Another March; another budget. But this time it feels very different. The challenges are unprecedented; the solutions would have seemed beyond the bounds of political possibility just a couple of years ago; and there is a lot buried in the small print. As with any budget, the measures are good, bad and ugly. SMEs are at the heart of everything we do and we want to do our best to help in this difficult time, so we'll discuss this from five different points of view: business recovery, business financing, business tax, trade and Brexit, and people and households.
Before we get to the small print, let’s cover the headlines:
- Extension of the Job Retention Scheme: Furloughed staff can receive 80% of their pay until the end of September. But from July, employers will have to pick up 10% of the tab; and from August, 20%. Also, employers will still have to make NI and pension contributions. Full details can be found in our guide: Saving jobs in a Covid-19 world: what the Self-Employment Income Support Scheme means for the self-employed.
- Extension of the Self Employment Income Support Scheme: This is also being extended until the end of September. Full details can be found in our guide: Saving jobs in a Covid-19 world: what the Self-Employment Income Support Scheme means for the self-employed. However, the important thing to note is that those who became self-employed last year will now be able to claim. Many people have had no choice but to become self-employed in the wake of the economic devastation left by the pandemic, so it is good to see the scheme being expanded to include them.
- Restart grants: These are one-off grants for businesses re-opening as we emerge from lockdown. They will start to be distributed from April. The details can be found here. Non-essential retail businesses will be the first to open, and will be entitled to a £6,000 grant per premises. Other businesses that were hit by Covid-19 restrictions and are set to open slightly later than this (including hospitality and leisure businesses such as gyms or personal care facilities) will be entitled to a £18,000 grant per premises once they open.
- Recovery loan scheme: This replaces the Bounce Back Loan and CBIL programmes which have closed. Starting from 6th April 2021, the Recovery Loan Scheme will give lenders an 80% guarantee on eligible loans of £25k - £10 million. This is additional to any other support accessed under the Covid-19 guaranteed loan schemes.
- Business rates: From 1st April until 30th June 2021, eligible retail, hospitality and retail properties won’t have to pay business rates. After that, until 31st March 2022, there will be a 66% relief for these eligible businesses. This will be capped at £2 million per business for properties that were forced to close on 5th January 2021. Additionally, £105,000 will be available for any other eligible properties including nurseries.
- VAT reduction: The 5% reduced VAT rate for tourism and hospitality businesses has been extended for a further 6 months. Following those 6 months, there will be a rate of 12.5% for another 6 months.
- Statutory Sick Pay (SSP) Rebate Scheme: SMEs across the UK will continue to be able to reclaim up to two weeks of eligible SSP costs per employee, while the Covid-19 pandemic continues. But the Government have warned that this is a temporary measure.
Whilst all of this is good news and certainly helpful, unfortunately for many businesses it won't be enough. Many won’t be able to re-open after the lockdown. And others will only be able to do so at a much smaller scale.
- Help to Grow Scheme: These are two programmes designed to help SMEs expand: one focuses on management training (a mini-MBA) and the other on digital skills and productivity enhancing software. Farillio will be watching this scheme carefully and reporting back on the details. In the meantime, you can register now at Help to Grow.
- Future Fund: Breakthrough: This is the successor scheme to the Future Fund, which closed in January. This new £375 million UK-wide fund will invest in highly innovative companies such as those working in life sciences, quantum computing, or clean tech, and that are aiming to raise at least £20 million of funding. We’ll be reporting back on the details as and when they are announced here.
- Apprenticeships: There is enhanced support for apprenticeships, with employers receiving £3,000 per hire. But more interestingly there is a new scheme allowing apprenticeships across different employers, which could be of real benefit to SMEs and start-ups seeking to scale up, and to apprentices wanting a varied experience and training. Employers will be invited to bring forward proposals, and in particular the Creative Industries Council will be asked to do so in recognition of the potential benefits of this new approach for the creative sector.
