What will the impact of Brexit on small business be?

Preparing your business for Brexit now rather than later could mean the difference between success or problems in the months and years ahead. In this article, we look at what the impact of Brexit on small business might be and some areas any company might want to focus on to kick-start their Brexit preparedness processes.

Brexit and small businesses

To shine a light on the impact of Brexit on small business, Sage has conducted a survey in partnership with YouGov looking into Brexit preparedness within businesses. The figures speak for themselves:

• While 66% of UK companies say Brexit will impact them, only 21% of small businesses have started adapting their business processes to prepare.
• 40% of UK businesses aren’t sure when they’ll begin preparing and 34% aren’t sure how long they will need to prepare for Brexit.
• 45% of UK businesses say Brexit is impacting their confidence—and is therefore impacting their business.

The survey results are all the more startling considering how close we are to the Brexit date of 29 March 2019.

Brexit small business opportunities

The Sage Business Experts panel are small business owners. When we surveyed them prior to the Brexit vote, 41% told us they would vote to stay, 24% said they would vote to leave, while 35% were undecided.

There was a near 50/50 split between those who thought that staying in gave their business no benefits, and those who thought leaving would negatively impact their ability to trade with EU businesses.

When we spoke to them again after the Brexit referendum in 2016, we saw mixed emotions tainted with pragmatism – happiness that the falling sterling exchange rate made their international sales more appealing, caution about expansion plans, optimism for what advantages might lie in wait, but ultimately a wait-and-see outlook.

Speaking to Sage Advice again today, there’s one overwhelming message shared by most of the experts, and astutely summarised by business strategist Jon Kandiah: “[My company’s] greatest concern is the level of uncertainty surrounding the change and given our experience of negotiations an expectation that the biggest issues will not be resolved until the last possible moment.

“As a result, there is little information that we can take action on at present and it is unlikely we will get better information for some time.”

Software and marketing consultant Helen Lindop adds: “Nobody seems to know, not even the government. And because of this, I can’t prepare or even ask any useful questions that might move me forward.”

Other concerns raised by the experts relate to the core business concerns of trade and employment. Professional Certified Coach Amanda Alexander explains: “From a business perspective, there is a real danger that the UK will become economically isolated.

“For my own business, I am concerned that I will no longer be able to send products to the EU without my customers paying import duty.”

Conrad Ford, the CEO of Funding Options, adds: “In recent years, the UK has excelled in high-growth sectors such as information technology. Much of this success has been due to the UK becoming a beacon for talented and ambitious individuals, from Europe and beyond. After Brexit, it’s vital that the UK remains open and welcoming.”

But when it comes to advice for the future there’s a continuing optimistic caution, as social media consultant Paul Ince summarises neatly: “Although it is genuinely hard to prepare for an unknown outcome of the Brexit negotiations, companies that remain innovative and agile will be able to adapt to whatever the final situation.

“There are always opportunities to be had, and Brexit will present them to those that look for them.”

Business consultant Janice B. Gordon underscores this: “There is no point being concerned about Brexit. You must prepare as best you can and then get on with delivering an excellent service to your customers.

“The best thing about Brexit is that we are talking about, understanding and seeing the relevance in international trade as a model for growth.”

Brexit information for small businesses

The UK and EU governments have published guidance on how Brexit will affect UK businesses. Here’s the official sources of information that we have right now.

“No deal” technical notes

The UK government has published technical notes on a “no deal” Brexit, with details of how it will affect everything from trade to tax. It has followed this with its Partnership Pack: Preparing for a ‘No Deal’ EU Exit white paper, intended to explain things in simpler terms.

Both the UK government and the EU have emphasised that they do not want a no-deal Brexit, and that the prospect is also unlikely.

However, both have also advised businesses to ramp up contingency planning for a “no deal” scenario, noting that planning for a worst-case scenario is different from expecting such an outcome. Sage Advice has already examined the most pertinent technical notes for small businesses to help with this planning.

EU Brexit preparedness notices

The European Commission has published guidance, primarily in the form of Notices to Stakeholders, which largely adopt a similar “no deal” outlook in order to prepare businesses. In the language of EU legislation, the UK would become a “third country” in the event of a no-deal Brexit. This means it will fall back to World Trade Organisation rules that govern import/export with the EU.

Chequers Agreement

The UK government has also published The future relationship between the United Kingdom and the European Union, known informally as the Chequers Agreement or the Brexit blueprint. It envisions a new free trade arrangement, a facilitated customs agreement that treats the EU and UK as a “combined customs territory”, and various “common rulebooks” for everything from state aid to agriculture.

This agreement is currently on the negotiating table and there’s a likelihood that the final agreement will resemble it in some way.

Impact of Brexit on small business

Prior to Brexit, the UK is a member of the EU’s single market and customs union. This means all 28 member states in Europe function as a single trading area with no tariffs or border checks, and with a combined VAT system. This covers not just goods but also services and allows the free movement of EU citizens, who businesses can employ without significant additional red tape.

Following Brexit, the UK will function under an as-yet unspecified different system based either on a no-deal outcome, or a form of the Chequers Agreement. From the perspective of a small business, the following issues are perhaps most important.

Import and export for small business after Brexit

When it comes to trade of products or services with EU countries, businesses worry about increased costs following Brexit, as well as increasing red tape. Under the Chequers Agreement there could be a new kind of “frictionless” free trade area, devoid of customs declarations and regulatory checks at borders.

Products would only need one set of approvals for either market. However, in a no-deal Brexit, Britain would switch to being a third country in the eyes of the EU. Customs duties would need to be paid, declarations made, and businesses that import or export would need to undertake tasks such as registering for an Economic Operator Registration and Identification (EORI) number.

