Tue 26 Feb 2019

What are the obstacles preventing Scottish small and early-stage businesses from fulfilling their growth ambitions?

It is estimated that there are approximately 365,000 small and medium-sized enterprises (SMEs) operating currently in Scotland, providing around 1.2 million jobs.  Many of those businesses have been established in the last 10 years as a direct consequence of former employees being made redundant as a result of the recession and reinvesting their redundancy money in new ventures.

Another source of new enterprises is those former employees who have taken early retirement, many on generous final salary pensions, and set up lifestyle businesses which sit well within the so-called gig economy.  Business like these, together with more traditional small enterprises, such as small-scale construction companies, food producers and small manufacturing companies, have become an integral part of the Scottish business landscape. Indeed, they account for 99% of all private sector enterprises.

But smaller Scottish enterprises are finding their growth potential limited and many of them are struggling to overcome obstacles which prevent them from building a sustainable business. 

These are uncertain times in many ways.  The turmoil unleashed by the result of the Brexit referendum in 2016 has yet to subside.  Many SMEs are stuck in a holding pattern when it comes to their growth plans and fulfilment of their potential until further clarity on a number of critical issues can be delivered.

The major issue which is causing concern in the business community at present is, of course, the uncertainty around Brexit.  Knock-on effects include:

  • A large reduction in the number of workers from EU Member States continuing to work in Scotland.  Those returning workers will need to be replaced: in the short term by indigenous UK workers, but longer term perhaps by immigrants from non-EU countries.  This may well distort the wages market, as historically indigenous workers command higher remuneration than migrant workers.
  • Certain aspects of the UK tax system are currently subject to controls imposed from Brussels.  Post-Brexit, those controls will cease to apply.  The challenge for the UK will be what to do with this new found freedom of choice regarding taxation. For example, will different VAT rates be introduced for different categories of goods?  There is also an increasing divergence between the tax paid by Scottish residents and that paid by residents in the rest of the UK, which has implications for Scottish employers trying to recruit and retain the best and the brightest.
  • It seems likely that most Scottish businesses will cease to be part of the EU's single economic market.  The consequence of that is that customs and tariffs will apply to imported and exported goods which will likely result in increased costs.  For Scottish manufacturers and exporters, the challenge is the extent to which those additional costs are passed on to the end consumer.
  • There has been much discussion on the likelihood of a second Scottish referendum on independence taking place, depending on the final shape of the Brexit deal.  The uncertainty caused by such discussions can have an ongoing destabilising effect for businesses and inward investors in businesses.
  • A lot of the regulations which currently apply to businesses in Scotland derive from the EU.  Upon leaving the EU those regulations will have to be replaced.  The challenge for the regulators lies in ensuring that businesses do not get so wrapped up in red tape that it limits their ability to operate effectively.
  • The economic effects of leaving the EU are very hard to predict, but the general consensus is that there will be an immediate detrimental effect to the UK economy.  Factors which will need to be considered include the chances of a currency devaluation (as happened in the immediate aftermath of the Brexit referendum), inflation caused by a lower value currency and potential increases in interest rates to curb rising inflation.  The duration of those depressed economic conditions is very difficult to predict and depends to a large extent upon how quickly trade agreements can be made which will replace the shortfall in trade which currently exists between the UK and the other EU Member States.

Small and early-stage businesses wishing to make the jump to their next level of growth, should be mindful of these factors and take measures to safeguard themselves against the uncertainty that exists in the current economic climate.

This article first appeared in The Scotsman.

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