During the budget on 11 March the Chancellor publicly announced that the level of budget spending was “the right economic thing to do.” Or was it?
The budget was a mix of temporary measures to address the coronavirus crisis and longer-term changes with the aim to strengthen the economy and a sprinkling of green initiatives. The economic forecasts within the budget had been initially based on the Office of Budget Responsibility (OBR) forecasts, however, they did not have the full effects of the coronavirus built into them.
During the budget it seemed the new Chancellor, Rishi Sunak, was very happily spending with the UK’s credit card. The previous government was diligently trying to decrease net borrowing, however, with this government that aim has been thrown out of the window. Borrowing is forecast to grow significantly each year.
How will this borrowing be paid for?
A quarter of the bill is to come from corporation tax not being cut, however, we will have to see which businesses will have profits that will generate corporation tax in the coming months. The remainder is to come from increased borrowing which means that this will have to eventually be repaid by increased tax receipts due to the economy growing or increases in taxes at some point.
There were many ambitious but generally welcome infrastructure projects, including flooding, hospitals, broadband and road projects. This amount of investment, £640bn, should certainly help keep many businesses in the UK busy over the next five years.
The package for helping businesses through the coronavirus crisis within the budget was just the starting point for the months to come. However, the various initiatives to note include the coronavirus Business Interruption Loan Scheme, flexible time to pay arrangements, funding of coronavirus related absence Statutory Sick Pay (SSP).
The coronavirus Business Interruption Loan Scheme headline sounds attractive, loans up to £1.2m, with 80% guaranteed by the government – the key to these will be ensuring access to them quickly for businesses. On paper they read very much like the Enterprise Finance Guarantee loans. EFG loans are very useful for businesses that don’t have assets for securing loans, however, common complaints regarding these loans are that banks are reluctant to do these loans due to the extra paperwork required, can take quite a lot of time to be processed, and usually not available for struggling businesses.
As always, it is a catch-22 with borrowing, when you need to borrow money it is often hard to find good options, when you don’t need to borrow you are inundated with offers. For these loans to be taken up and used they need to be flexible and be willing to borrow against future business forecasts. Let’s see how much has been borrowed against these guarantees in twelve months time.
Flexible Time to Pay Arrangements (TTP) are being offered on a case by case basis and 2000 additional staff have been added to this team. In the last recession TTP was relaxed and available to many more businesses than normal, it looks like a similar approach is being offered. However, businesses do need to remember that they will still need to pay their taxes eventually so make sure they adhere to the TTP arrangements agreed and don’t think that their taxes can be deferred indefinitely.
As yet it is still not clear how qualifying SSP will be reimbursed, let’s hope that it will be a simple and efficient procedure.
The core budget announcements were mostly welcome by business. Many business owners were worried about the impending changes to Entrepreneurs Relief. Thankfully it wasn’t abolished completely, although the Lifetime Allowance was cut from £10m to £1m. Thousands of business owners are relying upon the eventual sale of their business to pay for their retirement, many of these are not extremely rich people, but hard working entrepreneurs who have often risked their own assets, and forsaken their own earnings to build their company.
Many of the other changes will not have a massive impact on businesses but could have a positive cumulative effect. These changes include, the increase in national insurance thresholds, increase of Employer’s Allowance, business rate decreases for certain sectors, grants for some businesses, increase, changes to R&D relief and an increase to structures and building allowances. However, other changes will potentially increase costs for businesses, increases to the National Living Wage, freeze of the corporation tax rate at 19% rather than the anticipated decrease to 17%. Every business will have to calculate the overall net impact to their business.
What should businesses and their accountants do now?
Now more than ever company owners and their accountants need to prepare flexible business plans so that immediate difficult decisions can be made. Before making any changes, businesses need to be aware of all the possible assistance available to them during a potential downturn in trading, this is where the proactive accountant can really demonstrate their value to their clients. Some of the measures that the Chancellor is offering may help businesses survive a dip in trade and a temporary reduction to their workforce due to illness or self-isolating, however, it is essential to access these measures now to ensure the survival of their company and jobs in the long-term. These are unprecedented times, and hopefully with extra patience and kindness from each other we can all help one other through this.
Nicky Goringe Larkin, managing director at Goringe Accountants