There are some interesting ideas here and it is clear that the Government is focusing on SMEs and start-ups to lead the economic recovery! But the Future Fund: Breakthrough scheme does appear to be targeted towards more mature SMEs and start-ups; some of whom might not need the support. And whilst the Help to Grow scheme could be great, it could be quite impractical if it does not take the real needs of SMEs into account.
- Corporation tax rate: This will increase to 25% in 2023. Businesses with £50,000 or less in profits will still be taxed at 19%. Beyond this, there will be a tapered rate for profits greater than £50,000. Businesses will only be taxed at the 25% rate if they earn £250,000 or greater profits.
- Super deduction: A 130% 'super deduction' for corporate tax purposes will be introduced for capital investments in qualifying new plant and machinery.
- Trading losses: Trading losses can temporarily be carried back for three years.
- R&D tax credit cap: For accounting periods beginning on or after 1 April 2021, the amount of R&D tax credit that an SME can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and NICs liability. There is an exemption to this cap if the company: creates or actively manages intellectual property; and does not spend more than 15% of its qualifying expenditure on subcontracting R&D to, or the provision of externally provided workers by, connected persons. The Government is, however, conducting a review into R&D tax credit which could potentially broaden its scope into data and cloud computing costs.
Check out our Tax 101 for Small Businesses for more detail. Some SMEs won’t be affected by the increase in corporate tax. But many would. Any new obstacles to scaling up your business are not helpful. And while the super deduction is welcome, we wonder how many would be able to benefit from it, as it is limited to capital investments in ‘qualifying new plant and machinery’ (the latter remains to be defined). It is disappointing that it doesn’t cover a wider range of investments.
Brexit and trade
- Freeports: This idea has been floating around for a while: specific geographical areas that are subject to a more favourable tax regime to stimulate trade and business. So far we have eight in England: East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames. And more to come elsewhere in the UK. Within each Freeport, ‘tax sites’ can be designated that come with a grab-bag of tax incentives running until September 2026: an enhanced 10% rate of Structures and Buildings Allowance for constructing or renovating non-residential structures and buildings within Freeport tax sites; an enhanced capital allowance of 100% for companies investing in plant and machinery for use in Freeport tax sites; full relief from Stamp Duty Land Tax on the purchase of land or property within Freeport tax sites in England; Full Business Rates relief in Freeport tax sites in England for all new businesses, and certain existing businesses where they expand. Plus, potentially relief from National Insurance contributions from April 2022.
- Towns Fund: Over £1bn funding for specific towns.
Brexit was not mentioned in the budget. And there seems scant recognition of the impact of Brexit on exporters and importers. The Freeports concept may help the government’s levelling up agenda, but it is not really aimed at relieving the frictions and difficulties in importing and exporting goods and services.
People and households
- Income tax thresholds: Although the tax rates themselves are not going up, the personal allowance (i.e. the amount of earnings not subject to income tax) is to be frozen (after a raise in April) at £12,570 from 2021/22 to 2025/26. Basic and higher rate income tax thresholds are to be frozen at £37,700 and £50,270, respectively, from 2021/22 to 2025/26 (again, after one raise in April). Usually, the thresholds would rise in line with inflation. The effect of that is that many people getting a pay rise, even in line with inflation, will pay more income tax because they will get drawn into a higher tax bracket.
- National insurance thresholds: The Government says that it is also freezing the upper earnings limit for National Insurance contributions (NICs) (after raising it in April) at £50,270 (£967 per week or £4,189 per month) for the next five years. Usually, the threshold would increase in line with inflation. Again, the effect of this is that many people will pay more tax if they get a pay rise.
- National Living Wage: This is going up from April by 2.2% and it's applying to people aged 23 and above.
For many individuals and their households, this is a budget of creeping tax increases. The tax rates haven’t changed but neither have the thresholds. Some people who were previously not income tax payers may start paying income tax at the lower rate. Others will start paying the higher rate on part of their income. And that’s not even taking National Insurance into account. If thresholds had continued to rise in line with inflation, they'd have remained in the same tax bracket. This is to be set against all the spending to aid business recovery and growth, which will also help individuals.