The impact of Brexit on the UK’s SME community

However, this political and economic realignment has impacted both individuals and businesses in many ways.

SMEs are the backbone of the UK economy and make up the vast majority of UK businesses – recent company population estimates released in October 2023 suggest that there are just over 5.54 million1 SMEs in the UK, making up 99% of firms.

Many of these companies trade directly with the EU or are part of the supply chain that feeds into the flow of goods to and from our main trading partner.

Put simply, Brexit made it more challenging and expensive for those firms to do business.

Arguably the greatest impact was the restrictions imposed on the freedom of movement of goods and the loss of access to the EU’s single market and customs union. Before Brexit, UK businesses were able to purchase goods from the EU without the import tariffs and extra VAT.

Introducing these tariffs reduced the competitiveness of UK SMEs in the EU market, and made it more challenging for businesses that import assets and equipment from the EU.

Businesses that operate in industries such as construction, agriculture and manufacturing purchase or lease high-value machinery or vehicles that can cost tens, if not hundreds, of thousands of pounds. Overnight, they became more expensive and more difficult to acquire.

The loss of access to the EU’s free movement of people also had an impact on UK SMEs. Many businesses rely on workers from the EU to fill skills gaps, and the end of free movement made it more difficult and expensive to recruit and retain these workers.

Another factor has been the extra bureaucracy and complication of trading with the EU due to the increased complexity of doing business with the EU companies. Many SMEs have had to invest in additional resources to manage the new requirements, while others have faced delays and disruptions to their supply chains.

However, despite these challenges, SMEs have adapted. They have coped with not only Brexit, but the permacrisis that seems to have engulfed the UK economy in recent years.

After the Global Financial Crisis, the economy has weathered austerity, a coalition government, the UK referendum, the Brexit vote and subsequent exit, the pandemic and its subsequent shockwaves, war in Europe compounding supply chain challenges, soaring energy costs and high inflation.

Of course, some businesses haven’t made it and insolvency numbers have started to increase but, on the whole, British SMEs have continued to adapt to the market and change how they work to overcome these issues.

For instance, in the asset finance industry we’re starting to see businesses keep their equipment for longer and extend their finance terms. This can be seen as a medium-term solution for many SMEs mitigating the increasing costs of equipment. However, long term maintenance costs and resale values need to be factored into the change in replacement cycle behaviour. The key here is that SMEs are adaptable and changing their business plans to overcome issues in the new working environment.

Encouragingly, despite all the challenges, positivity is growing. Inflation is receding and despite the recent news of the economy going into recession, we are seeing a period of relative stability (although an Election may bring that to a halt). Lloyds Bank’s SME Confidence Barometer showed confidence hit a two-year high this January.

This is a good initial indicator that businesses are overcoming the challenges of recent years and are more confident in the market.

Note:

1 Business population estimates for the UK and regions 2023 – Business population estimates for the UK and regions 2023: statistical release