Chancellor Kwasi Kwarteng’s “mini-budget” was anything but miniature in scope. It signalled a substantial shift in UK economic policy towards a more low-tax, low-regulation model.
It was part of the Government’s Growth Plan – a sweeping attempt to revive UK economic growth to 2.5% per year. This post is our take on the budget, along with its likely impact on SMEs.
The main takeaway is this: lower taxes will certainly give SMEs breathing space. But those who run SMEs are also coping with increased living costs in their own lives. Now let’s look at it in more detail.
What measures did the government announce?
The mini-budget included cuts to taxes that individuals and businesses pay, as well as measures to reduce regulation. For our purposes, the most notable measures were as follows:
· Basic rate of income tax cut from 20% to 19%.
· Initially, abolition of the 45% higher rate of income tax. But the Government has now reversed this proposal.
· Repeal of IR35 Reform.
· Reversal of the 1.25% rise in National Insurance contributions.
· Reversal of plans to raise corporation tax to a maximum of 25%, depending on profits. The 19% rate will remain as a flat rate for all businesses.
· Annual Investment Allowance will remain at £1 million permanently. The allowance offers businesses 100% tax relief on plant and machinery investments per year, up to £1 million in value. This reverses plans to reduce the limit to £200,000 in March 2023.
· The creation of Investment Zones with further tax and regulatory incentives for investment.
What was the purpose?
The hope is that this will create growth by encouraging investment and driving down costs.
In economics jargon, these are called supply-side reforms. In other words, they’re designed to increase the supply of goods and services.
How are the tax cuts funded?
The government plans to fund the cuts through borrowing, but the Chancellor has also committed to reducing the public debt. He plans to make a statement on this at the end of the month, so we’ll have to wait and see.
What was the response?
As with any budget, responses varied. Many business leaders welcomed the reduction in costs and regulation. Some also expressed hope that the low corporation tax rate (the lowest in the G20) will encourage international investment.
Nonetheless, there has also been plenty of doubt and controversy – which has been pretty hard to avoid for anyone following the news in the last week!
What are the implications for SMEs?
Time will tell whether this delivers growth, and how quickly. There are certainly positives for SMEs in terms of costs. The package of tax cuts will undoubtedly free up capital. This comes alongside the Energy Bill Relief Scheme, which puts a cap on wholesale energy costs.
Still, inflation remains high, especially in energy. These increased costs will still cause big concerns for people who run SMEs. That’s not just because of extra business costs – they’ll feel it in their personal lives too.
There’s also a question of whether demand will go down. Cost-of-living worries are widespread, and people may have less to spend on goods, at least in the short term. This could have knock-on effects for all sorts of SMEs, especially those who sell direct to consumers.
This makes for a bit of a mixed picture for SMEs. Many were worried about surviving the winter before the budget and Energy Bill Relief Scheme. Hopefully, there’s some extra breathing space there. But there remain doubts about near-term economic confidence.
How should SMEs react?
As ever, this depends on your business. But there are plenty of financing options for businesses, including government grants and leasing. This can help with anything from improving cashflow to investing in capital assets.
Navigating the options is far from easy, and it’s wise to speak to experts. If you’d like more information on what’s available, by all means get in touch.