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Budget 2021: The impact on SMEs and the owner-managed business

Encouraging recovery, investment, and growth, the Budget announcement two weeks ago gave many reasons for business owners to be optimistic about the future.

Encouraging recovery, investment, and growth, the Budget announcement two weeks ago gave many reasons for business owners to be optimistic about the future. However, with the planned rise in Corporation Tax and the end of the furlough scheme, it is now more important than ever to scrutinise and monitor business finances.

Below we consider the key impacts of the announcements:

Furlough scheme

As expected, the furlough scheme has been extended until September 2021. Employers will be expected to pay 10% towards the hours their employees do not work in July, increasing to 20% in August and September. Business owners will need to assess the cash-flow impacts of these contributions as well as the on-going Employers’ National Insurance and pension costs. From October, unless businesses can return to pre-Covid revenues, the true cost of maintaining a full work force will need to be understood to see if this is viable.

Help to Grow scheme

The new Help to Grow scheme has been set up to empower small and medium-sized enterprises (SMEs) to become more productive by providing access to some of the UK’s top business schools. The scheme will give businesses access to a range of management training courses, provide online training seminars, and any small business can apply for a £5,000 grant to pay for Government-approved productivity software. Even for the more experienced entrepreneur there may be beneficial insights for the taking here and this shouldn’t be overlooked.

Business rates holiday

The business rates holiday in England has been extended by an additional three months so that businesses in the retail, hospitality and leisure sectors will pay no business rates for three months from 1 April 2021. From 1 July 2021 to 31 March 2022, rates will be discounted to one third of the normal charge, up to a maximum of £2m for closed businesses, and this change is important to factor into cash-flow planning.

Restart Grants

Grant funding will be available to businesses in England through a new Restart Grant scheme which provides a one-off cash grant of up to £18,000 for leisure and hospitality businesses (as well as gyms and personal care) and £6,000 for non-essential retail per premises. This will replace the current Local Restrictions Support Grants which close at the end of March.

As with previous Covid-19 grants, businesses will be paid via local councils and amounts will be based on rateable values. It is therefore essential to keep an eye on local council websites to ensure these grants are not missed.

Self-Employment Income Support Scheme

The scheme will continue with a fourth and a fifth grant and many more people including those that became self-employed in 2019/20 will be able to claim. However, company directors who are shareholders (who pay themselves in dividends) were again excluded from support and are unable to make any claims.

Recovery Loan Scheme

A new Recovery Loan Scheme which will make available loans between £25,001 and £10m, and asset and invoice finance between £1,000 and £10m will be launched to replace the existing Government-guaranteed loan schemes (the Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme) which close at the end of March.

The scheme aims to help businesses affected by COVID-19 and can be used for any legitimate business purpose, including managing cash flow, investment, and growth. It is designed to appeal to businesses that can afford to take out additional debt finance for these purposes.

Further details on the scheme can be found here:

https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/recovery-loan-scheme/

Critically, businesses which have previously received support under the existing schemes will still be eligible to access facilities under this new scheme, although the new scheme will not be interest free.

Given the availability of lending options, business owners may wish to think carefully about whether it is worth taking on additional debt now which could be used in the future i.e. to fund future tax liabilities once they return to profitability.

For businesses that took out Bounce Back Loans, many will be coming up to the end of their 12-month interest free and repayment free period and need to consider how these repayments will be funded. The Pay as You Grow measures announced last September give various options such as extending the length of the loan from six years to 10, requesting interest-only payments for three periods during the loan term and requesting a one off six month repayment holiday.

Unfortunately, the Chancellor didn’t allow the repayments under the debt schemes to be spread over even longer periods to ease the cash flow burden or provide further solutions for businesses that are already very debt-laden. It is therefore important that early conversations are held with lenders about repayment options or even a potential refinance and that a detailed cash flow forecast is maintained to indicate how repayments will impact a business’ working capital.

VAT

The 5% VAT rate for the hospitality and tourism sector is to be extended until 30 September 2021 and then an interim VAT rate of 12.5% will apply for a further six months to 31 March 2022.

Businesses will therefore need to decide whether to keep their prices the same and benefit from the additional income or to pass on some or all of the VAT reduction to their customers by reducing their prices to encourage spending.

For VAT payments deferred from 2020, businesses can opt to repay in 11 instalments from March 2021 or in eight monthly instalments starting in June 2021. However, the total amount of deferred VAT needs to all be paid by March 2022. This needs to be factored into a business’ cash flow planning.

Corporation Tax

The current rate of 19% will be increased to 25% from 1 April 2023 for companies with taxable profits over £250,000. The current 19% rate will be maintained for small companies with taxable profits below £50,000 and for companies with taxable profits between these two thresholds, they will pay a tapered rate.

As the date approaches, it will be important for business owners to consider the timing of any one-off income or expenses and to also re-look at the most optimum way to pay themselves, i.e. the balance between salary and dividends.

Trading losses

All businesses with trading losses arising in the two years impacted by Covid-19 will be able to carry these back to off-set taxable profits arising from the same trade in the previous three years.

Ordinarily, loss carry-back claims will need to be made within a Tax Return. However, if the claim is below £200,000 it may be made outside of a Return which can accelerate the timing of the cash repayment.

Should a repayment be due, company directors will need to consider whether to ‘cash in’ the repayment at a rate of 19% or to carry the losses forward to future years where tax relief may be available at 25%.

Enhanced tax relief for capital expenditure

Companies that acquire new qualifying assets will be able to claim a new ‘super deduction’ of 130% for expenditure incurred between 1 April 2021 and 31 March 2023. It will therefore be important to carefully plan the timing of expenditure, i.e. deferring new IT purchases from March 2021 to April 2021 and ensuring that significant capital spend within a business plan is brought forward, where possible, to before March 2023.

Key advice

Given all of the recent announcements and knowing that much of the detail is still to follow, it is critical that business owners ensure that they are aware of all of the Government support and incentives that are there to make use of and that they understand how these can be accessed.

A flexible business plan is essential; something that can be tweaked and developed as industry sectors recover at varying paces and as a business learns how their customer base is reacting.

Cash flow planning is vital and a forward-looking forecast, factoring in the upcoming changes to circumstances, will assist with early planning and enable business owners to make informed decisions about their employees and whether to take on additional debt, either due to necessity or through more creative thinking about how they can make cash work for them over the next few years.

Would you like to know more?

For more information on how the Budget impacts you, either as a business or an individual, or how you can make use of the various Government support schemes available, please get in touch with your usual Blick Rothenberg contact or one of the team whose details are on this page.

You can also visit our Budget Hub, where you can find our commentary and a range of tools to help you better understand how the Budget may affect you.

Or if you would like to find out more about how you can control costs and free-up time to focus on your core business, visit our Outsourcing Hub.