What Small Businesses Can Expect From Brexit
The separation of the U.K. from the EU will bring many changes.
The process of the United Kingdom's exit from European Union has been already started through triggering the Article 50 of the Treaty of Lisbon. This article allows a period of two years for negotiation with the 27 European Union member states. In this period they should agree and even finalize the terms related to the separation.
It will be new territory for the EU and it is difficult to imagine the enormity of the responsibilities involved. Since all the states will get the right to veto any agreement after the conditions of U.K.'s exit are set, there will be a big bundle of tasks involved.
The process of exit started a year ago; however, thinking from the U.K.'s point of view there is still some amount of clarification required. Even though many feel that the road toward negotiation is maybe a bit long and even unknown, the imaginary climate for startups and small businesses looks very good.
Import tax changes for small businesses
Over 130,000 small businesses in the U.K. will be forced to pay VAT upfront on all goods imported from the European Union after Brexit. This is the first time that MPs have implemented such a law.
This means that there will be an extra duty tax and VAT cost, all alongside the cost of the product itself. Small-business owners who import goods form Europe may look to seek new suppliers from within the United Kingdom for frictionless trade and lower costing goods.
Industry groups suspect this would create issues for U.K. importers and retailers. For small businesses running currently, the cost of VAT is passed along the supply chain when importing from the EU, taking the pressure off them. In 2020, these costs will be handed directly to small-business owners who will have to pay immediately. This cash outflow means that profits will take longer to recoup, which is potentially dangerous for retailers with EU suppliers.
The reality is that businesses with healthy growth and steady profits will not have much issue paying the new VAT. Businesses that have less consistent profits may want to lower costs in other places to ensure there is enough liquid funds to cover new VAT costs.
Small business funding after Brexit
With financing from the EU, the European governments and from many private banks, it was possible for the European Investment Fund (EIF) to pool billions through fund investments, starting in 1994. This helped in fostering innovation and even growth of small and medium-sized business in EU. The EIF does not lend money to small businesses directly; instead it provides finance through banks.
These funds were significant for U.K.-based ventures as well. But, post exit, it is clear that source of funding for these U.K.-based ventures will be lost. The fund has committed almost £2 billion to U.K.-based firms already. This was expected to have a significant impact on the economy because funds such as Seedcamp and Hoxton have been denied funding. Without new companies, tax revenue in the U.K. will decrease causing deficits to increase in the economy. A tip for new companies looking for funding may be to crowdsource your initial investment money.
EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) are U.K.'s tax authorities and the tax reliefs for mainly individual investors will continue to support generating many startup activities. These schemes are incomparable with similar ones in other European countries. There, most of the entrepreneurs usually complain about the tax and regulatory environment, which are less favorable for small businesses.
Corporate tax changes
Experts such as Daniel Lyons, head of Deloitte's tax policy group, are of the opinion that after Brexit, issues raised related to corporation tax will be "manageable." This is greatly reassuring for small businesses.
However, corporation tax is surrounded uncertainty. The government states that after Brexit, it may go down to 17 percent, which is not easily affordable for the economy. But, there is no clarity that it will happen. This will be based on two changes: corporation tax rate and tax reliefs. It is possible to be more generous when it comes to tax reliefs after the Brexit than is possible now.
There is undoubtedly a prolonged period of uncertainty within the U.K. and European Union as Brexit deals continue, which is not good news for small businesses. Although, the impact of Brexit may be cushioned by the U.K. renegotiating replacement deals with the EU. It is too early to assess the possible tax implications that could be implemented. In summary, Brexit gives us a good opportunity to rethink what we, as a country, want from our tax system