Andrew Bullard, head of business at specialist factoring and invoice finance broker Cashflow UK discusses the huge impact on many small businesses of the UK Governments decision to raise the rate of VAT and other Budget changes.

THE Governments decision to raise the rate of VAT in this years budget 2010 will have a huge impact on many small businesses.

For the first time in history, the tax on many goods and services will rise to 20 per cent and small businesses will be forced to dig deep to make up the difference.

Andrew Bullard, head of business at specialist factoring and invoice finance broker Cashflow UK, said: The state of the economy meant it was already tough for small firms.

Now they will have to pay more to their suppliers and will be forced to pass this cost on to their customers, which could mean the difference between survival and failure for some.

The Government wanted to stimulate economic growth at grass roots level yet this is a backward step.

But the coalition Governments first Budget was not all bad news for small firms.

While the rate of National Insurance contributions will still rise as planned in April 2011, Chancellor George Osborne has raised the threshold at which employers start to pay it by £21 a week.

Companies outside London and the South East will also have a National Insurance holiday for the first year of trading.

Small business rate relief will be increased from October, giving another saving, and the extension of the Enterprise Finance Guarantee means businesses will continue to receive support when seeking finance.

Mr Bullard said: Businesses still need all the help they can get and such measures are welcome.

But he fears the crackdown on the banks through the introduction of a levy could lead them to becoming further risk averse, making it harder for small firms to arrange credit.

He added: Small firms in particular should continue to use alternative forms of finance, such as factoring, to help smooth the negative effects of the Budget and push them into the prosperous future Mr Osborne is predicting.

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The Chancellor, George Osborne, has just delivered his first Budget, and has announced big changes to both the tax and welfare systems.

He said the tough measures announced were “unavoidable” because he had to deal with the country’s debts, but everyone would be “in it together”.

According to the Treasury’s own analysis, individuals will only be worse off, from the income tax and national insurance changes, once their income gets close to £50,000.

But the picture is different once all the VAT and benefit changes are taken into account.

From 2012, when many of the tax credit changes kick in, all households will be worse off, even the poorest.

Taxes

Overall you will probably pay more. Taxes are going up, and the chancellor made no bones about it.

Firstly, VAT on goods and services is going up. On 4 January 2011, the main rate of VAT will rise from 17.5% to 20%.

This is a huge increase and will generate more than £13bn a year by the end of 2014-15.

However, zero-rated items, such as most food and children’s’ clothing – which do not attract the tax, will be spared over the course of this parliament.

As for income tax, the personal allowance is to be increased by £1,000 in April to £7,475.

This is part of the coalition’s plan to eventually raise the allowance to £10,000.

This first stage means about 23 million basic-rate taxpayers will pay up to £170 a year less, while 880,000 will pay no income tax at all.

To stop higher rate taxpayers benefiting from this, the threshold for paying higher rate income tax will be reduced, to clawback the benefit of the extra personal allowance, until 2013-14.

There will not be any new increases in duties on alcohol, tobacco or fuel after the rises announced by the previous Labour government in the March Budget.

In addition, the last government’s plan to increase the duty on cider by 10% above inflation will be scrapped from the end of this month.

Capital Gains Tax (CGT) stays at 18% for low and middle-income earners, but from midnight taxpayers on higher income tax rates will pay 28% CGT.

This is likely to affect second-home owners, and those who own share portfolios, or art or antique collections.

However, their taxable gain still has to be more the annual allowance of £10,100 before capital gains tax is payable.

Meanwhile, the 10% CGT rate for entrepreneurs will be extended from the first £2m of qualifying gains to £5m.

The CGT changes, Mr Osborne said, should bring in an extra £1bn.

State Benefits

The new government wants to save lots of money on the welfare and benefits bill.

So, benefits, tax credits and public service pensions will be uprated each year in line with the consumer prices index, not the often higher retail prices index.

This is a big change that will eventually save the government £6bn a year.

The chancellor is planning to cut the cost of a variety of welfare benefits, the cost of which he said had got out of hand.

Tax credits will be cut for households earning more than £40,000 next year.

However, the child element of the Child Tax Credit will rise by £150 above inflation.

Elsewhere, Mr Osborne said he would abolish the “health in pregnancy” grant from April 2011, and restrict the Sure Start maternity grant to the first child only.

