Planning for Brexit: SMEs

11 January 2018 | By Pip Brooking

What the UK’s smaller businesses say they now need from Brexit negotiations

Small and medium-sized businesses account for almost half of the UK’s private sector turnover and more than 60 per cent of private sector employment. The UK’s economic growth depends on them. So how they respond to the challenges posed by Brexit is vital.

Due to their size and the resources they have to hand, many of those exposed to the risks of leaving the European Union have less capacity to respond than their larger counterparts. But they often have greater potential to adapt to the opportunities. Their ability to do so, however, depends on information and confidence.  

Confidence may have ticked up a little following the breakthrough in Brexit negotiations that has seen talks move on to what our future trading relationship could look like. But when progress has been accompanied with the caveat that “nothing is agreed until everything is agreed”, question marks remain.

And that has a knock-on effect for companies’ ability to plan.

Preparation counts

Reducing the risk and maximising opportunities of whatever deal Britain gets takes preparation, and the CBI’s Brexit survey in November revealed that fewer of its smaller members had undertaken any scenario planning than their larger counterparts (44 per cent vs 76 per cent).

This tallies with a CitySprint survey the same month that showed 64 per cent of UK SMEs had not made specific plans to Brexit-proof their business.

But Mike Plaut, chairman of CBI Wales and managing director of Northmace, argues that has more to do with the lack of detail they have to go on, than lack of awareness of what’s at stake.

The problems posed by Brexit are much more visible if you're a small company

“The problems posed by Brexit are much more visible if you’re a small company,” he says. “Because you haven’t got the economies of scale, you can’t just start splitting your operations. The decisions you have to make have a much more lasting importance.

“Opening operations elsewhere is a big step, because you’ve got to get it right,” he adds.

Plaut’s own business, Northmace, designs and manufacturers products from kettles to ironing stations for hotel rooms worldwide. And he has two main concerns around his imports into Europe, should there be a hard Brexit: regulation and customs clearance.

“We’ll have to comply with European safety regulations whatever happens – and we need to ensure that Britain doesn’t go it alone with its own,” he explains. “It’s even more important Wales and Scotland don’t have different rules from the rest of the UK. We desperately need a UK single market as well.”

He also fears the additional costs, in time, paperwork and money, of customs barriers will lose companies a lot of business – and, in the event of a hard Brexit, the options for avoiding them are limited. 

Shifting bases

Before any progress had been made on the Irish border, Northern Ireland-based shed manufacturer Yardmaster and bulk material handling system firm Telestack, for example, made it clear they were exploring options to move operations to the Republic of Ireland or mainland Europe in the event of a no deal, or a deal where tariffs would have an adverse effect.

And at cloud communications provider Redwood Technologies Group, concern about whether it would be possible in future to process data for EU citizens and businesses in the UK led the management to set up a company in the Republic of Ireland, within a couple of months of the referendum.

“How much we make of that entity depends on the outcome of negotiations,” says the company’s co-founder and deputy chief executive Martin Taylor.

The sliding scale of possibilities starts with simply running communications services on the company’s Irish cloud platforms via the new Irish company. In three or four years’ time, ongoing Irish client growth might have prompted the business to open offices in Dublin anyway. The second step would be to absorb the company’s existing EU-based subsidiaries (in the Netherlands, Italy and Germany) into the Irish structure. However, if there were to be serious problems caused by ultimate UK control, the company would consider re-headquartering its growing global business in Ireland. The owners of the company have all obtained dual Irish citizenship, just in case.

All these steps represent varying levels of loss to UK plc

“All these steps represent varying levels of loss to UK plc,” Taylor says. “We are rooting for Britain to succeed, and we are continuing to invest in Britain, but our fundamental responsibility is to ensure the survival and growth of our business,” Taylor says. “We needed a hedge against Brexit uncertainty – and the Irish structure has given us options.”

The business, which currently has a turnover of £25m, has also increased its investment outside the EU – in the US in particular, as well as in Japan, Australia and Singapore.

Despite the threat of Brexit, staff numbers increased by 39 per cent in 2017, with revenues up by 30 per cent – but Taylor warns that it might not be the UK that ultimately benefits from the business’ continued global growth if Brexit ends badly. The business recently had a harsh reminder of why it needed a contingency plan, when it lost a key piece of business with an existing French client – Brexit was explicitly cited by the client as determining factor.

Rising costs

But such a plan costs money to put in place. South Gloucestershire-based skateboard distributer Shiner has estimated that opening a warehouse in Europe would add more than £1m to its overheads each year. As a result, its managing director Charlie Allen, wants to try and stay in the UK. “But either way it means increased costs and being less competitive against other European suppliers,” he says.

