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As part of the EU, the UK currently benefits from access to the world’s largest single market, with harmonised trading rules across the European Economic Area. Following the UK referendum, the future – and any potential benefits – is uncertain. The immediate reaction has been mixed. The Bank of England has produced a report which shows the economy as having remained resilient in the past weeks, with slowdown in growth not as significant as many feared. However, the Bank is closely monitoring this and is expected to introduce additional measures to uphold this positive trend. Since the result was unexpected, many businesses, large and small, did not carry out any form of contingency planning and are only now beginning to address commercial, legal and contractual issues.

Impact on imports and exports

The weaker pound has provided some benefits for exporters, although the UK’s exporting market is much smaller than in the past. However, Britain still exports approximately 28% of production. UK international trade in 2014 saw 45% of UK exports go to the EU. On an exit from the EU, 90% of British exports to the EU could face tariffs. However, due to a weak pound, UK companies may find overseas vendors becoming relatively expensive, requiring them to review the feasibility of renewing existing contracts. Consumer confidence has also fallen sharply- an area of obvious vulnerability for small and medium sized enterprises (SMEs).

EU regulations

Some SMEs are hoping that Brexit will lead to a general reduction in so called “red tape” regulations. In addition, the EU state aid rules have restricted the way in which the enterprise investment scheme (EIS) and other venture capital reliefs can offer assistance to growing businesses. Depending on what form Brexit takes, it could mean greater flexibility for these reliefs in the future, thus increasing the funding available to SMEs.

SMEs have often been critical of the myriad of regulations and there may be some relaxation of regulatory burdens. However, this may increase in the short term since businesses may need to monitor parallel sets of regulations for the UK and EU. This potential administrative burden when operating in the EU and the UK may result in the UK adopting or retaining many of these regulations even after an exit. PwC have estimated that the economic gain of avoiding some regulations would be as low as around 0.3% of GDP in 2030.

The practical impact will depend on the result of the exit negotiations once Article 50 has been activated. Should the UK pursue a ‘soft’ Brexit similar to the Norwegian model, which may be the only way of retaining financial services passporting rights, then it could, according to some surveys,end up retaining almost 95% of the most costly regulations and 75% of EU law.

Free movement of people

The impact on the labour market is likely to be significant. Many SMEs are dependent on EU workers currently able to work in the UK due to the principle of free movement of people. This gives SMEs access to a wide pool of skilled labour, alongside language and scientific skills lacking in the UK. Many SMEs will find it difficult to plug this skills gap and may not be able to afford training and development for its UK workers. This is of particular concern in the IT sector, and the UK start-up industry.

Changes to commercial contracts

Many SMEs will need to carry out a thorough audit – costly and time consuming – of the impact Brexit will have on their commercial contracts. Commercial terms and pricing assumptions for goods or services based on tariff-free movement of goods or people to deliver services (particularly when covering several jurisdictions) will need to be reviewed in the medium term: costs may need to be allocated differently for example to reflect the increased trade barriers the UK may face. Allocation of risk for currency fluctuations and exchange rates in contracts with key customers and suppliers will need to be re-considered.More fundamentally, the changing definition of the EU itself should be noted: the UK will fall out of such definitions and its use in existing and future contracts should therefore be considered.

Angella Castille and Costanza Russo are Partners and Katherine Newman is a Trainee Solicitor at the London office of international law firm Faegre Baker Daniels 

Global Banking & Finance Review


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