Lone parents will now be expected to look for work when their youngest child goes to school.

Child benefit, to which all families are entitled, will be frozen for the next three years.

The government will also introduce a medical assessment for Disability Living Allowance from 2013 for new and existing claimants to try to cut down on the numbers claiming it.

And housing benefit will be restricted to a maximum limit of £400 a week, in a package aimed at saving £1.8bn a year by the end of this parliament.

All these welfare and benefit changes will save a massive £11bn a year by 2014-15.

Pensions

From April 2011, the state pension will rise by the increase in average earnings, or move in line with prices or by 2.5%, if either of those two are higher.

And the government confirmed its intention to speed up the process of raising the state pension age to 66.

Public Sector Workers

A two-year pay freeze has been announced for workers in the public sector.

However, the 1.7 million of public sector employees who earn less than £21,000 a year – 28% of the total – will be “protected”.

They will receive pay increases of £250 a year for each of those two years.

The government is also going to look at ways of making it cheaper to fund your public sector pension scheme which could well mean higher contributions or lower benefits.

Employers

The threshold at which employers will start to pay National Insurance will rise by £21 per week above indexation in line with inflation.

Meanwhile corporation tax will be cut next year to 27%, and by 1% annually for the next three years, down to 24%.

The small companies’ tax rate will also be cut to 20%.

George Osborne “We’re all in this together”

To see how this years Budget has affected you, please see the Budget Calculator 2010

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A recent straw poll* conducted by business finance provider Bibby Financial Services shows that the majority of UK firms feel the new coalition Government will improve the outlook for businesses in the UK.

With the emergency Budget due to be announced on Tuesday, almost 90 per cent of the firms surveyed by the invoice finance provider feel that the recent switch in leadership will bring about an improvement in conditions for businesses, despite public sector spending cuts and an increase in National Insurance being high on the agenda.

Out of all of the parties, the Conservative party (54 per cent) was cited as having the best manifesto for small and medium-sized businesses, with Labour only drawing 14 per cent of the vote. In addition, 31 per cent of businesses feel the Bills announced in the Queen’s Speech, such as the Government’s commitment to tackling national debt, will have a positive effect on their fortunes over the forthcoming months.

Edward Rimmer, UK chief executive, Bibby Financial Services, said: “In spite of the tough measures being introduced by the new coalition Government to tackle the national deficit, the businesses surveyed in our poll feel that the coalition will bring about an improvement in trading conditions in the long term.

“In order to start reducing the nation’s £166 billion deficit, the Government is going to have to make some serious cuts to public expenditure, which could have negative ramifications for those businesses which are dependent on public sector contracts.

“Tuesday is a crucial day for UK firms, and businesses must ensure they are tenacious and prudent as public sector cuts take effect. However, these businesses feel they are in safe hands, and it appears that many are looking forward to the future with a sense of cautious optimism.”

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Deep spending cuts in Tuesday’s Budget must be balanced by a concerted effort to stimulate business if soaring unemployment is to be pre-empted, Britain’s turnaround and recovery specialists are warning.

The expected increases in taxes, particularly VAT, and the prospective loss of thousands of public sector jobs will have a deep consequential impact on consumer spending, says TMA (UK). Added to that will be the adverse effect on the private sector of the anticipated axing of many Government and local government contracts, many of the contractors having relied on the growing public sector for their very survival.

“We appreciate the need for austerity measures to maintain market confidence and keep interest rates down,” said TMA (UK) Immediate Past President Tyrone Courtman of Leicester-based Cooper Parry. “But if the private sector is to have any hope of taking up the slack, then the Government absolutely needs to match spending cuts with an equal commitment to encouraging private enterprise.

“And given Chancellor George Osborne’s limited financial room for manoeuvre, all Government departments must show a ruthless determination to cutting costs and ripping up red tape.”

Mr Courtman said businesses had faced soaring administrative costs thanks to the former Government’s desire to command and control from the centre and had had to invest significant resources in terms of staff tied up in negotiating increasingly complex and onerous legislative minefields in areas such as planning, employment, pensions, health and safety, and environmental health.

“These are not trivial matters,” he warned. “For a distressed business struggling to implement a recovery plan the costs associated with ensuring compliance, to say nothing of the weeks and months it often takes local councils to process straightforward applications, can literally be make or break. Combined with working in a global market where many competitors have no such obligations, for many businesses it’s like trying to compete in a 100-metre sprint with your lane full of treacle.

