The Chancellor hit a home run today in the budget for the future of the UK economy. Whilst many of the announcements were “leaked”, there were also some huge positive surprises. In March 2020, Sunak promised to do whatever it takes to support the economy. Today, he has set an environment, not only of support, but of recovery and growth via a three part plan:
- To do whatever it takes to save jobs and businesses
- Fix public finances
- Begin the work of building the future economy
Buried in those benign points are some hugely significant fiscal stimulus packages that will ignite UK business. Furthermore through Forward Guidance, a communication strategy used by the core central banks such as BOE, ECB and the Federal reserve he has provided certainty beyond the “opening up” of the economy. Most Budgets normally provide £2bn of changes but this one has brought a further £65bn to the Covid support package.
Looking through the lens of an accountant working with SME at the three point plan:
1. To do whatever it takes to save jobs and businesses.
Extended Furlough and SEISS through to September. This will likely cost the Treasury £15billion but it will ensure that the unemployment rate does not manifest the worst fears that were forecast in November 2020. Through the financial crisis, unemployment peaked at 7.8% Sunak expects unemployment to peak here at 6.5% which is lower than the 6.9% average back to 1971. A win for any government facing a crisis of this extent.
The biggest risk for the government in the face of a lower unemployment will be the insidious nature of long term unemployment, which Sunak will hope that the various loans, grants, freeports, apprenticeships will help to address. More on this below.
2. Fix Public Finances
In March 2020 - Sunak pledged £280 billion in support across the pandemic. This financial year, the government will have borrowed £355billion, 17% of national income, which is the highest level since WW2. Sunak is a fiscal hawk and made the point that 10yrs+ of austerity enabled an effective response to this crisis, which on a global scale is one of the largest per capita. As a hawk, Sunak has pledged to reduce the level of borrowing to 10% of national income in 2021/22, 4.5% in 2022/23 and down to 3.5% in 2023/24. Whilst this fiscal responsibility will be the job of many governments over many decades, below are some of the key measures Sunak has initiated that will impact you and your clients:
Corporation tax to headline at 25% April 2023
- For businesses with sub 50k profits, some 1.4million SMEs they will be frozen at 19%
- For £50k-250k it will be tapered
- £250k+ will be the full 25%
Whilst well trailed in the leadup to the budget - The CBI are already calling this a shortsighted tax. I disagree, it is progressive and only affects those who have not only recovered, but are trading through a threshold of profitability.
Manifesto Led Freezes
Unable to increase many taxes due to the manifesto, Sunak has frozen Income Tax, VAT, CGT, Pension relief, IHT and more up to 2026. A stealth tax, that will pull many into increased levels of taxation, as inflation led pay rises and contributions are taken into account.
3. Begin the work of building the future economy
This is where Sunak has tilted the balance in the economies favour:
CBILS has been given a refresh into Recovery Loans. This will be a vital source of new funding as many businesses are running up against their 25% turnover limits of the CBILS and BBLS criteria - What we know so far:
- 80% government guarantee
- No Turnover limit
- Wide range of products - term loans, overdrafts, asset finance and invoice finance
- Term length will be 6yrs for term loans and overdrafts and invoice finance 3yrs
- Interest and all fees to be paid by the business at the outset
- Access multiple schemes i.e. CBILS, BBLS and Recovery Loans
- Loans will be affordability assessed and will vary between lenders
The program will run until December 31st 2021.
This is huge! Any business making sufficient capital investments will be able to reduce their tax bill by 130% for the next two years. This is world leading and will represent £25billion of tax cuts. From an OECD perspective, this will take us from 31st in the OECD to 1st for credits around business investment.
The assumption is that it will be via capital allowances and we wait to see the detail around which assets qualify. It will perhaps require businesses to re-assess whether they should buy or lease their equipment and machinery. With supportive lending schemes via the recovery loans, there will be the opportunity to clawback loan costs through for capital investments and these allowances.
With eight locations in England and provisions for Scotland, Northern Ireland and Wales, Freeports will provide company tax breaks for construction, investment and job creation and cheaper customs duties and infrastructure funding. With additional investment from the National Infrastructure bank the goal here will be to drive innovation and green infrastructure. The hope will be that there is less red tape, not more.
For accountants in these areas, businesses will be making key decisions on where to base their company and how to invest.
Innovation and Productivity
Much like the Khalifa report released last week on Fintech, Sunak has kicked off two key consultations on R&D and EMIs. UK has long been the poor man of productivity when compared to the G7 or Europe. Along with the Help To Grow Scheme with online training from key MBA providers, 50% discounts on productivity tools and a points based VISA scheme for highly skilled individuals Sunak is trying to shift the nature of our economy.
More grants have been announced for businesses affected by lockdown and are shortly hoping to restart their businesses. These will again be based upon rateable property values and administered by the Local Authorities and this scheme doesn’t appear to include a discretionary element this time, where local business development teams can set the criteria, so home-based businesses are unlikely to qualify. Given the low drawdown rate of the previous grants for Additional Restrictions to date, it is hoped that the Councils can organise their resources to distribute these swiftly to provide some cashflow to these businesses as they need to gear up to launch in the coming weeks.Maintaining the VAT rate at 5% for hospitality and leisure and returning it to 20% gradually, plus extending the business rates holiday all aim to support the relaunch of our British high streets.
Sunak has delivered a hugely supportive budget today, but he also outlined how to retain fiscal responsibility. SMEs will continue to have their challenges, but with these new initiatives and forward guidance Sunak has walked a delicate tight rope.
Your SME clients will be looking to you for guidance on the furloughs and SEISS, Corporation Tax, Super Deduction allowances and whether they should be leasing or hiring, recovery loans, grants and R&D, apprenticeships and much more.
Sunak has once again put you at the heart of all guidance around Capital Advisory.
If you would like to hear more about how Capitalise could help you with your clients – book a consultation.