Ready to leave?
Surveys have shown that many small and medium-sized companies have not prepared themselves for an EU exit, but safeguards are still possible.
Earlier this year, British companies were warned by the Financial Reporting Council, independent corporate governance regulator for the UK and Ireland, to account for the risk of an exit from the EU in their financial statements – not an easy exercise, given the many unknowns that would follow a vote to leave.
Despite that warning, many businesses remain almost entirely unprepared. On April 18 Foenix Partners, a foreign exchange firm, published the results of a survey of the heads of 103 small and medium-sized UK businesses. It found that around a third remain unprepared for a British exit from the EU.
Ninety per cent of respondents said they would vote in the referendum; more than 60% believed that an exit would be bad for Britain; and 58% believed that it would lead to a fall in the value of the pound. Yet despite widespread exposure to sterling and other risk factors, only two thirds felt that their business was exit-ready.
Much will depend on the nature of the business itself, but an exit from the EU might well create both new risks and new opportunities. Even now, there is still time for business owners to consider what an exit might mean for them.
Some changes could come hard on the heels of an exit vote, while others might only be made after protracted exit negotiations. Either way, businesses can be prepared for at least some of the most obvious challenges and opportunities that await life after the EU. In the event of a vote to leave, you may need to be able to prove your exit-readiness to shareholders – and to clients.
One immediate challenge is funding. Britain is currently eligible for around €3 billion of European Regional Development Fund allocations. Funding is given to both public and private sector projects, so long as they meet the relevant criteria. Allocations are made to the north-east of England and to north-west Scotland, but it is west Wales and Cornwall that qualify for the most extensive aid. While some businesses in these regions benefit from direct funding, others may benefit indirectly from the increased investment into their local area.
The Leave campaign has committed to match current funding levels, but inevitably there would be a period of transition and those who made such promises may not hold the levers of power.
Businesses that import and export goods to and from the UK should be aware of potential shifts in the value of the pound. In fact, sterling has been very sensitive to the polls, dropping in value whenever polls show a lead for the Leave camp. That means that your business could be affected by either result.
In the case of a vote to leave, markets are currently predicting that sterling would fall further – good news if you are an exporter, but a challenge if you import goods from abroad. In the case of a vote to remain, the pound may well return to 2015 levels, offering a potential boost to importers. In recent weeks, it has become much more expensive to insure against sterling price volatility.
The Foenix Partners report found that a significant number of UK businesses are exposed to sterling losses but have not hedged their risk. The UK government forecasts a 12% drop in the event of an exit. It is certainly worth considering how that might impact your business.
One of the most significant potential changes would be to the UK’s trade tariffs. Leaving the Common Market could lead to a new trade deal with the EU, but some tariffs are expected – the EU currently imposes a 10% tariff (plus VAT) on imports of cars from the US, for example.
Special tariff arrangements tend to be for countries aiming to join the EU, such as Turkey, rather than simply for non-members, but a departure from the EU would also free the UK to reduce tariffs on trade with other countries – although in many cases similar deals have already been struck by the EU itself. It is worth checking the details of the different producer and consumer markets you do business with – or would like to do business with. Perhaps above all, you will need to keep especially close relations with both suppliers and customers abroad.
Finally, it is important to review your contracts. Although commercial contracts are UK-based, employment regulations are governed by the EU. If you employ staff from other EU countries, it may become more expensive to employ them, and you may want to consider whether you want to hire any more non-UK EU staff before exit negotiations finish. Retention of staff might require some planning, as some could be tempted to leave.
It is, of course, impossible to prepare for every eventuality, and change will not come the day after a vote to leave, but an exit from the EU could have significant consequences for UK trade in the months and years that follow a vote to leave. Now would be a good time to consider whether you are exit-ready.
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