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Small change?

15 July 2016

An outline is emerging of the possible challenges and opportunities faced by small businesses ahead of the UK’s departure from the EU.

Little more than a week had passed since confirmation of the referendum result when George Osborne announced his intention to cut Corporation Tax from the current level of 20% to just 15% – having already dropped it from 28% during his six years in office.

Osborne’s successor has since refused to commit to any further cuts to Corporation Tax. But Philip Hammond may be looking for other ways to provide a policy tailwind for business and investment in the UK. Despite improved access to cheap credit, small business confidence has fallen to its lowest level in four years, according to the Federation of Small Businesses’ (FSB) latest quarterly report. Just 12.2% of small firms plan capital investment in the next 12 months – against 31.9% a year ago.1

Some changes may come quickly, but the shape of the biggest change for UK business – departure from the EU – will only begin to become clear in the coming months. Above all, business owners need to think ahead, in order to be able to respond nimbly when the time comes.

There are several issues worth monitoring for developments.

1. Corporation Tax

Philip Hammond left the fate of proposed corporation tax cuts up in the air. He could yet choose to employ them at a later stage in order to encourage investment.

2. Single market access

For businesses that buy or sell goods in the EU, this is probably the crux issue. Hammond has already said the UK will leave the single market before negotiating fresh access to it. When access ceases, the cheaper pound will help to offset new tariffs – helpful for British exporters, but not for those importing EU goods to the UK.

3. Skilled workers and training

The EU insists that single market access requires the free movement of labour, but Theresa May has called for more control over UK border policy. If free movement of labour is reduced, companies that rely on skilled EU labour (whether in the form of employees or contractors) might need to turn to domestic or non-EU alternatives – in some technical employment areas, supply is limited. Any new government training schemes will take time to replicate current skilled worker numbers. Meanwhile, EU workers may need incentives not to quit, especially after sterling’s significant fall against the euro.

4. Deregulation

Several prominent pro-Leave business figures argue that the EU imposes too many rules on UK business. The significant exception is financial services – the UK has one of the world’s strictest financial regulators. But the government may cut ‘red tape’ in other areas – areas cited by Leave campaigners include worker rights and environmental protections.

5. Beyond Europe

The UK has not negotiated its own trade deals for decades, and is looking to hire foreign negotiators as it seeks fresh deals abroad. There is potential for significant deals with, for example, China, India, Australia, New Zealand, and the US. This could open up markets that businesses had not previously considered viable as retail focuses – or as places to source their products. Perhaps the greatest threat to such deals is delay; technically, the UK is not meant to begin negotiating them until it has agreed its exit arrangements with the EU.

6. Funding challenges

In mid-June it was announced that Funding Circle, a business financing company, would lend £100 million to small businesses in the UK through the European Investment Bank.2 Funding Circle’s co-founder now believes that plan is off the table, so it will be up to others – the government, the British Business Bank et al – to decide whether to take up the slack. Meanwhile, some companies may turn to cost-cutting or mergers.3

A recent survey by the Business Growth Fund found that nine in ten business leaders expect the referendum result to lead to a short-term dip in economic growth, while 54% said that continued access to the EU single market must be a priority for the UK in negotiations.4

Nevertheless, 74% of the 450 people surveyed said that the UK remains an excellent country in which to do business. That confidence will be important in the months ahead; so, too, will be the ability to adapt.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

4Growth Climate Index, Business Growth Fund, July 2016

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