Brexit latest: What do small businesses need to know?

You’d be forgiven for allowing Brexit to have fallen off your radar during the last six months. But here at Startups.co.uk, we think it’s time the issue was placed firmly back on the agenda.

Remember those halcyons days in January when the UK’s future outside the EU was the biggest concern for small businesses?

Now, after one of the most testing periods for the country in living memory, we continue to hurtle with an unwavering inevitability towards the end of the transition period on 31 December, after which the UK will no longer be bound by EU trading rules.

With negotiations still in progress, the impact that this will have on small businesses remains to be seen. But if one thing is certain, it’s that there will be an impact…

This page will help you stay on top of all the latest Brexit news, and try to explain how the latest developments might affect small businesses. We’ll be updating it regularly.

How did we get here?

On 23 June 2016, the UK voted, by a narrow margin, to leave the European Union (EU).

This was followed by four years of tumult and turmoil, during which two prime ministers resigned, two general elections were held, three Article 50 extensions were agreed, three Brexit deals were rejected by parliament (which was then controversially prorogued), and one Boris Johnson secured a thumping majority for the Conservative party.

This victory enabled him to pass his Withdrawal Agreement Bill through parliament, setting the stage for the UK’s official departure from the EU on 31 January 2020.

But it’s not over yet. We’re currently in the midst of an 11-month transition period, during which the UK will continue to follow EU rules and regulations, and will remain in the single market.

What is being negotiated?

The UK and the EU are trying to agree on the terms of their future relationship.

The most important aspect of this, and the part that will affect the UK’s small businesses the most, is the post-Brexit trade deal.

Currently, the UK’s inclusion in the single market and the customs union gives small businesses access to tariff-free trade and minimal border checks, as well as the freedom to hire any resident of the EU or European Economic Area (EEA) without additional visas or a work permit.

The UK’s negotiators are attempting to secure a deal that allows businesses to retain as many of these advantages as possible, whilst leaving the country free to strike trade deals with other major global economies.

One of the issues proving stickiest in the trade negotiations, and one that could have a significant bearing on small businesses once we’re outside of the EU, is rules on competition and state aid for companies.

The EU state aid rules prohibit any national government from offering financial support to businesses, such as grants and subsidies, if they would distort competition and trade within the EU.

During the Covid-19 pandemic, the EU adopted temporary measures to fast-track approval of any targeted financial support introduced by governments to mitigate the impact of the coronavirus on small businesses.

Outside the EU, the state aid rules will no longer apply, but the EU is keen to make sure this doesn’t confer any unfair advantage on UK firms trading in the EU.

September 8 update

Following a brief summer recess, talks have resumed this week with a significant ramping up of rhetoric.

Lord Frost, the UK’s chief negotiator, has said there’s still time for the two sides to agree a deal, but has called for “realism” from the EU. And in an announcement on Monday 7 September, Johnson pledged to walk away from talks and leave with no deal if one can’t be agreed by 15 October, leaving just five weeks to conclude negotiations.

Whether this is just bravado and brinksmanship from the prime minister remains to be seen. But if it comes to pass, the UK’s small businesses will know for certain that they’ll have two and a half months left to prepare for leaving the EU without a deal.

Meanwhile, Wednesday 9 will see the government publish new legislation that it claims is necessary to align the Withdrawal Agreement with UK law. This includes giving the business secretary the power to decide whether or not to tell Brussels if any decision on state aid made by the government could affect Northern Ireland’s goods market, and allowing ministers to define what type of goods are at risk of distorting the EU market.

Many see this is controversial, suggesting that the UK will simply pick and choose which rules to follow if a deal can’t be agreed. Critics have also suggested the move could damage trust in the negotiations, and that it could affect our position in any future trade discussions with other countries.

Can the Brexit transition be extended?

The deadline to extend the transition period passed on 30 June. However, according to the Institute for Government, it might still be possible to agree on more preparation time in the form of a “real implementation phase” later this year.

This would give small businesses, still reeling from the effects of the pandemic, more time to prepare.

What happens on 1 January 2021?

Happy New Year! After January 1, the UK is no longer bound by the rules and regulations of the EU, and is no longer in the single market.

In a no-deal scenario, we would trade with the EU on World Trade Organisation rules. This would mean that tariffs would be applied to nearly all goods, making it more expensive for small businesses to trade in Europe; and all goods would be subjected to full border checks, which could cause bottlenecks and delays at the ports.

What should I do to prepare?

Preparation in the face of ongoing uncertainty has been one of the enduring problems faced by small businesses over the last four years. But there are things you can do…

We spoke to Caroline Plumb, founder and CEO of Fluidly.com,  a cashflow management startup, and Simon Menashy, partner at MMC Ventures, about how businesses can best prepare for January 2021.

“The best way to plan for the uncertainty of Brexit is to model different scenarios as none of us can be entirely sure what small businesses will face when trading within the EU. You’ve got to have a Plan B – and possibly a C too. Inevitably, the outcome will have an impact on every small business’ finances, one way or the other.

“To enact one of the scenarios you may need to secure more finance and will want to develop a credible plan for lenders. You need to consider one-off costs such as an outlay on stock or materials, different tax rates, and the cost of taking on new people to support exporting efforts.

“All of this will have an impact on how much revenue you generate, when you might need to re-stock, and therefore your working capital cycles. These are the decisions that keep business owners up at night. Ideally you want to be able to identify cashflow shortages at least a few months out and any potential funding gaps.

“Making decisions without adequate information or ample time could lead to being forced to take inferior funding options that have a negative and material impact on cashflow.

“Fluidly’s funding tool has a Goal Planner tool designed to support this, allowing you to tweak each element of a forecast to play out so businesses can plan with confidence.”

Menashy says: “Startups are built to adapt to uncertainty, and boy has this been tested over the past six months. So at this point in time, Brexit uncertainty is already ‘baked in’ as part of the business journey. This means that startups will largely shrug off whatever the outcome is, with tech visa programmes working well and zero tariffs on software under WTO rules. In all scenarios, the biggest impact is likely to be emotional – some talented people are less enthusiastic about coming to the UK than they once were.”

“Fintech is the great exception, with issues around regulatory alignment and data sovereignty still unclear. As one of the most important sectors in the UK startup (and overall) economy, it’s critical to get more clarity here. That may be challenging, with the EU itself still grappling with its spaghetti of equivalence regulation.”

“Outside of fintech, many of the UK’s most successful startups are software companies, or create unique IP – for example, in chips or pharmaceuticals. For most of those companies, a US trade deal would arguably be more impactful than whatever the outcome with the EU. That’s not the case for direct-to-consumer brands, where UK-EU cross-border friction is a more important issue.

“Supply chains and tax and import duties is the other area that is going to be materially impacted. Particularly when parts and stock are sourced from Europe and then sold back across the EU from the UK.”

What next?

We’ll be keeping this page updated with all the latest Brexit news as we get ever closer to the end of the transition period.

Make sure to check in regularly.