This morning’s referendum result has been confirmed as 51.9% to 48.1% in favour of leaving the EU. Here at Focus Insolvency Group, we have analysed the initial effects of the Leave vote, preparing a forecast on what will happen next, and what this will mean for UK businesses.
Is the UK definitely leaving the EU?
In theory, possibly not, but in all likelihood, yes. However, there is a long road ahead of us.
The Alternative Vote Referendum held back in 2011 contained a legal trigger, which meant that the result had to be acted upon by the government of the time. By contrast, the EU referendum did not have such a clause; the result is therefore merely advisory, and in theory could be totally ignored by UK government. However, given the dangerous waters that it would leave the government in to ignore the will of the people, it seems likely that the referendum results will be enacted.
For the UK to begin withdrawing from the EU, the government will need to invoke Article 50 of the Lisbon Treaty. Once this notification has been given, there is no turning back and the UK must leave the EU within two years. It is in theory possible to extend this deadline, but it would require the unanimous decision of all the member states.
However, the government is under no obligation to invoke Article 50 straightaway. By delaying the announcement, it would allow the government extra time to explore various exit options prior to negotiations. Dr Peter Catterall of the University of Westminster recently spoke to Business Insider, stating: “It’s not just pro-EU Tories who have talked about delaying Article 50. People like Michael Gove have said that they wouldn’t want to implement the Article 50 procedure until at least 2018 because they think it would take a very long time to get things sorted. Cameron did initially say he would invoke Article 50 immediately following a Leave vote. I haven’t noticed him reiterating this recently, and if he did, he would only increase the chances of a disorderly Brexit.”
In Mr Cameron’s resignation speech this morning, he stated “A negotiation with the European Union will need to begin under a new prime minister and I think it’s right that this new prime minister takes the decision about when to trigger Article 50 and start the formal and legal process of leaving the EU.” By contrast, Jeremy Corbyn has called for Article 50 to be enacted “immediately”, although this was prior to Mr Cameron’s resignation.
What effect will the decision have for businesses in the short and longer term?
Initially, there may be a period of “business as usual”, especially for small businesses, as any changes in regulations will take many months to be negotiated, and potentially many years to take effect. The UK will now be required to reconsider 80,000 pages of EU agreements, deciding those to be enshrined into UK law, and which to abandon. This process could well lead to a long period of market uncertainty.
This uncertainty in the UK’s trading future was reflected in the value of the pound sterling today. As the referendum outcome emerged in the early in the early hours of the morning, the value of the pound fell dramatically, at one pointing hitting $1.3236, a fall of more than 10%, and a record low since 1985. In contrast the Japanese yen has soared, reaching 100 yen against the US dollar. Karishma Vaswani, the BBC’s Asia business correspondent stated that this was “bad news for Japan’s economy which needs the yen to stay weak so its exports are more attractive around the world.” However, the fall in the value of pound is not necessarily a negative for all businesses. For example, if a company is purely in the business of exporting UK made goods, a lower pound value could lead to increased profits.
In the opening minutes of trading this morning, the FTSE index fell by more than 8%, wiping £120 billion off the value of the 100 biggest UK companies. The referendum has also had an impact on the global market place, with Germany’s Dax down by more than 6% and the French Cac 40 falling by more than 8%.
Dennis de Jong, managing director of the broker website UFX.com stated: “This is simply unprecedented, the pound has fallen off a cliff and the FTSE is now following suit. Britain’s EU referendum has been a cloud hanging over the global economy for the past few months and that cloud has got very dark this morning. The markets despise uncertainty, yet that is exactly what they’re faced with this morning. The shockwaves are likely to reverberate for some time and the warning lights are flashing brighter now than ever.”
What will happen to UK businesses in the longer term will also strongly depend on whether the UK wishes to (and subsequently manages to negotiate to) remain in the single market. Whilst remaining in the single market will make the exit from Europe smoother for businesses, it may not necessarily be an option for the UK. Remaining in the single market will also mean agreeing to the free movement of people, something which has been strongly campaigned against by various leave campaigns.
Matthew Elliott, Vote Leave’s chief executive, strongly believes that being part of the EU was bad for small businesses. He told the BBC “whilst the EU might be good for big multinationals, for smaller businesses it acts as a job destruction regulatory machine. Brussels hinders smaller businesses, particularly those firms who can’t afford to lobby Brussels to curry favour. Jobs, wages and our economy will thrive when we take back control.”
One industry that will be particularly affected by today’s referendum result is farming, which received £3.1bn in EU funds last year. Approximately 55 percent of UK farmer’s income in 2014 was made up of support payments from the EU’s common agricultural policy (Cap). However, there are many farmers who believe that the referendum result will be beneficial to their industry, allowing them to escape various Cap regulations.
Our Group Development Director, Andy Platt, stated: “It is by no means a foregone conclusion what the result will ultimately be for UK businesses. There are almost certainly going to be changes to taxation and trade regulations which will affect businesses of all sizes. We would strongly recommend that all businesses revise their cash-flow forecasts, or if they do not have one, they should make one as soon as possible.” You can read more about preparing a cash-flow forecast here.
Can we help?
If you have a client who is experiencing financial difficulties, or if you would like to discuss anything that has caught your eye in this blog post, please get in touch! Focus Insolvency Group specialise in recovery solutions and are keen to help individuals and businesses get back on their feet. We can help with debt consolidation, preventing bailiff and debt collection agent action, allowing individuals to make a fresh start and companies to continue to trade.