been in place to make sure the laws of its member states are in line with each other in Europe.  The figures in this instance are confusing, as there are innumerable pieces of legislation, decisions and directives that come directly from Brussels that affect us.  The UK still makes its own laws, but because of the European Court, some of these  have been influenced.  Some believe that UK laws influenced by the European Union are anywhere from 15% to 75%.  The picture is somewhat confusing, even to politicians who have all quoted vastly different figures.  The consensus is that all this excess legislation is costing the UK lots more money over the long term.  Legislation from how bent your average banana in the shop can be, to the official size of the house brick – Brussels by and large has a say in the matter.

And that annoys a lot of people in the UK, as they also see the European Parliament in a very bad light due to a number of highly publicised expenditure issues, such as the frequent move once a month from Brussels to Strasbourg of the European Parliament at a cost to the taxpayer of £130 million per year.  Obviously there are other excesses in the system that have come to light which have also infuriated the average British voter.

Leaving the Eurozone would mean that British industry would be free of EU regulations and its trading quirks.  It also means that the British taxpayer would no longer be subsidising welfare payments to non domeciles in the UK.  Also, some British customs and traditions, even units of measurement have been affected by EU legislation.

The argument against Brexit

David Cameron and the Conservatives were advocates for staying in the EU. As a result of the referendum David Cameron made a public statement saying that he was standing down as PM.  He was of the belief that the country needed a leader who would stand by the majority of voters. He stated that a new Prime Minister would be in place by the end of September 2016.  Theresa May was in charge by mid July after a swift leadership contest, having virtually demolished the competition.

Business benefits were the basis of the argument for remaining in the EU. The single market system established by the EU parliament is a benefit to UK businesses. In terms of our borders, the claim by the remainers has always been that having an open border policy actually helps develop an eager workforce and supports public service projects.

Remaining in the EU also offers the UK economic and cultural strength as well as an element of security. There was a concern that UK could face a potential backlash from other countries who had remained as part of the EU.  Also, immigration is a necessity in any country or industrialised nation.  Migrant workers not only come here for the work and the pay, they come here for the other things that Britain has to offer, amongst which are the standard of living, acceptance, and tolerance.  The majority of immigrants that come to the UK bring a dynamic work ethic with them, and have actually enhanced the British Economy.  When balanced out with emigration, the number of people actually leaving the UK was approximately half the number coming into the UK (immigration in 2015 was 630,000 entering the country, with 297,000 leaving).

Even though we moan about the EU having control of our laws, we are still members of the EU – therefore we have also a say in how those laws are made.  Britain could go the same way as Norway, which has access to the Single Market, but is not bound by EU laws and regulations.  Currently, given the posturing between Theresa May and Jean Claude Juncker, the current president of the European Union, it’s looking as if the divorce may not be amicable, and the end result unfavourable for all parties.

What does Brexit mean for the future of the UK?

Before Brexit could be formally confirmed, there were still many barriers that were in front of the UK. The vote to leave Brexit was not legally binding until certain criteria were met.  There was also opposition from various parties and individuals that believed the referendum was not legally binding. Once those barriers had been removed, Brexit became a reality when Theresa May invoked Article 50 of the Lisbon Treaty in April. The UK are still governed by the laws of the EU until the official exit is complete. Being the first country to leave the EU, the process for exit is not clear, nor is there a time scale for the exit to be complete. At the point when the UK invoked Article 50, we now have two years to negotiate our departure with the other member states.  It could even take longer than two years.

Also, because of Brexit, the United Kingdom itself is now threatening to split asunder. Nicola Sturgeon, the First Minister of Scotland, wants to run another referendum in Scotland  for the vote to become independent of the United Kingdom in order to remain in Europe.  The majority of voters in Northern Ireland didn’t vote for Brexit either. An unforeseen consequence (or foreseen depending upon which side of the fence you are on) of voting to leave the EU could result in the dissolution of the United Kingdom as it exists now, as well as the end of the European Union.  The future is definitely in a state of flux as to what may happen in the next five to ten years, in the time leading up to and beyond the UK’s exit of the Eurozone.

How does it affect the economy and you?

The last time there was such a massive split between economies was during the Second World War.  There is no specific model for the removal of the UK from the EU. Whatever happens now that Article 50 has been invoked, one thing is for certain: it will cause a massive change in relations between the UK and the rest of the EU.

Research evidence revealed by the Federation of Small Businesses (FSB) shows that a trading deal with Europe is one of the most important outcomes of Brexit for small businesses. 92% of small businesses export from the UK to the EU, with 85% in terms of imported trade. When exporting from the UK, the EU is the first foreign market that many small businesses go to. Of the small businesses who trade abroad, 58% of them have said it is easier to trade with the EU, compared to non-EU countries. Only a small percentage (6%) say that it is more difficult to trade with the EU countries.

One of the main things small businesses are concerned about, are the trading tariffs in that would be put in place once the UK leaves the EU. If a tariff of between 2-4% is applied, then 34% of exporting companies have said they may not continue trading with the EU.  Over the last few years this percentage has been the EU’s average range. 76% of businesses who export abroad are expecting the tariffs to play a key role in any future exports. This would be due to the increased administration costs that could be applied to small businesses.

From the businesses that trade exclusively with the EU, 21% of them are small businesses. 39% of all businesses that were surveyed have said that they would stop trading with the trading bloc if the tariff was higher than 0%.

There are a number of small businesses that export globally, and even they are considering changes. 20% of these small businesses are considering moving their supply to the EU. A minority of only 9% are considering moving to the UK. It is not all negative news for businesses out there, as there are opportunities to expand into other markets. 72% of exporting small businesses and 53% of importing businesses trade both with and outside of the Single Market.

