The prospect of high inflation, how to address the UK’s eye-wetting levels of national debt and increases to the National Living Wage will only add to some of the longer-term problems businesses have faced of late. But setting aside the headwinds, how can businesses find their feet in what Chancellor Rishi Sunak has modestly described as a challenging environment?
Was there any cause for optimism?
The almost daily question facing every business-owner or manager is how well are sales performing, and how much profit is growing. Increases to the National Living Wage from £8.91 per hour to £9.50 are welcome in so far as they will help levels of discretionary spending among the public. But given higher operating costs now associated with some staff, businesses may question whether this is ultimately helpful.
While limited in his help to business, Sunak made several announcements that will spur some SMEs in the coming months:
Business rates – It’s an understatement to say that the High Street has struggled during the pandemic, but even before 2020 the picture was far from rosy for shop-based retailers as customers went online. So, the government is introducing a new temporary business rates relief in England for eligible retail, hospitality and leisure properties for 2022-23. Reducing the rate to 50% and capping at £110,000 is thought to benefit many smaller, independent High Street businesses, even if there is doubt the policy will help larger companies.
R&D tax reliefs – Of the £1.25bn announced in new research and development help, £500m is being targeted at start-ups. But for ready-established SMEs, the good news is that £750m will be available through the grants and loan scheme system operated by Innovate UK, the UK’s national innovation agency. Newcomers will be offered £175,000.
Fuel duty freeze and help for HGVs – In the wake of a well-publicised fuel shortage, increasing prices and delivery problems, the Chancellor has announced a freeze on fuel duty increases. This may do little to reduce currently high prices at the pumps, but addressing some of the structural issues that have plagued logistics firms will ease some of the pressure. Help is twofold: extending the suspension of the HGV levy until 2023, meaning businesses operating trucks weighing 12 tonnes or more will not have to pay extra to use the UK’s roads; and, freezing Vehicle Excise Duty for HGVs.
Boosting the bottom line
Sunak’s lifelines will be welcomed by the industries he has targeted, and many pubs will be raising a glass following a revision to alcohol duty. But for the rest of the economy, what about profits? Raises to the minimum wage mean higher bills for business, of course, putting pressure on the bottom line. But even companies that pay above the minimum wage have cause for concern. Notably, higher inflation, which may top 4% this year, will also likely drive people to demand higher salaries, and… boost further inflation.
But investing in automation, or even simply better technology, may help you combat the problem of having to employ too many staff (and paying the higher associated costs of wage increases). While Government is focusing on some industries, such as manufacturing, to invest in smarter factories, the benefits of things like artificial intelligence, cloud computing and outsourcing to Software as a Service providers mean that SMEs are not only freer of wage inflation uncertainty, but can boost productivity levels too. The key is in determining likely customer demand, the financing costs of investment, and how leaner unit costs of service or product delivery can offset the initial outlays.
Those looking to invest will take heart that the Annual Investment Allowance (AIA) has been extended at £1m until 2023. (Fears were that it would fall to £200,000 from January 2022). The AIA offers 100% relief against spending on plant and equipment in the year it is purchased, meaning businesses that invest in eligible assets face a lower tax burden.
The nuance in the numbers
The pandemic has most likely forced an appraisal of your finances since the start of 2020, but now is no time to stop delving into your business’ numbers. Issues such as the good use you put to working capital, the relative savings of in-house vs outsourcing some business functions to third parties and adjusting your approach to accounts payable are just some of the decisions businesses should look at to become more efficient.
A good financial director or enlightened accountant can help you look at these issues, as well as taking advantage of some of the tax breaks and loan schemes offered by government in the months ahead.