Shiner is considering bonding its UK warehouse to avoid paying unnecessary duties. But when speed to market is important, Allen adds customs barriers could also bring “a catastrophic halt” to its ability to deliver. He worries that without a transition deal, ports simply won’t be able to cope. And just a 2-minute delay at customs in Dover could cause 17 miles of traffic on the M20.

Either way it means increased costs and being less competitive against other European suppliers

To fast track through customs, Allen has looked into becoming an “authorised economic operator” but believes those who hold the status will need a reserved lane on the motorway.

And when no one knows what the final deal will be, he argues a transitional arrangement is imperative to give businesses like Shiner the chance to work out what other operational changes are needed.

The risk to innovation

But it seems a transition deal is already too late for SMEs that typically use the research facilities at the Materials Processing Institute. Its chief executive Chris McDonald warns that because a lot of research funding comes from the EU – and because of the lead time around funding applications – his SMEs are already cutting their research plans under the assumption they won’t get the grants.

And alongside access to funding, innovation also relies on access to talent. According to the European Start-up Monitor in 2015, a third of UK start-ups were founded by non-UK nationals and 51 per cent of UK start-up employees come from outside the UK. The Federation of Small Business (FSB) has also found that one in five small business employers rely on skills and labour from the EU.

As a result, Mike Cherry, the FSB’s national chairman, said those affected would be “relieved” by the pledge guaranteeing the rights of EU citizens to live and work in the UK made at the end of the first phase of negotiations. But he previously warned that no deal in this respect would leave small businesses “disproportionately impacted” – and until the final deal is signed, uncertainty remains.

New skills required

Cherry also points to missing skills within companies that currently trade exclusively with the EU, which make up 22 per cent of the organisation’s exporting members.

It could lead to a chilling effect on small business appetite for exporting

“They will not have experience applying tariffs or complying with administrative burdens like rules of origin,” he explains. Without a speedy agreement on a time-limited transition and a clear view of what our trading arrangement with the EU will look like, it could lead to a “chilling effect on small business appetite for exporting that will damage the UK economy,” he warns.

It would also pose a risk to the larger businesses many of these companies support. Speaking to Business Voice about the effect of a no deal on the automotive sector, Ian Howells, vice president of Honda Motor Europe said the ability of SMEs in the supply chain to cope with these extra administrative burdens – from both a time and cost perspective – was one of the most critical issues they faced.

“They need to be as ready as we are,” he said.

Opportunity in confusion

For some businesses, of course, the chaos that could be caused by Brexit offers its own opportunities. Centurion VAT, for example, is looking at starting training courses to help firms negotiate any added complications around VAT.

“The conservation is all about customs, tariffs and trade and borders, but nobody is focusing on the fact that we have the tax system that we do because of the membership to the single market,” says director Liz Maher. “Arguably we will be outside of the control of the VAT legislation, which gives us more flexibility. But it also means we are no longer a member of any agreement where VAT issues are simplified because we’re part of that union.”

While large corporates will be deploying their tax experts to look into this – and the impact it has on supply chain contracts, already being signed to cover the next few years – smaller businesses and their accountants will likely need help, she says.

Strengthen from within

And just as the CBI is advising its members to invest in training to fill any skills gaps Brexit will leave in their workforce, Chris Stappard managing director at Tyneside recruitment firm Edward Reed is seeing plenty of anecdotal evidence that businesses are busy “putting their own house in order”.

“In the absence of detail, it’s all they can do,” he says, explaining that they are looking at both staffing and operational efficiencies. “They are looking in-house at profitability, analysing their own data and just getting a lot closer to having their finger on that pulse rather than relying on market conditions.”

And this is one of the reasons why Mark Thompson, managing partner at Ryder Architecture, is optimistic his company can weather Brexit – despite the Royal Institute of British Architects warning that the industry could see EU exports slump by nearly a third, costing as much as £73m a year in lost income.

Ryder, Thompson explains, has built in a lot of resilience since the company had to halve staff numbers amid a downturn in business in 2009/2010. That has involved broadening the sectors and geographies they work in, by setting up international offices in Hong Kong and Vancouver, as well as establishing an alliance with likeminded practices in Europe and Australia.

But George Mackintosh, chair of the CBI’s Enterprise Forum and chief executive of software business Testplant, argues that many small businesses need more support from government before they consider exporting. “Brexit is only adding to their reluctance,” he says.

And while Testplant is “knuckling down in the US” – where, as a software firm, it finds it easier to do business than in Europe – Mackintosh also highlights the opportunities at home in the UK for technology companies as all firms look to new technology to protect themselves from any economic fallout from Brexit. 

There will be other opportunities for the UK’s smaller businesses too. But providing clarity on what Brexit will look like – and having a transition deal in place – will help more businesses to make the most of them, and leave fewer businesses facing decisions that they worry they can’t afford.

Next post: Meet the vice-president

Previous post: A bet on the future

Join the discussion