The “nation of shopkeepers” is about to choose whether or not to stay in the European Union. Which outcome would make life easier for UK SMEs? Eleanor Wragg reports.
As the United Kingdom (UK) prepares to go to the polls in June in an in/out referendum on European Union (EU) membership, the country’s SME sector – which accounts for over 99% of all private sector businesses, 60% of all private sector jobs and 47% of all private sector turnover – is struggling to work out which potential outcome would serve it best.
The main issue is a lack of clarity over what a so-called Brexit would actually look like. Would it jettison the island nation to pariah status in Europe or open the doors to a brave new world of free trade and light-touch regulation? Taking in these two extreme-case scenarios, think tank Open Europe says UK GDP could either fall by 2.2% or grow by 1.6% by 2030 in the event of a UK exit from the EU, or somewhere in between – a huge margin either way and not precise enough to base a business decision on.
While the British government is in favour of remaining in the bloc, along with an apparent majority of the country’s large corporates and City of London lawyers, opinion in the small and medium business sector isn’t as clear-cut. A recent poll by the Federation of Small Businesses showed 47% of owners said they would vote to stay, while 40% would vote to leave, but that only three-quarters of respondents actually had a “firm view” regarding the UK’s membership in the EU.
“SME owners’ opinion has been divided on whether the EU is beneficial or not for the UK and their businesses,” says Mike Cherry, policy director at FSB, in a statement.
No trade please, we’re British
Unlike Germany’s booming Mittelstand, which accounts for 68% of its exports, British SMEs are markedly more reluctant to trading internationally, and make up just 33% of UK exports.
“The vast majority of SMEs do business within the UK,” says Rory Broomfield, director of The Freedom Association pressure group and its Better Off Out campaign. “As a result, in the event of a Brexit, the vast majority of businesses and SMEs in the UK will not be affected directly with any potential trade barriers because the UK will still be intact.”
However, those which do carry out trade activity do so overwhelmingly with the EU, and see remaining within the bloc as vital to their future, as in the case of Adnams, an independent brewer based in East Anglia. Andy Wood, its chief executive, says: “As we look to expand our business and increase our exports abroad, remaining in the EU brings us the certainty we need. Selling our British beer to Europe easily through the EU single market, and our largest export market of Sweden, means we can continue to grow our 420-strong workforce back home.”
EU estimates show that when a large company spends €1 per employee in connection with regulations, a small business has to spend €10 on average, and it is precisely this disproportionate regulatory burden that upsets SMEs, particularly non-exporters, who challenge that they have all the rules and none of the benefits of EU membership.
In March, more than 200 bosses of small firms signed an open letter urging Britain to leave the European Union, citing “the EU’s constant diet of unnecessary regulations which add to our cost base, reduce our bottom line, and raise prices for our customers for no return”. These firms are no outlier: a poll carried out by YouGov of over 1,000 SMEs shows that only 14% believe the EU market makes things easier for them.
“A Brexit would give the ability for the UK government to unwind a lot of EU legislation that hurts small and medium-sized enterprises but actually benefits large corporates,” says Broomfield. He believes this would enable SMEs to compete more successfully with larger companies at home as well as against their counterparts at the international level.
However, if the UK is to continue to trade with the EU, it would probably need to implement the union’s regulations anyway. According to a report by Capital Economics for Woodford Investment Management, estimates that axing EU regulations would save Britain a lot of money “exaggerate the true picture, as the United Kingdom would still choose to implement many of them”.
The red tape tangle
Although poorly designed EU regulation is a source of frustration for many businesses, steps are already being taken by the bloc to cut red tape for small companies. As part of the Small Business Act for Europe (SBA) – the EU’s flagship policy initiative to support SMEs – the British government between 2010 and 2015 introduced a “one-in, one-out” rule to reduce the flow of regulation affecting business, in which it committed to making the net cost of new measures to business zero or better over the course of the parliament. This rule was strengthened in January 2013 to the “one-in, two-out rule”, where government departments were forced to find double the savings in compensation for any costs created by new regulations being imposed.
“As for the argument that leaving the EU will get rid of bureaucracy, as far as trade is concerned we will have paperwork where we did not have paperwork before,” says Lesley Batchelor OBE, director general of the Institute of Export (IoE), a professional membership body that helps businesses with international trade.
Jan Gerhard, IHS senior analyst for Europe, says that there is a possibility that less regulation coming from the EU could trigger entrepreneurship in the UK, particularly in terms of procedures such as setting up a company. “I am quite sure that the government would be keen to give incentives to businesses [post-Brexit],” he says, but cautions that if the UK left the EU its economy would likely be weakened. “That is a risk for all SMEs because they would be exposed to the fall of sterling, probably decreasing purchasing power, and a decrease in investment. There is quite a broad risk coming out of the overall macroeconomic outlook of the UK.”
