A majority government following the recent Conservative victory at the General Election takes us straight towards a referendum on whether or not the UK should remain in the European Union.
While there is considerable uncertainty about what the consequences of Brexit might be to the UK economically, it is clear that one thing we do seem to have become expert at in the UK is creating serious business uncertainty generally. First the Scottish referendum, then the general election and now Europe. One wonders when we will see any protracted period of stability and give businesses a chance to understand the challenges facing them and to strategise accordingly. Perhaps this is what happens when politics becomes so obviously and quickly influenced by public opinion, itself in a constant state of flux.
Such ongoing uncertainty is not helpful for our economy and our businesses, large and small, however important the issues at stake may be.
The Conservative party victory in the recent election, from a stability perspective, will ensure continuity of previous economic policies which have certainly propelled the UK economy away from the depths of recession considerably quicker than some of our European colleagues. But there remains some way to go.
So how will Brexit affect small businesses?
Some aspects are certainly easier to analyse and to proffer a view on than others; for example our laws.
These are of course crucial to business and to our society generally. Does leaving the EU mean we will suddenly no longer be subject to EU law and that we are likely to see immediate substantial change?
The answer is that it will be business as usual or rather ‘law as usual’ in the first instance.
Our laws are English laws, some of which have been adapted to comply with, or introduced to implement, European laws.
Whilst we are generally portrayed as the bad man of Europe, our Parliament implements European laws speedily and quite effectively through UK legislation. All member states have their own laws but wherever necessary these embody those laws which are imposed on all member states by European legislation. The two main legislative instruments used by Europe are Regulations and Directives.
A Regulation is a binding legislative act. It applies automatically in its entirety across the EU. It gives EU citizens direct rights, which cannot be legislated away by EU member states.
A Directive is also a legislative act that requires all EU countries to implement it. EU citizens have rights against a national government that has not implemented the relevant Directive, to the detriment of the citizen. However, it is up to the individual countries to decide how to do so. This was the case with the working time directive which gives workers minimum rest periods, the right to a minimum amount of holiday per year and the right to work no more than 48 hours per week, but it is up to each country to devise its own laws on how to implement this. In the UK it is very common for employers to ask workers (and for workers to agree) to ‘opt out’ of the maximum 48 hour week.
The source of EU law in the United Kingdom is the European Communities Act 1972, which provided for the sovereignty of EU law, and this would have to be repealed. So Brexit would likely result in the direct impact of any regulations falling away which had not already been implemented into our own legislation. Furthermore any directives not yet enshrined in UK law would also no longer need to be introduced in UK law.
Having said that, the vast body of laws we live by daily will not change because of Brexit.
That means that commercial contracts and agreements governed by English law will not suddenly change because the law has suddenly changed. To further underline this point commercial contracts don’t, as a rule, refer directly to EU laws, but to English law. Nevertheless, if the rule of EU law were abolished in the UK, it would raise the spectre of a large portion of what has come to be accepted as essential legal protection being suddenly lost, such as consumer law, which has been largely EU based in recent years.
It is of course possible and likely that Parliament has to distinguish between the less popular aspects and principles of underlying EU law, and those which have ongoing value. The extent of this will depend upon the party in government. So one might with a Conservative government foresee changes in working hours legislation and a softening of employee rights in the workplace.
Immigration and work permits
Another area where there is certain to be change is in the area of immigration and work permits. The millions of people from EU Member States living and working legally in the UK, currently because under EU legislation they are allowed to do so automatically, will presumably all have to go home unless legislation is introduced to enable some of them to stay. Businesses with many EU workers, long term or seasonal, will have to think carefully about how they will deal with this, if and when the situation arises.
Another trend is also foreseeable; government is likely to seek to repeal or introduce non-compliant legislation from an EU perspective, to give UK businesses a competitive advantage in Europe. Given the considerable economic uncertainties that Brexit would give rise to, there would be huge desire and political will to do all things possible to make the UK an attractive place to do business and to be based.
A number of significant companies are already threatening to move their factories or offices to European countries in the event of Brexit and if this happens everything will need to be done to ensure that the UK remains a compelling and attractive place to do business.
If Brexit happens, there is a real risk that Brussels will seek to make an example of the UK by making it more difficult for UK financial and manufacturing businesses to operate in Europe generally. The very countries with which David Cameron will need to agree a change in the UK’s relationship, if it is to remain a member, are the same that may stand to gain significantly in the event of Brexit. The financial community of Frankfurt is already talking about becoming No.1 in Europe in place of London, which from an EU perspective it would of course immediately become.
Consequently ongoing liberalisation by the UK government, to create a more competitive environment in UK, is an obvious way to respond to these issues. Possible legislative changes could include abolishing restrictions on working hours, relaxing competition legislation and reducing employee protection. Of course if we were outside the EU but transacting with companies in the EU, it would still be necessary to take into account in many cases the effect of EU laws on those contracts, to the extent they were capable of having an impact on the EU, such as the law on data protection.
Furthermore, one has to ask the question of what sort of relationship the UK would have with the EU going forward. The possibilities include staying within the EEA like Norway, which still has to abide by EU laws but has no influence on their creation, or becoming an EFTA state like Switzerland, which also has to modify its laws in many areas to make them more like EU law. Even EU associated states such as Turkey, which simply have a trade connection, are required to comply with parts of the ‘acquis communautaire’. So it may be very hard to escape EU law altogether.
From an economic perspective, we cannot know whether the UK economy and its people would be better off in the event of Brexit, but one thing is certain. To the extent that large international companies make good their threats to leave the UK or relocate their HQs in the event of Brexit, and to the extent that Brexit means fewer companies setting up in the UK to access the EU, there will inevitably be a knock-on effect to smaller businesses.
It is clear that the government and electorate needs to think very carefully indeed about the potential consequences of Brexit. The uncertainty the mere fact of the referendum will now create will certainly not be good for small businesses.
Michael Hatchwell is a senior corporate lawyer at law and consulting business Gordon Dadds, specialising in international work and business development.
Further reading on small businesses and politics
