Facing the future: What the next five years could mean for business

  • 07 Apr 2020

As the United Kingdom continues to get to grips with the Coronavirus outbreak, the country also has other long term issues that were waiting to be resolved. But following the General Election, and despite ongoing uncertainty around our future relationship with the EU, a majority Government means small businesses can start trying to get to grips with the big domestic issues. Penelope Rance explores the main challenges and priorities for small firms over the coming years

After five years of political uncertainty and division, the UK finally has a majority Government with a set mandate. While a long-term deal between the UK and EU is still to be negotiated once the Coronavirus pandemic is defeated – political attention will turn back to the domestic agenda.

Increased stability can’t come too soon: in December 2019, ahead of the election result, FSB’s Small Business Index (SBI) showed SME confidence at its lowest point for eight years, sapped by rising employment costs and trade concerns. Margins were being squeezed in every sector, with 42 per cent of small businesses reporting a decrease in profits – the highest number in five years. 

And since this snapshot was captured, the global economy has come to an unprecedented standstill as part of a united effort to defeat the outbreak.

If confidence among small businesses is going to have a chance to recover during the next five years, then the following issues need to be addressed, and small businesses helped to prepare.

 

 

Late payments

Late payments can make or break a small business, interrupting cashflow and halting trading. “Many smaller businesses are stuck between a rock and a hard place as they balance their relations with customers against their need to recover money owed,” says Graham Lamont, Chief Executive of chartered accountants and business advisors Lamont Pridmore.

FSB wants the Government to take action. “It is welcome to see the interim Small Business Commissioner Philip King using his naming and shaming powers to tackle late payments, and that needs to continue,” says Sonali Parekh, Head of Policy at FSB. 

Small businesses can, to some extent, protect themselves from the effects of late payments. “Ensure you have the right monitoring and forecast systems in place to spot where cashflow is going to be an issue, and secure funding to cover any gaps,” suggests Mr Lamont.

“Where late payments from a customer are causing issues within the business and its ability to grow, it may be worth cutting a customer and gaining some certainty.”
 

Taxation

Small businesses need to see taxation in all forms simplified – ideally reduced. The Making Tax Digital (MTD) programme aims to do this, but shifting to fully digital reporting will take time, effort and expense for many small businesses. For simplicity’s sake, FSB hopes those currently below the VAT threshold that brings them into the scope of  MTD will stay outside its scope in the immediate future.

Incoming changes to income tax and National Insurance contributions will help small businesses; the personal allowance is rising to £12,500 from April 2020. “Government will also raise the threshold for NICs by several thousand pounds to £9,500, which 
will reduce both the amount of NI that employees pay, and employers’ contributions,” says Mr Lamont. 

“These moves are welcome, but there have been many other steps that have adversely affected employers, including changes to the business rates system.”

IR35 is also causing concern for the self-employed, even though this has now been delayed until April 2021, as individuals operating through a personal service are likely to get caught up.

 

“The end-client will be responsible for clarifying contractors’ status,” says Mr Lamont. “If they are found to be within the IR35 rules, they will need to be paid via PAYE, which may mean they are taxed more and required to pay greater NICs.”

 

Business rates

Business rates are an ongoing burden for small firms. Martin Davenport, business rates expert at commercial property consultancy Hartnell Taylor Cook, says: “Rates equating to almost 50p in every pound of rateable value per annum combined with upward-only rent reviews are having a devastating effect. And the inefficient appeals process is cumbersome and very tricky to navigate.”

Changes to the system need to go further than currently planned. “We need to see a more radical, wide-ranging reform of the system with a clear view as to how the Government can reduce the burden that falls upon small businesses,” says Ms Parekh.
 

Regulation

“Increased regulation is one of the top issues that smaller businesses are struggling with,” states Ms Parekh. 

“In many instances, small businesses are not objecting to the purpose of a regulation: effective economic and social regulation is essential to a healthy competitive market. The issues come with implementation and enforcement of regulations, and the cumulative impact of the number of regulatory requirements a small business has to deal with.” 

While regulation varies from sector to sector, most SMEs could benefit from a reduction.

For solicitor Catherine Gannon, the pressure on her small practice, Gannons, is too great. “We have to go through all this compliance, and it’s a sledgehammer to crack a nut. I’m not sure if the clients, on the whole, are better protected as a result of it. 

More regulation doesn’t necessarily create a better business environment.”
 

Self-employed finances

“The Government has announced a review of the ability of the self-employed to access various financial products, including mortgages and pensions,” says Ms Parekh. “It’s really important to look at what the requirements are, if they’re proportionate and fair, and whether they can be relaxed to ensure small businesses and the self-employed have fair access to these products.”

