What is the Budget impact for SMEs?

I have hundreds of SME clients (I am also an SME-owner myself) and, judging by the messages I’ve already received, the general consensus is one of feeling utterly underwhelmed.  

Boosting R&D spending is too be lauded, as are moves to attract the best global talent in science and technology, while help for challenger banks will also heighten the diversity of the lending sector.

Nevertheless, cutting the corporation tax surcharge for major banks – from 8% to 3% - seems somewhat frivolous to hard-working SMEs who are the lifeblood of UK plc and the foundations of our recovery. It’s important to remember that SMEs are already carrying an almost unbearable burden so it was a surprise to see some of the missed opportunities for the Exchequer to provide some help. For example, the Chancellor failed to commit any additional government help for businesses struggling with record gas prices thanks to a 250% rise in the wholesale price of gas since January.  

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"In September there was a 56% year-on-year rise in corporate insolvencies and that fact seems to have been lost."

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It also felt as if we are being too hasty to move on from the scarring caused by the Covid pandemic. Nothing was done to alleviate the pain caused by Coronavirus Business Interruption Loan Scheme (CBILS) loans which are now having to be repaid. And we also seemed to have forgotten that furlough has come to an end and struggling businesses will have salaries to pay. In September there was a 56% year-on-year rise in corporate insolvencies and that fact seems to have been lost.

And don’t forget the 1.25% jump in NICs and dividends rate leap of 1.25% which were announced in September effective April 2022, and the Corporation Tax hike (up from 19% to 25%) announced in March (effective March 2023) which will be worrying many SMEs. One could say that getting bad news out of the way over the past few months was a rather clever ploy so that today’s budget could be seen in a more positive light.”

"I feel the Chancellor has missed an opportunity to reverse the loss of Entrepreneurs’ Relief."

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CGT: An Opportunity Missed

There has been huge relief that the Chancellor did not hit wealth creators and SME owner-managers by increasing CGT across the board. Business owners had already received a substantial blow last year on Entrepreneurs’ Relief (since renamed as Business Asset Disposal Relief) when up to £900,000 of benefit was stripped away.

This means that an entrepreneur selling their business in February 2020 for £10m would have paid £1m in tax, benefiting fully from the 10% tax offered on a £10m lifetime allowance by Entrepreneurs Relief. The same business selling in April 2020 would have paid £1.9m in tax as this lifetime limit was reduced to £1m.  

To be honest, I feel the Chancellor has missed an opportunity to reverse the loss of Entrepreneurs’ Relief and I still believe that CGT needs a complete overhaul. It seems extraordinary that those who speculate on property when the underlying asset is highly unlikely to lose value, pay the same tax as an SME business owner taking real risk who has spent years building a successful business and providing jobs for a local community. The levels of risk and effort and vastly different.

One radical idea floating around our office is to abolish the concept of CGT entirely but to offer an Entrepreneurs Relief against Income Tax to an uncapped level for those individuals who truly pass the test of building UK PLC. Why uncapped? Because whilst I make the argument that it is the smaller business owner that will be unfairly hit by a ‘rate alignment’ and a generation discouraged from taking the risks needed to build a business, the larger business owners will have the ability to simply ‘off-shore’ their assets and the UK government will miss out on any tax income altogether. With the surge in remote working thanks to coronavirus and the enabling technology surrounding it, don’t be surprised to see huge numbers of UK business run by entrepreneurs sat on Caribbean islands.”

"It’s easy to see where the shortfall will be – in people’s pockets!"

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Foundations of Sand?

GDP levels returning to pre-Covid levels is obviously good news but look under the skin and a lot of growth is being driven by inflation which brings its own risks.

The Chancellor has painted a positive picture but inflation is at its highest level (4%) since the ‘boom and bust’ days of the UK economy in 1992 (the blip in 2011 notwithstanding). Wage increases are sitting at 3.5% so it’s easy to see where the shortfall will be – in people’s pockets. The knock-on effect for SMEs will be pressure from employees for wage increases to fund the increased cost of living. Some help in the form of an increase in the personal allowance of income tax would have been welcome. Holding the personal allowance and rate bands at current levels until 2025/26 (as announced in March) is already an inflationary environment is in effect a tax increase. Again, a missed opportunity or, worse, a blatant requirement for business to fund the Chancellors spending spree.”

SMEs will have to be careful to manage this inflationary pressure and many will not be accustomed to such an environment. Our clients have started looking to re-establish inflation clauses in long-term contracts so they can renegotiate deals if inflation rises above a certain level. Only a certain generation of business owner will have experience in this area. However, renegotiating anything also causes uncertainty within the whole system. What’s more, we are still coming out of a pandemic and SMEs are just not confident enough in passing these additional costs onto customers. This will result in lower margins and less room for investment.”

Finally, unemployment was expected to be at 12%, but now is around 5%. Great news on an individual level. However, SMEs are still reporting a significant shortfall in skilled and unskilled labour, headlines have highlighted HGV drivers, turkey processors, fruit pickers etc. Brexit and the end of free movement has had hugely adverse impact on the available work force, so low unemployment of those still on our shores should not come as a surprise.