Friday morning was a shock.
I’ve been pro-European for a long time. From a personal standpoint, Europe represents access to a huge diversity of culture right on our doorstep, but with the protections that a single regulatory body brings – cheap mobile roaming, affordable currency, free healthcare, and so on. While I might not have plans to work in Europe, having the possibility there felt good. Working on the web means you can work anywhere – the option to spend six months working in Italy (or wherever) was always appealing, and available if circumstances were right.
I’ve also always agreed with the idea of free movement of people to the country. The evidence is pretty clear that migrants – especially from Europe – contribute more to the economy than they take out; they work in our schools and hospitals, they pay taxes and buy goods and contribute to the economy and are overwhelmingly (because they’re economic migrants) young and healthy, needing much less from the NHS than people not of working age.
But that’s all academic now. The votes have been counted, and our relationship with the EU is changing. I find all these calls for a second referendum disingenuous; the remain camp mocked Farage for saying it when we thought leave would lose, and now those same people are calling for it. The votes have been counted. The people who didn’t vote, or who now regret their vote, have had their chance: their apathy or indecision was their choice and must count as such. Democracy is not about re-running votes until you get the result you want.
Regardless, this is the situation we find ourselves in. Let’s have a look at possible ways the outcome will affect a company like mine, and how we might mitigate some of those risks.
It’s difficult, if not impossible, to separate the personal from the professional when running a small business. Financially, the amount an owner needs to draw from the company makes a big difference to cashflow: break-even is – for the smallest of companies with low overheads – effectively determined by how much the owner needs to live on, so if those costs rise (as they almost certainly will) then the amount needing to be taken from the company rises. This means less available for investment; the impact on the economy of small businesses going through this is minimal, because it’s a shift in how we spend rather than how much, but in terms of small business growth it may be damaging. There’s a possibility prices will go up, but in a competitive market that seems unlikely at the moment. Instead, it’s going to be more a case of saving less, replacing equipment less, and just hanging tight for a while.
There’s also the element of worry, which shouldn’t be underestimated. It takes a psychic toll; it’s a distraction. There’s a lot of uncertainty around mortgages, rent, food prices and so on, and there’s a difficult and near toxic atmosphere in the country at the moment. There’s a risk of disruption to a lot of businesses – a need to move home offices, the possibility that we’ll need to take second jobs to make ends meet – although this is all conjecture. It could all be fine. That doesn’t stop me waking up every morning wondering if today is the day our landlord tells us that they’re moving back from Spain and want to live in their house again.
The uncertainty is the main issue at the moment. Uncertainty means businesses aren’t spending until they find out what form the new relationship with the EU takes. Whatever form – a Norway-style EFTA/EEA agreement, a default WTO agreement, something else – we’ll adapt and work within that new framework. But until we know, it’s hard to make decisions about the direction to take, so we and our customers are going to be wary of spending.
This feels more tangible in places like Cambridge. Much of the business investment in the city comes from overseas investment by large companies, whether directly (like Microsoft’s research campus) or indirectly in terms of the spinouts and supporting businesses. If the large multinationals decide to move to Europe for better access to the single market, then there are a lot of risks to those smaller, supporting businesses. Reductions in research money from Europe also have a potential impact on spinouts, although Cambridge does feel like it’s in a bit of a research funding bubble, protected by reputation. The impact here may be much smaller than we expect.
Regardless of the final impact, the short to medium term issue is uncertainty, and the lack of investment which comes with it. While large businesses can absorb a couple of years of reduced business, SMEs are often working right on the edge of liquidity. We don’t have staff we can lay off and costs to reduce if we lose some projects. Anecdotal evidence is already that orders are being cancelled and projects put on hold, so it’s a worrying time for small business.
One big reason many people have given for voting leave is “sovereignty” – making laws for UK people and businesses in the UK. This, again, brings a lot of uncertainty, as we don’t know what that regulatory environment looks like – but it’s probable that UK business will need to be aware of, and compliant with, much more regulation in order to remain competitive.
