Chancellor Rishi Sunak’s Budget on 3rd March was eagerly anticipated. Many small businesses were hoping that he’d set out a clear strategy for the country coming out of the coronavirus crisis and in the post-Brexit world. However, the Budget he delivered lacked ambition as well as that longed for clear strategy we could all work too. It was also full of risks for the longer term.
There is still a lot of uncertainty in the economy. The Chancellor announced another major tranche of borrowing to pay for ongoing Covid-19 schemes, including the welcome extension of the Furlough Scheme to September 2021. Then he outlined a major retrenchment by announcing significant tax rises from next year. The freezing of the personal income tax allowances at the April 2021 thresholds was accompanied by a proposed huge increase in Corporation Taxes to 25% for larger firms from 2023. If you are a small firm and your profit is less than £50k your corporation tax will remain at the 19% rate. While the chancellor says that 7 in 10 firms will be unaffected by the 6 point rise, and that at 25% the headline rate will still be below that of other G7 countries, there is a big risk that the announcement will help to stifle the robust growth predicted by the OBR of 4% this year and 7.4% next year.
Paul Johnson, Director of the IFS said:
Make no mistake, this proposed increase in the main rate of corporation tax is a big reversal of decades of policy direction and a significant risk. For all the rhetoric about it leaving the headline rate here below that in other G7 countries, our effective tax rate will be relatively high.
Apart from the Furlough scheme there was good news for some self-employed. The Self-Employment Income Support Scheme (SEISS) scheme will be extended to include an estimated 600,000 previously excluded self-employed workers. However there was nothing for the remaining ‘excluded’ who run one person limited companies. It was also confirmed that the delayed changes to IR35 in the private sector would come in to force on 6th April 2021.
Also from 6 April 2021, the Recovery Loan Scheme will provide lenders with an 80% guarantee on eligible loans of between £25,000 and £10 million, to give them the confidence to continue to provide finance to UK businesses. The scheme will be open to all businesses, including those which have already received support under the existing COVID-19 guaranteed loan schemes.
The Government will provide ‘Restart Grants’ in England of up to £6,000 per premises for non-essential retail businesses, and up to £18,000 per premises for hospitality, accommodation, leisure, personal care firms and gyms, giving them the cash certainty they need to restart and plan ahead. Local authorities in England will get an additional £425 million of discretionary business grant funding, on top of the £1.6 billion already allocated. Altogether, this support brings the total cash grants provided by the Government to £25 billion.
The Business Rate holiday will be extended to July. The reduced VAT rate of 5% will be extended for the hospitality sector until September. Businesses taking on new apprentices from April to September this year will get a payment of £3k for each apprentice.
Then there is the super deduction which will run for two years until April 2023. A firm investing in qualifying new plant and machinery will get a 130% first-year capital allowance. It’s an interesting idea but the likelihood is that it will pull forward investment that would already have been made, and that come April 2023 investment will fall off a cliff just as the corporation tax goes up.
The long and the short of this Budget is that most people will be poorer by the time the next election is due in May 2024 and many will have lost their businesses and their savings. Will unemployment really be under control by then? And what about the big spectre hanging over the whole of the world as the major countries inject major stimuluses? Inflation. It could lead to higher interest rates and which could make the UK’s whooping debt unsustainable! For this reason I believe the Chancellor, whoever that may be, will have to, in due course, impose even harsher measures to tackle the debt and that risks stifling the full potential of our economy.
One final observation: due to the pandemic the economic cycle and the political cycle are out of kilter. Normally you plan to bring in all the harsh fiscal measures in the first year of a Parliament and then give away gifts in the last year of the Parliament, in the run up to the next election. That is now impossible in this Parliament. Unless, on the back of a successful vaccine roll out and a short term boom in 2022, an election is called for the autumn of 2022 in the hope of getting re-elected with a renewed mandate for the task ahead! That puts a slightly different complexion on the Chancellor’s budget.