SME attitudes about EU membership vary depending on size, sector and trading activity.
British SMEs in certain sectors, such as construction, complain of low-cost competition from migrant workers from the rest of Europe. On the other hand, some SME employers rely on European workers to stay within budget. Insurance search site QuoteSearcher commissioned a YouGov survey of 683 SME decision makers, which showed that while two-thirds of all small enterprise decision makers believe their ability to hire will not be affected by an EU exit, because they do not hire staff from outside the UK, those from medium-sized firms had a different perspective, with 30% believing it would become harder to get the skills they need.
“In the event of Brexit, some SMEs might find it easier to compete on the UK national market, because in some situations they have a lot of competition from other European countries,” says Gerhard. “Having said that, if the UK goes down the route where it would have lots of free trade agreements with other international partners, the very same SMEs then run the risk of having competition across markets and being priced out in other ways.”
New markets or no markets
In 2014, the EU accounted for 45% of UK exports of goods and services, and 53% of UK imports of goods and services. According to research recently conducted by FedEx, European markets are a key destination for 96% of UK SMEs who export. Sales to and from a multitude of other trading partners, such as Turkey, Mexico, South Korea and Israel, are also governed by deals struck with the bloc. This would mean that international trade post-Brexit would depend on swift work by British negotiators with both the EU and non-EU countries if exporters are to avoid being hit
Not everyone’s worried. “It is almost inconceivable that the EU would not have a free trade deal with an independent UK after a Brexit,” says Better Off Out’s Broomfield. “The UK already implements 100% of commercial law from the EU. There are no new rules that need to be implemented, there are no new directives that need to be integrated within the UK: they are all already there.”
But public sentiment in other EU member states points to the UK receiving tough treatment in the event of an out vote. After all, it is not in the interest of Europe to set a precedent for an easy exit. In a statement, Mark Lamb, partner at accountancy firm Moore Stephens, says: “Some argue that membership of the European Economic Area would allow companies to access the key benefits of Europe without having to deal with EU bureaucracy, similar to countries such as Iceland. However, there is the loss of free trade agreements with non-EU countries which would have to be renegotiated, likely on less favourable terms as a smaller individual trading partner.”
The Leave.EU campaign says that EU membership prevents the UK from taking full advantage of a surging global economy, but the IoE’s Batchelor disagrees.
“With the greatest respect to everybody who says that we could trade with the rest of the world, we haven’t been,” she says. Even in the online space – inherently an international environment – British firms lag behind their neighbours. An Ipsos MORI survey, conducted on behalf of online payments company PayPal, asked more than 1,200 small and medium-sized businesses in major online retail markets about their international sales strategies, and found that just 56% of small British online businesses have capitalised on international sales, compared to 64% in France and 61% in Spain.
“International trade is a skill and we need to learn how to do it properly instead of looking for a quick fix,” adds Batchelor. She calls for greater support for SMEs to develop international demand and better education and training for potential exporters, rather than a departure from the EU.
Access to finance
At present, the EU offers SMEs a range of grants, loans and guarantees either directly or through programmes managed at the national level. SMEs can also benefit from a series of non-financial assistance measures in the form of programmes and business support services. And the European Investment Bank (EIB) offers tranches of SME financing. Meanwhile, the bloc is also active in funding research and development – an example of which is Horizon 2020, a seven-year research and innovation programme with almost €80bn of funding that is intended to remove barriers to innovation and help public and private sectors to work together. Then there are subsidies, such as for the farming sector. Out campaigners counter that the British government could use the cash it would save by leaving the EU to set up similar schemes, but there is no certainty that this will happen. “Some SMEs benefit from the possibility to tap into EU funds, and it remains to be seen what the UK government would do after Brexit in terms of mitigating the losses that SMEs could face due to not being able to get EU funds. The UK would really have to think about what it can afford to continue funding and what it can’t, so there is a risk,” says IHS’ Gerhard.
Worryingly, access to finance for SMEs via the banking sector might be made more difficult in the event of a Brexit if rating agencies follow through on their threats to downgrade the UK’s sovereign credit rating. Analysts say that effects of a downgrade could include a fall in bank share prices, a higher price for credit and reduced availability of external financing for the entire UK economy – which means less credit available for small businesses.
Personal and business views are hard to separate, and even more so for people running small firms. “Whether most concerned about economic growth or the amplification of a skills shortage, the noise surrounding the EU referendum is clearly creating a lot of uncertainty about the risks to small and medium businesses. In the event of leaving or staying in the EU, these companies are the heartbeat of the British economy and it is essential they have the tools to enable and support growth,” says Anne Griffiths, head of SME propositions at Zurich.
No member state has ever left the EU, and to do so means entering uncharted territory. So until June 23, British SMEs will continue to mull the merits of the potential for more flexibility in an independent UK versus the support that comes with being part of the world’s biggest combined economy.