If we take the route of EEA/EFTA membership we’ll still need to comply with the current (and future) EU regulations in order to trade with the single market. We’ll need to do this without having any say in those rules, unlike the position as members of the EU where we had at least 1/28th of a say. On top of this, we’ll need our own UK regulation, which should – hopefully – match EU regulations fairly closely. If this is the case, we won’t have to “double up” on meeting obligations, but we will need to double up on checking that what we do meets those criteria.
If we take another route, then who knows? Regardless of the UK’s position, companies will need to meet EU regulations to trade there. The danger is that the official UK position is one of isolation, and that UK regulations become misaligned with EU regulation and that products or services need to be adapted for different markets. This does seem unlikely: we should theoretically just need to hit the strictest regulations and be good for all markets.
Data protection is one area of particular note to businesses like us, though. European data protection regulations are changing and coming in to force in the next couple of years, and it’s already a complex area. Basically, if UK companies want to hold or process data on EU customers, they will need to comply with these laws, almost certainly keeping the data physically within the EU. If similar data protection rules apply to UK data – i.e. that it must be held in UK data centers – we end up with a situation whereby a company operating internationally needs to filter data at source and store it in the right physical location. Factor in the US and we end up with a need for at least tripartite negotiations on data protection between the EU, UK and US in order for UK businesses to be able to comply. It’s uncertain, but it’s probably going to make an already complex area much more complex and expensive.
Online shopping and eCommerce are again uncertain. VAT is already a complex situation in the EU. It may be that this is fixed completely by Brexit, and that VAT is no longer something we need to think about when selling to the EU. This might be one real boon to the online industry if it means less paperwork for those of us trading with the EU.
In the web industry, much of what we buy comes from Europe, even if it doesn’t exist physically, or is priced in dollars. A weak pound is increasing hosting costs on services like Amazon; Google have various services based in Ireland and billed in Euros. We take where we buy themes and designs and code snippets for granted – wherever it is, we just buy it, and only really worry about it when it comes to VAT. It’s currently impossible to tell the impact Brexit will have, but in the short term it means rising costs as the exchange rate works against us.
The marketplace is obviously changing dramatically, but one point I wanted to mention is tendering. While competition law in the EU has had its controversial moments, one real benefit is that tendering for government and local government projects is much better regulated and very, very open. Over certain thresholds, opportunities must be advertised in the Official Journal of the European Union and must be open to companies across the whole EU. While that means there’s more competition, it also means that specialist UK companies have access to large contracts in 27 countries on an even playing field – where they can’t be discriminated against just for being in a different country. To a lesser extent, EU regulations mean access to tenders below these thresholds also need to be advertised within the UK and are subject to similar rules around transparency and non-discrimination. Effectively, EU regulation has meant a procurement process which evens the playing field for all suppliers, stops the favouring of incumbents (there are ways around this, of course, but they’re usually more bother than they’re worth). If we follow the Norwegian model we’ll probably not change anything; any other deal brings huge uncertainty to this process.
Another aspect of this is that EU funding does demonstrably trickle down through the economy. I’ve personally built sites for small companies who have only been able to afford a site thanks to EU funding; not only do they get a site from it, but I get work. Funding is now uncertain. Funds already set aside should still be available, but long-term prospects look bleak. Tenders currently being advertised are being paid for by EU money and will still go ahead, but will launch and then suddenly have all funding cut, making them effectively dead projects and a waste of two years of funding and work.
The result is, as I say, massive uncertainty, but some things are reasonably clear:
As the days pass it seems that the best case scenario for business in the UK is a move to the Norway-style relationship with the EU, which is absolutely not what most leave voters wanted: no reduction in migration, no reduction in regulation, no reduction in the fees we pay, but huge losses in the money we get back and control over the regulations we must comply with. The alternative, some new trade agreement with the EU, may well include some of those elements as well. The worst case scenario – and what many leave voters want – is an insular approach to the EU, which leads to an increase in red-tape as we need to comply with both UK and EU regulation (and new trade agreements with the US and other markets); a reduction in access to a huge talent pool and the costs and delays that come from visa applications; and massively decreased access to a market of 27 other countries and around 700 million consumers.