“Ministers are going to have to be very tough to force radical changes on the very departments that came up with these regulations in the first place, but if business is to have a chance to play its part in the recovery these challenges have to be tackled quickly and resolutely.

“We don’t want them to throw the baby out with the bathwater – we just want room to breathe!”

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During May, the rate of business insolvencies fell to its lowest point since January 2010, according to the latest Insolvency Index from Experian®, the global information services company. Experian’s latest analysis also reveals an 18.0 per cent fall in the total number of business insolvencies during May compared to April, bringing the rate of insolvencies down to 0.08 per cent from 0.10 per cent in April.

It also marks an improvement compared to May 2009 when the rate was 0.10 per cent.

Last month’s performance was due to a vast month-on-month and year-on-year improvement among medium sized businesses with 51 to 100 employees.

These businesses, which have suffered some of the highest levels of insolvencies in the last two years, saw the rate of insolvencies fall from 0.24 per cent in April 2010 and 0.23 per cent in May 2009, to 0.13 per cent in May 2010 – the lowest point since September 2007.

The average financial strength score of all UK businesses was up year-on-year, from 79.98 during May 2009 to 80.70 in May 2010, but it was down slightly on the 80.76 recorded in April 2010. Although a small decline, this was the third consecutive month-on-month decline in average financial strength score of all UK businesses.

Rolf Hickmann, Managing Director of pH, an Experian company, said: “The fall in the number of insolvencies is a good sign and shows that businesses are distinctly aware of the current environment and are taking vital steps to protect themselves from risks.

“Apart from the very largest businesses, companies of all sizes saw marked improvements in insolvency rates. However, the greatest improvement came from the medium-sized businesses, which, as we have commented in previous months, have been the hardest hit by the recession.

“However, the small deterioration in the overall financial strength score for UK businesses during May highlights the need for businesses to ensure they continue to exercise caution with regards to their risk exposure and those they choose to deal with.”

Other key highlights include:
The rate of insolvencies among businesses in the North East saw the biggest fall – down to 0.08 per cent from 0.13 per cent in April 2010 and from 0.15 per cent in May 2009.

All regions saw their financial strength score improve from May 2010 with Yorkshire seeing the biggest improvement (from 79.24 to 80.81).

However, looking at the April to May comparison, Scotland was the only region to see its financial strength score increase (from 80.57 to 80.63).

By far the biggest increase in insolvencies came from businesses with 501 or more employees – from 0.06 per cent in May 2009 and 0.12 per cent in April to 0.16 per cent in May 2010.

In terms of financial strength, although micro businesses (with 1 to 2 employees) saw the biggest year-on-year improvement (from 80.39 in may 2009 to 81.32), more recent activity reveals a small month-on-month deterioration in their score compared to April (81.95) – the biggest in comparison to other businesses.

Of the five biggest industries in the UK (business services, building/construction, property, IT and non-food retailing), building/construction saw the biggest April to May improvement (0.18 per cent to 0.14 per cent).

The property sector saw the biggest month-on-month deterioration in its score (from 82.73 in April to 82.46 in May 2010) and the second biggest year-on-year decline (from 84.05 in May 2009).

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Scrapping HM Revenue & Customs’ ‘Time to Pay’ scheme in next week’s Budget could force thousands of small firms struggling to manage tax payments into administration, the Forum of Private Business is warning.

The ‘Business Payment Support Scheme’ was launched in 2008 to allow small businesses hit by the recession to defer tax payments to HMRC. It has so far helped more than 200,000 businesses ease their cash flow problems by allowing them to defer over £5 billion in tax payments.

In a poll last year the scheme was voted the most popular of all the Government’s business support programmes. According to the Forum’s latest Economy Watch survey, almost 60% of business owners believe HMRC has been supportive in recent months.

This is despite 28% saying that levels of taxation are too steep, 19% reporting that they struggled to speak directly to a HMRC representative and others complaining of problems with making online payments and a lack of payment flexibility.

In all, only 3% of business owners surveyed said they have experienced difficulties in accessing the scheme and just 1% said that HMRC’s advice has been inconsistent.

The scheme was extended for a further four years by the previous administration, but recent reports suggest it could be being wound down as part of public spending cull to reduce the hole in the UK’s finances. Reducing the deficit was seen as a top priority by the majority of small businesses polled by the Forum in an earlier survey.