There are four emerging markets – China, India, the United Arab Emirates and South Africa, and almost one in every five exporter’s trade with at least one of these.  There is also one other trading bloc and frontier that many overlook in the Brexit argument, and that the is internet – the new frontier is free of trading blocs, and it is an easy matter to trade on the web, in simple terms at least with other world countries.  And with the advent of cryptocurrencies such as Bitcoin, the rules of trading and perhaps trade blocs themselves may soon go out of the window entirely.

Australia and Canada are chomping at the bit to trade with the UK in a post Brexit world, as are the United Arab Emirates.  China is very open about trading with British companies, and actively pursues trade with the UK.

Chairman of the Federation of Small Businesses (FSB) Mike Cherry has said: “The reality is that the EU single market is still a crucial market for smaller firms and cannot be undervalued. Compared to larger companies, small businesses typically work to tighter margins with limited resources, meaning changes to the trading landscape will hit them disproportionately hard. We call on the government to ensure that a sensible phased implementation arrangement is put in place to avoid a cliff edge, once we have left the EU.”

Small businesses and Brexit

A vast number of statistics have been released over the course of the past year that show how SME’s have been dealing with the current uncertainty following the referendum result. As of yet, there are no real clear decisive effects on small businesses following the initial vote. Since the outcome of the Brexit referendum, the Pound has plummeted, then rapidly recovered almost immediately.  There has been persistent uncertainty as to exactly what Brexit will mean for small businesses in the long term.  However, to date, Brexit has not had as major an effect as expected.

Opus Energy have issued a Brighter Business report.  The results of this show that regardless of the economic uncertainty, a large number of SMEs are not yet affected by the referendum result. Of the 500 SMEs surveyed in July 2016, 29% of them felt more secure about their business than prior to the referendum.

Bizdaq performed a similar questionnaire in August 2016.  The results of the questionnaire were somewhat different to that of the one carried out by Opus. Only 20% believed that the future was positive. The outcome of the analysis from both surveys show that small businesses still have an element of doubt surrounding Brexit and its aftermath.

As the exact level of effect on small businesses is unpredictable at present, they must ensure that they invest tactically in order to continue moving in the right direction. There are signs that growth in the future will be noteworthy for investors. Mark Sismey-Durrant of the Hampshire Trust Bank commented, “The National Association of Commercial Finance Brokers has seen business mortgage enquiries increase since the referendum.”

This is further explained by Rupert Haines, the Vice President of Finance at Oracle. “Uncertainty doesn’t stop market disruption; if anything, it opens up new opportunities for strategic movers. Some of today’s most successful companies launched in the wake of the 2008 financial crisis, jumping on changes in consumer habits and implementing and adapting processes as they grew.”

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Export and import

The negotiating process for a new trade relationship with the EU will take place over a two year period, now that Article 50 has been triggered. The negotiations will principally be centred around import and export, research, immigration policies and actions concerning the use of UK workers in the EU, and similarly EU workers and companies in the UK.

Jacob Thundil, founder of the Organic Coconut Product Company, has seen a change in attitude to export, but has not noticed any reduction.  “Our exports have grown more than 40% since Brexit due to Sterling weakening, However, some new buyers are anxious about committing to us due to the long-term uncertainty that customs tariffs and complicated paperwork brings.”

Leaving the EU has brought back some of the Dunkirk spirirt to the nation – initially, we were in a state of shock after the vote, with opinion nationally and bitterly divided.  As Europe becomes more bellicose about our place in the world following our exit. and Theresa May promising to be a ‘Bloody Difficult Woman’ when dealing with Juncker, that ‘Keep Calm and Carry On’ mentality is back in force.

Almost one year on since the referendum, and business and the economy is actually picking up.  And the housing markets, a key performance indicator of how the economy is doing, is stable, with new builds popping up everywhere.

New starts

One thing that the referendum has led to, is more businesses going it alone, statistics suggest. Data analysis following the referendum by LinkedIn has shown an increase in microbusinesses by 5%. Creditsafe compiled their own research in September 2016, and this showed that more businesses had been set up in the 100 days following the referendum, compared to the same time scale in 2015.

Joshua Graff, UK Country Manager and EMEA Vice President at LinkedIn has suggested that there is a new strain of small businesses emerging, launched by people who have worked for large companies, and that have lost their jobs due to the uncertainty surrounding Brexit.  “A change in focus for bigger businesses has given people an opportunity to strike out on their own. The UK’s thriving entrepreneurial culture shows no signs of slowing down.”

At Starjammer, our own experiences as a company seems to concur with this – we have seen a near 40% increase in small businesses coming to us for help in the initial stages of starting up.  From the initial few days to the traders who have been in business for at least three months, there seems to be an almost Churchillian spirit developing among small business owners and start-ups, an attitude we are only too willing to encourage.

Perhaps this country needed to be reminded of the fact that it can stand on its own two feet on the world stage, that it can and always has been a world leader in trade and export, in employing the right people for the right job.

Yes, there will be times over the next couple of years when we’ll all experience a wobble of confidence or two.  But we will recover from these, learn and increase in strength and confidence as we retake our rightful place on the marketing floors of the world, both independent of Europe, and almost certainly alongside it.  For the truth is, Europe still needs the UK onside as an ally and as a friend, as much as we need it for the same reasons.

Brexit must happen; the people and the consensus have decreed and asked for it.  But it needn’t be as hard as you might expect.  In fact, it might be the remaking of us as a business nation.  And if that is the case, there is a lot to look forward to.

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