Even with Government assistance, says Lamont, you need to plan ahead. “To improve their chances, the self-employed should keep up-to-date records, seek help from a chartered accountant, and get advice from lenders. Use a specialist mortgage broker versed in the way the self-employed draw out their earnings from their businesses.”

Likewise, even when funds are tight, pension planning can pay dividends.

“By diverting some of their income into a pension, such as a SIPP (self-invested personal pension), a person can reduce their exposure to income tax,” points out Mr Lamont. “Each individual has an annual tax-free pension allowance of up to £40,000.

 

You can transfer more into a pension to bring your annual income within a lower tax band and therefore pay less tax, while also building up a substantial pension pot.” 

 

Labour costs


A quarter (24 per cent) of SBI respondents cited labour costs as an impediment to growth, while just one in 10 small businesses were planning to increase headcounts.

The National Living Wage, parental leave and sick pay all add to staffing costs. 

“There are cumulative costs that burden small businesses significantly,” says Ms Parekh.

“That’s why we campaigned successfully to increase the employment allowance from 
£3,000 to £4,000 from this month. That will effectively reduce the employer NICs that many small businesses need to pay, making increases in the National Living Wage affordable.”

Auto-enrolment pensions take another financial and administrative toll, making it harder to remain competitive. “The requirement to create a scheme was initially very burdensome, and so are the ongoing payroll requirements,” says Mr Lamont.

“SMEs can make use of payroll software to make managing contributions easier, or have a payroll specialist manage their workplace pension scheme, freeing up time and helping the business remain compliant.”
 

Access to talent

The availability of skilled talent, both homegrown and from overseas, is central to small businesses’ success. Technical training in the UK is already a challenge.

“There’s an onus on Government to ensure we have a world-class technical education system, but that takes time,” says Ms Parekh. “We have apprenticeships, but the levy – the underspend of which funds the vast majority of small business apprenticeships in England – is going to become exhausted.”

With funding drying up, she says, the Government needs to make up the shortfall without reducing the threshold at which the apprenticeship levy applies.

For overseas workers, the Government aims to have a new system in place by 1 January 2021.

“We are supportive of a points-based system, but are concerned about the costs that small employers will incur through sponsorship of international talent,” says Ms Parekh.

“We believe the costs of a tier 2 general visa amount to around £3,000. Almost half – 48 per cent – of small businesses will be unable to meet these costs. That is why we want the Government to ensure costs are no more than £1,000, and ideally below. For example, the Government could exempt small business employers with less than 50 employees from paying the immigration skills charge.” 

It’s a pressing issue for many SMEs. “We’re concerned about rising costs of staff coupled with a reduction in skilled personnel,” says Scott Sully, CEO of international transportation specialist RIF Worldwide. “A smaller talent pool, with higher costs, is not a good combination for any business.”

Infrastructure improvements

Outside Britain’s cities, small businesses continue to be hampered by poor connectivity.

“Our recent research showed 30 per cent of smaller businesses are struggling to access the internet, or are experiencing download speeds of less than 10Mbps,” states Ms Parekh. “We welcome the Government’s commitments to gigabyte-capable, full fibre and 5G. 

 

But there should be a cut-off point – which we propose is the end of 2021 – by which they guarantee all small businesses are receiving download speeds of above 10Mbps.”

Non-metropolitan destinations also suffer from poor transport, with fewer services from smaller stations, bad roads or non-existent local options, which makes moving staff and goods difficult. “Local roads are incredibly important to many small business owners,” adds Ms Parekh. “It was good to see due allocation of funding to those bread-and-butter transport issues, such as tackling potholes, in the Budget.”

 

International trade

The SBI showed a marked lack of optimism among exporters, with just 23 per cent expecting an increase in international sales over the first quarter of 2020, compared to a third expecting them to drop, due in large part to the UK’s departure from the EU. 

“There will be additional friction for smaller businesses trading with the EU from 1 January 2021,” says Ms Parekh.

“Therefore, it’s essential that smaller businesses are helped to prepare for the changes they’re going to have to make from that point.”

RIF advises clients on how to deal with those changes. “The main issue will be agreeing with your export clients who is responsible for the new areas of admin and costs that Brexit will bring,” Mr Sully says. “Agreeing your Incoterm with your export clients is the right way to get this set in stone so that both parties know where their responsibilities start and end, prior to trading beginning.”
 

And finally... Climate emergency

Finally, it will be incumbent on every small business to identify ways to reduce their impact on the environment, while still staying profitable. “This is going to be the big issue of the next decade or so,” says Ms Parekh. “We have reached a tipping point in the public consciousness, and it’s going to be a major public policy challenge facing the UK and the global community. 

“As smaller businesses stand ready to play their part, they need support to make the necessary adaptations, and to make sure they’ve got time and space to play their role in delivering on net-zero carbon emissions in the future.” 

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