Almost a quarter (24%) of respondents to Economy Watch note a recent increase in their tax burden. Further information from a range of organisations, including accountants and finance specialists, suggest that the rate of approved applications under the scheme is shrinking, particularly for firms owing larger sums of money, and that businesses are being given less time to defer payments.

However, despite the UK limping out of recession the need for the support service remains widespread. Out of businesses requiring support in the near future, 38% anticipate needing help to meet their tax payments.

“The Business Payment Support Scheme remains a real lifeline for many small firms struggling with cash flow and this will be the case for a while. Now is not the time for it to go,” said the Forum’s Head of Campaigns Jane Bennett. “Re-balancing the economy is clearly a major priority but sacrificing genuine support like this will only jeopardise small businesses and hinder sustained recovery. The message is clear – it is important to preserve ‘time to pay’ and other viable small business support schemes in the Budget.”

Tuesday’s Budget is expected to herald a range of measures on tax and public spending to tackle the record deficit, sparking fears among small businesses that they could suffer.

The Small Business Minister, Mark Prisk, has already hinted at plans for the Government’s business support structure, including possibly axing regional Business Link offices, which cost £190 million per year to run, and making changes to the Enterprise Finance Guarantee (EFG) scheme, a government guarantee for bank lending to small businesses introduced under the previous administration.

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The Finance & Leasing Association (FLA) has written to the Chancellor of the Exchequer in advance of next week’s emergency Budget, stressing the importance of helping business investment.

The FLA has pointed out to the Chancellor how the leasing industry can help British businesses invest for economic recovery.

A third of all UK businesses, many of whom cannot access other forms of lending, already use leasing to support investment in new equipment. It avoids the need to find the full purchase price, and helps ensure that businesses always have up-to-date and functional equipment.

Leasing can also play an important role in reducing the cost of public services. The Government’s Spending Review Framework, announced last week, made clear that options for non-state involvement in services should be considered by Government departments. Leasing should be part of this.

But a number of barriers prevent businesses and the public sector from making best use of leasing. The FLA has therefore called on the Government to:

· use the corporate tax system to support investment, not only by profitable businesses which can afford to buy equipment outright, but also by smaller businesses who would find leasing more cost-effective.

· ensure that any reforms to the corporate tax system at least allow the cost of equipment to be recovered over its economic life. Any substantial decrease in Capital Allowances could make it difficult for lenders to fund leases.

· simplify the current accounting and procurement rules which limit the ability of public services to lease rather than buy equipment.

Julian Rose, Head of Asset Finance at the FLA, said:

“The leasing industry can help economic recovery by directly funding the equipment needed by business and the public services. But to do that we need two things: a fair tax system that does not – as at present – favour the purchase of equipment over renting; and the removal of unnecessary barriers to the use of leasing by public services, so allowing public money to be spent cost-effectively on newer, energy-efficient equipment.”

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With the ‘emergency’ Budget less than two weeks away, and rising costs fears over potentially damaging tax hikes are denting the confidence of small businesses, according to the latest Economy Watch survey from the Forum of Private Business.

The Forum is warning that the struggling small business sector – widely regarded as the catalyst for economic recovery and growth – must not suffer unduly as a result of the difficult steps necessary to re-balance the economy.

In all, 37% of business owners surveyed in May 2010 said the cost of doing business – excluding tax – has increased. Almost a quarter (24%) said the tax burden has increased and 28% believe that existing levels of taxation are too high.

According to the monthly report, confidence has been dented by fears that tax increases in the Budget could hit small businesses hard.

The coalition Government is expected to reveal a raft of tax measures aimed at reducing the UK’s huge deficit, alongside significant public spending cuts.

They include possible changes to capital gains tax and an increase in VAT, a rise in employers’ national insurance contributions for some staff – although the 1% increase originally planned has been partially scrapped – and changes to corporation tax.

Despite a mooted cut in the higher rate of corporation tax there has been no indication of a reduction in the lower rate paid by small firms.

“All eyes are on the 22 June budget for the kind of policies needed to help small businesses grow,” said the Forum’s Head of Policy Matt Goodman. “We know that public spending will be cut to help get the deficit down, but there will be knock on effects to public sector contract opportunities and business support measures, so it is important that the coalition government gets it right – particularly in the area of tax.

