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The Potential Impact of Brexit on Start-ups

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Brexit has been the most prominent issue in the UK since the referendum result was called three years ago. Yet despite the countless debates and proposals since then, we still don’t know what Brexit is actually going to mean or entail. Uncertainty is never good for businesses and the latest news suggests that the UK is headed for a recession as the services sector, which accounts for the bulk of the UK economy, has slumped unexpectedly.

The uncertainty resulting from Brexit permeates every part of the British economy. Both large and small businesses have been left unclear of what they should be expecting over the next few months, let alone the next few years. Multinational corporations have been scaling back their investments in the UK and there are few businesses looking to expand into a market that is paralyzed by indecision.

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Brexit threatens to cause serious disruption to start-ups in the UK across all sectors and industries. There is a multitude of factors that will impact start-ups going forward, as well as a number of potential obstacles that we cannot predict with any certainty.

Restricted Growth

Until the EU referendum, the UK was a very attractive investment target for businesses. As an English-speaking nation with a large domestic market and access to the EU’s single market, the UK has historically been in an unassailable position. Not only has the UK’s situation been advantageous for international businesses, it has also meant that domestic start-ups are able to expand their business onto the international stage with relative ease.

Post-Brexit, unless there is a significant shift from the current standing, the UK will no longer be a member of the single market. This will mean that expanding a business to mainland Europe will be more difficult and expensive than it currently is. Any start-up that established themselves in the immediate aftermath of Brexit is going to have to think carefully about their long-term plans. 

Suppliers and Sourcing

Brexit will cause severe disruption to supply lines across industries. Goods that previously would have flowed freely between the UK and mainland Europe will now be subject to checks at the border. In the longer term, the UK could diverge from the EU in terms of standards of goods. If this happens, it could create further difficulties for businesses who wish to sell their goods in Europe, or who need to import supplies from Europe to the UK.

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Even if the UK does continue to mirror EU standards (any business that wants to sell its goods to the EU will need to comply anyway), it seems certain that the costs of importing supplies will increase dramatically.

Even start-ups whose entire supply chain will be based in the UK are going to have to contend with the increased risk of those suppliers collapsing. After all, businesses that supply other businesses have to get their supplies from somewhere. The UK has spent almost half a century intertwining its economy with that of the EU. As a result, the UK’s capacity to manufacture supplies or harvest natural resources reflects its place within the single market. As a member of the single market, the UK has been able to source resources from elsewhere, and therefore has not invested in the infrastructure required to produce her own raw materials.

Health and Science

As an EU member, the UK has attracted a significant amount of investment in its health and sciences sectors. According to government figures, the UK is home to over 5,800 life science companies, who collectively employ almost a quarter of a million people. There is currently £80bn of research and development funding that has been pledged to the life sciences sector.

However, Brexit threatens the UK’s thriving life sciences sector in a multiple ways by decreasing access to funding, hindering access to the best talent, and by complicating the imports and exports of products. Businesses who export products to Europe may be hit the hardest after Brexit and many large corporations have already moved resources and jobs across to the continent in order to prepare for Brexit. Dr Stewart Newlove, Managing Director at Antibodies.com, is concerned that post-Brexit many early stage UK companies will no longer be able to compete on the international stage – “the increased bureaucracy coupled with customs and import duties on shipments will make it difficult, if not impossible, for companies to compete in Europe while being based in the UK”. 

E-Commerce

Once the UK leaves the EU, it will no longer be able to take advantage of the EU’s e-commerce directive. This EU directive, spearheaded by the UK, was introduced in 2002 and ensured that e-commerce businesses operating throughout the EU would have to comply with the laws of the state that they are incorporated in, but would not have to adjust their compliance for every territory they operate in.

Essentially, this means that UK-based e-commerce businesses can currently operate throughout the EU while only having to adhere to UK law regarding online selling. When we leave the EU, businesses will have to ensure they are compliant with every territory that they want to do business in.

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Any UK start-ups who want to continue operating throughout the EU after Brexit will need to continue to adhere to the EU’s geo-blocking and cross-border content regulations. This means that UK e-commerce businesses will need to treat all their EU customers equally, they can’t give preferential treatment to citizens of individual member states.

Data

After Brexit, the UK will be a third country to the EU. This has implications for the flow of data being sent from the EU to the UK. Sending data to the EU will continue as before, but in order to receive data from the EU, businesses will need to take action. Unless and until the EU recognises the UK’s domestic privacy framework, start-ups will be required to create contract-based legal structures that enable them to continue to receive and process data as before. This is something that smaller businesses haven’t generally had to do in the past and so represents a serious logistical challenge for many of them.

These are just some of the ways in which Brexit could have profound implications for start-ups in the UK. Of course, no one knows what the regulatory landscape will be like in the UK post-Brexit, so it is important that businesses prepare for the worst possible outcome.

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TUT Staff
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