Brexit and Its Impact on UK SMEs

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Since Britain’s decision to leave the EU, there have been various changes that have already taken place and had both positive and negative impacts on small to medium sized businesses that operate in the UK. These changes will be the one of the two focuses of this essay. The other focus will be on the changes that are likely to take place after the UK has left the EU in March 2019, and the consequences of these changes on UK small to medium sized businesses.

One of the first changes that impacted UK businesses was a fall in the value of the pound. After the Brexit decision, the value of the pound fell significantly. It since has been trading at approximately 15% lower compared to the dollar and 12% lower compared to the euro than was the case previous to the EU referendum (Bowler, 2017). The nature of the effect that this has on businesses depends on whether a business exports or imports a higher volume of goods/services. A fall in the UK’s exchange rate means that UK exports will appear cheaper to consumers overseas. This makes the UK more competitive and will likely mean that more companies overseas will purchase from UK companies. This has proved true for some companies. For example, Cocofina, a coconut product company, have seen a 40% growth in exports since the referendum, which has been caused by the weaker value of the pound. However, they have noticed that new customers are scared about committing to the company because of the uncertainty that customs tariffs and complicated paperwork bring (Pay, 2017).

For companies that import large quantities, the fall in the exchange rate will mean an increase in the costs of running their businesses, due to the rise in the costs of imports from overseas. Baxter Freight, a company with 50 employees, had been impacted by the fall in the value of the pound, and passed the costs onto their customers (Isaac, 2016). The same will have been the case for other UK SME’s who import goods and services. Where higher prices are passed onto the consumer, depending on the good/service in question, they may choose to shop elsewhere or postpone their purchase. SMEs are more likely to be affected by this than larger companies because of economies of scale. Larger companies may be likely to achieve a lower price on their imports than SMEs because they can buy in bulk. Where this is the case, they should be able to charge a lower price than SMEs and so customers will choose to buy from them as opposed to SMEs. However, a limited number of companies had passed the extra costs onto consumers due to the high level of competition they face (Monaghan, 2016). Whether or not SMEs decided to pass the additional costs onto consumers, they will have lost out, either due to lower profit margins or a loss of demand. This shows one of the ways in which the Brexit decision has been damaging to some SMEs.

Another impact of the weak pound to take into consideration is the growth in tourism that it caused after the referendum. Spending by tourists had significantly risen following the Brexit decision. Spending from international tax-free shopping in July 2016 rose by 7% compared to the figure in July 2015 (Rodionova, 2016). Department stores and specialist retailers had reported a successful month for sales (Allen & Monaghan, 2016). It could be the case for some companies that these benefits may outweigh or reduce the impact of the negative effects that have come from the higher costs associated with the weaker pound.

It is unclear whether the positive or negative effect of the fall in the pound has been stronger. It will be different for each SME, depending how they operate day-to-day. However, given Britain’s ongoing trade deficit, it is likely that more SMEs will have experienced a negative effect.

A big issue that SMEs face from now up until the UK leaves the EU is uncertainty. A range of problems have been caused by this e.g. SMEs deciding to postpone investment decisions, and companies fearing that they will lose demand from their customers located operating in other EU countries. Polydron, a 13-person company, were thinking about having an expansion. This was until the outcome of the EU referendum was revealed (Gordon, 2016). Mark Sumners, a UK based aircraft manufacturer, is concerned that his biggest customer may shift their supply chain back within the trading bloc after Brexit (Gordon, 2016). These are just two examples of the problems and many SMEs will have experienced similar. However, Carolyn Fairbairn, CBI’s director general believes that businesses can cope with challenge and can adapt to change (Lysakowska, 2016). Also, many groups questioned by Business West think that the future will be positive and that UK companies are able to get past any short-term problems (Gordon, 2016).

The workforce is a major part of any organization. For UK SMEs, the Brexit decision has left them uncertain of what will happen once we have left the EU. For Tony Hague, chairman of Manufacturing Assembly Network, the ease of access to a skilled workforce is a concern. He fears that the standard of education in the UK has resulted in a small amount of talent in the domestic workforce (Isaac, 2016). Costs of labor are also a concern. A halt in the freedom of movement would raise the competition between businesses for labor, resulting in a wage increase. This is bad news for many SMEs as they rely on low-cost labor (Lemos, 2016). However, the benefits of the potential employment law relaxation when we leave the EU should be weighed up against the effects of losing the overseas pool of labor. Many SMEs are hoping that an end to following EU legislation will bring more flexibility to adjust their future workforce (Isaac, 2016).

Once we have left the EU, the current funding to UK SMEs from the EU will most likely come to an end. There are many SMEs in Wales that receive funding from the EU or use the Jobs Growth Wales scheme, which has been cut due to concerns about future funding. It is unknown whether any funding will be replaced by the central or Welsh government. Because of this, SMEs are at risk of struggling to maintain operations at their current size (Isaac, 2016). The UK also runs other support schemes for SMEs e.g. Innovate UK. However, there is hope. When the UK has left the EU, we will start to save a lot of money which previously would have been spent on EU contributions. It is thought that some of these savings could be used to help fund SMEs (Lemos, 2016), but whether this will happen is unknown.

Arguably one of the biggest advantages of EU membership is the access we have to the single market. This gives businesses direct access to a customer base of around 500 million and is the world’s largest trading bloc. Leaving the EU means we may lose these benefits, which will be damaging to SMEs (Davis, 2015). However, Theresa May has revealed that the UK may form a near identical Customs Union with the EU after we have left, but this may mean that the UK may have so stick to a lot of the bloc’s rules although this may be unlikely to happen due to a Conservative think tank saying that they could stop a final deal unless we leave the Customs Union and the Single Market (Deacon, 2018). A thing to note however, is that the UK, upon leaving the single market, will be free to negotiate trade deals with the rest of the world, without being held back by rules and regulations, which could be a huge benefit to SMEs due to the increase in demand that they will gain.

Overall, up to yet, the short-term implications of the Brexit decision have been more damaging than beneficial to UK SMEs. The high level of uncertainty, combined with the fall in the value of the pound have greatly affected the operations of a lot of UK’s SMEs. It is impossible to tell whether the event of Brexit will be more of a benefit or a danger to SMEs because a full deal is yet to be negotiated. However, it is likely that businesses will be able to adapt to the situation once it arises.

Bibliography

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