“Running a business and controlling costs can be difficult. The Government’s emphasis must be on helping entrepreneurs to run their businesses more effectively, and fostering confidence as well as re-balancing the economy.”

Other economic indicators revealed by the survey include:

Orders, turnover and profitability

Orders have fallen for 21% of the businesses surveyed, turnover is down for 28% and profitability – including the impact of rising costs – for 37%.

These issues have become more problematic for businesses in most industry sectors, compared to last month’s figures, with the exception of manufacturers. The majority of these businesses reported relatively healthy order books and turnover.

Access to finance

In previous months, better financial performance was the main reason given for improvements in accessing finance. However, May’s figures show little change in the availability of finance, with 75% of firms reporting no change compared to April.

Just 3% said access to finance has improved – the same as the previous month – but a similar number (4%) reported a deterioration, compared to 13% in April.

Despite being profitable, some businesses have been denied overdrafts. Others have had their overdrafts reduced.

In all, 49% of business owners with existing external finance arrangements are confident that they will be able to access working capital and 45% that they can access growth finance.

Cost of finance

Access to finance is increasingly tied to the cost of finance. A number of businesses view increasing bank charges and fees as factors excluding them from accessing external finance.

With the Bank of England interest rate still at 0.5%, the latest Economy Watch data shows average rates on overdrafts at 5.8% in May, consistent with recent months, compared to the 6.5% recorded in the Forum’s ‘Economic Downturn’ panel in September 2009.

The cost of secured loans remains at 4.4% and, at 11.8%, is significantly higher for unsecured lending. In September 2009 the average rate for both types of lending combined was 6.8%.

In April slightly more respondents (85%) deemed finance to be ‘affordable’ or ‘very affordable’, compared to 78% the previous month. In both March and April just 10% said finance was ‘unaffordable’ or ‘very unaffordable’.

The affordability question was not asked in May because the results have been fairly consistent but, according to some members surveyed, there been slight increases in the cost of overdrafts and loans. Others reported increasing charges and banking fees.

Late payment and cash flow

Almost one in five (18%) firms experienced increases in late payments in May, but the levels of outstanding payment is decelerating. In addition, 20% reported that ‘other cash flow difficulties’ are rising.

Business priorities and needs

Priorities include increasing sales and turnover (47%), being able to operate in a stable business environment (35%) and reducing costs (17%).

Other factors entrepreneurs believe would help their businesses grow include improved business and consumer confidence (29%) – particularly given the uncertainty surrounding the imminent budget – stabilising the economy (20%), internal business development (18%) and specific industry incentives (11%).

Business support

Similar to recent months, 16% of respondents anticipate needing support while 69% intend to be self-sufficient and 15% are uncertain – indicating the importance of a stable business environment.

Few business owners detailed the precise nature of the support they require, but of those that did 67% called for help with training, the same number with recruitment, 50% need finance for training, the same percentage require working capital, 50% assistance with legal compliance and 38% want support on meeting tax requirements.

Business investment

In all, 28% have no plans to invest in their businesses in the coming month, 21% intend to invest in sales and marketing, 27% in training, 21% in machinery and equipment, 17% anticipate investing in upgrading property and the same number in product and process development.

Employment and skills training

Total employee numbers have dropped by 4% over the past year and around 8% of businesses have reduced their working hours. Some of these changes relate to agency staff or contractors but many have been full-time staff.

Respondents’ vacancies have dropped since April. However, so have the number of redundancies. Many small businesses appear to be reluctant to take on new staff until after the Budget.

Almost a third (32%) of the small businesses surveyed believe they are operating with a skills gap.

In all, 29% of respondents believe there is a shortage of employees with specialist skills, 24% identify a lack of generic technical or vocational skills and 19% of businesses perceive that there is a shortage of sales skills.

Further, 14% believe there to be a dearth of ‘employment attributes’, 12% customer service skills and 10% that there is a lack of administrative skills.

Selected by 47%, on-the-job training is still seen as the main solution to skills gap, followed by specialist external training (33%). Local colleges are also popular (26%).

Online training is seen as an option for 23% of respondents, but 22% selected outsourcing to a consultant or freelancer as a solution to meeting their skills requirements.

Formed in 1977, the Forum of Private Business is evolving following a year of intensive research about the real needs of small businesses.

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