The government advises businesses to look into the possibility of employing an export broker and using software to manage their imports and exports.

VAT for small businesses after Brexit

Although domestic VAT within the UK is not changing, businesses worry about how it will be paid on imports and exports. Small businesses in particular could be hit by cash flow problems if VAT has to be paid immediately, as well as any increases in admin demands.

All the Chequers Agreement says about VAT is there will be “common cross-border processes and procedures” to ensure new declarations and border checks are not required.

In the event of a no-deal Brexit, postponed VAT accounting will apply to UK imports and exports, meaning UK VAT-registered businesses will be able to account for VAT in their VAT return, rather than paying it as goods arrive or depart the UK border.

Businesses exporting will need to be aware of the VAT requirements of the EU country they’re selling into, including registration and reporting.

For businesses supplying VAT-registered services, the “place of supply” rules will remain the same. Those using the VAT MOSS system will need again to register for VAT in each EU member state or apply to register under the non-Union MOSS scheme.

Employment rules for small businesses after Brexit

Regardless of whether the Chequers Agreement or a no-deal Brexit takes effect, the free movement of EU citizens will end. This will directly impact UK businesses employing EU citizens within the UK.

The current proposals from the government protect the right to work for any EU citizen already in the UK by providing them with “settled status” (also known as Indefinite Leave to Remain, or ILR), if they’ve been here for five years or more, or “pre-settled” status (also known as temporary residence) if they’ve been here for between six months and five years.

They will need to apply for whichever applies to their situation, and notably the business can’t do this on their behalf.

Both these two statuses apply even if the individual is married to a UK citizen. Settled or pre-settled EU citizens will pay tax and National Insurance just like any other employee.

Post-Brexit, recruiting EU citizens who don’t already live in the UK is likely to be difficult, with strict requirements based on their skills and salary, both of which are intended to protect the UK’s existing workforce.

Product labelling and certification for small businesses after Brexit

The European Union (Withdrawal) Act (known previously and informally as the Great Repeal Bill) aims to incorporate EU laws into UK law, and this means that regardless of the Brexit outcome, the likes of existing food product composition standards will still apply. However, labels and logos may change slightly.

The Chequers Agreement common rulebook approach would also mean harmonisation necessary for the free movement of goods, and requests that the UK is present on EU boards that produce regulations.

There will obviously be minor changes post-Brexit – products manufactured in the UK should no longer be labelled as being produced in the EU, for example, and a UK address will have to be listed rather than an address within the EU.

Personal data (GDPR) after Brexit for smaller businesses

With their limited resources, such as fewer staff and smaller budgets, small businesses were among the hardest hit by the requirement to comply with the General Data Protection Regulation (GDPR), which was introduced across Europe and set new stringent standards for how businesses process the personal data of EU citizens.

The good news is that, following Brexit, little if any further work is likely to be required when it comes to data protection. The UK government has adopted the GDPR into national law as part of the Data Protection Act 2018, so once the UK leaves the EU, the same protections and requirements will apply.

The Chequers Agreement states that, post-Brexit, it would like the UK’s Information Commissioner’s Office (ICO) – which handles data protection enforcement in the UK – to work with its EU counterparts.

The requirements for organisations that share data across the EU border are uncertain and the current advice is to use the “model clauses” published by the ICO to regulate the use of EU personal data with the UK. These are standard contractual clauses that the European Commission adopted under the GDPR.

Three steps for Brexit readiness

Compared to larger businesses, small businesses are better off at times of upheaval such as Brexit, in theory at least. They can be more adaptable and responsive. A retailer can quickly switch to different types of stock more amenable to the trading conditions, for example, while a service-based business is likely to have close relationships with its clients, so can immediately cater for their changing needs.

There are often fewer staff members to support within the business, and fewer overheads of other kinds too, making for a business that’s as nimble as it needs to be.

However, smaller businesses also tend to hold smaller contingency funds (if they even hold any), and might find it harder to gain access to funding for a cash flow emergency, compared to a larger, more established business.

While managing cash flow is always a need at the heart of small businesses, ensuring cash keeps flowing in 2019 and beyond could require even more attention and a great deal of foresight. If a no-deal Brexit comes about then the likes of customs requirements and additional red tape might stretch the cash flow challenge to its limit.

Three steps are required right now to start any preparations for Brexit:

1. Start the conversation

Speak to staff in your business to ask what they think should be done to prepare their roles or departments for Brexit. Speak to your suppliers or those behind services you use to ask what work they’re doing to prepare for Brexit, and how what they provide to you might change.

You might even speak to your competitors, or trade organisations, to see if they have any advice they might want to share. Don’t think it’s too early to be asking these questions. Negotiations might still be continuing but you have just a few months before Brexit arrives.

2. Begin reviewing processes

When speaking to staff you might ask them to document any of their everyday business procedures, if you don’t already have this information.

Flowcharts or step-by-step lists are a simple way to do this, and will illustrate any areas that you might have to review or change in order to meet the new Brexit compliance requirements.

3. Embrace the uncertainty

Adventurer and TV presenter Bear Grylls famously says the key to survival is to “improvise, adapt and overcome.”

Although he is typically discussing this while wrestling a snake in a jungle, as Brexit approaches there’s little doubt it’s the best advice for businesses too. Sometimes you may need to make fast decisions that will have long-term consequences but, ultimately, there’s no way to prepare other than to ensure you’re informed. You must remain adaptable and responsive, and be always looking for opportunities.

In short, small businesses always need to stay ahead of the game utilising their inherent marketplace advantages – and Brexit is no exception.