Consultancies warn autumn budget shortchanges SMEs
While small and mid-sized businesses seem to be one of the key battleground on which the 2024 UK general election will be fought, many economic commentators feel the government’s latest budgetary statement does not go far enough to cater to their needs. While some leading consulting firms issued statements praising the implementation of new tax incentives for the mid-market, many more warned the measures did not go far enough to unlock the economy’s growth potential.
Small and mid-sized enterprises (SMEs) exist in an esteemed ideological position in the UK. Commonly referred to as the “motor” behind job growth and economic prosperity, often without either claim being particularly thoroughly evidenced, mainstream politicians have spent decades trying to woo the mid-sized business leaders among the electorate – often at the expense of other demographics – with the promise of tax cuts, state incentives, and laissez-faire regulations.
With the Labour Party’s continued shift to the right since the last election, this has seen it court SMEs as a core part of its strategy for when voters next go to the polls. The move has aimed at undercutting the incumbent Conservative government, which presents itself as the natural home of SMEs, but has found itself constrained in its attempts to aid them, by rampant inflation and economic uncertainty. Even so, recent research from Bibby Financial Services found that a majority of SMEs still do not believe either party is their best choice at present.
This made Chancellor Jeremy Hunt’s autumn statement a key moment ahead of 2024’s election campaign. Further outlining this, ahead of the statement, polling from Grant Thornton showed that mid-market confidence in government support provided to them had continued to decline since its spring budget – falling from 79% saying enough was being done, to 69%. When asked what they felt the priorities in the statement should be, 37% said infrastructure upgrades were key – ahead of investment in skills and incentives for research and development (R&D) on 34% and 31% respectively; and tax reform on a distant 21%.
Hazel Platt, the head of tax at Grant Thornton UK, commented, “Over the past few months, the prime minister and the chancellor have made it clear that the UK’s current fiscal position, along with economic priorities to cut inflation and bring down debt, mean this will not be a statement of big tax giveaways. However, the fiscal position is rumoured to be better than expected and with the government’s pledge to halve inflation this year met last week, a sense of optimism has entered the government’s narrative, with the chancellor positioning the autumn statement as a ‘statement for growth’.”
Consultants weigh in
The extent to which Hunt and the Treasury delivered on that front is a matter of continued discussion, though. One particular change looks set to give with one hand, and take with the other, in regards to SME interests. Explaining plans to merge SME and large company R&D schemes as “a welcome simplification” on the one hand, Rachel Moore, innovation incentives partner at PwC, warned that uncertainty remains on who is entitled to claim, and that a lack of delay in executing the scheme will cost firms which have already entered into contracts that are impacted by the rules” enforced in April 2024.
She added, “The merger is likely to result in a further reduction in claim value for many SMEs where the credit rate was already nearly halved earlier this year to just over 18% and will fall to 15% for profitable businesses. Today it was announced that the credit will be made slightly higher for loss makers at 16.2% which will bring an additional boost for large companies but could have unintended consequences on the accounting of the credit, reducing rather than increasing operating profits.”
Some consultants did strike a more positive note on the statement, though. Pointing to further research from Bibby Financial Services, the firm’s CEO Jonathan Andrew noted that 65% of SMEs would like to see the next government implement tax incentives to support them – meaning “today’s announcement is a welcome indication that politicians are responding to their needs.”
Andrews elaborated, “We welcome the permanent adoption of 100 per cent full expensing on qualifying capital spending. Particularly given the current turbulent market conditions, this will give SMEs a massive confidence boost and underpin their resilience. It presents an opportunity for SMEs to do something different to stay ahead of the competition, whether by investing in cutting edge equipment that improves productivity or by pivoting their business offering.”
Also striking a less conciliatory tone was Jay Bhatti, an R&D senior tax manager at MHA. Suggesting that R&D in the UK was in a dire state, he argued that the unified R&D Scheme that will come into force is “a bad idea and does nothing to fix critical flaws with the UK’s R&D system, especially as this pertains to SMEs.”
He added, “The chancellor has actually slashed the cash available to loss making SMEs conducting high risk R&D before commercialisation. The ‘R&D Intensive SMEs’ sub-category will only benefit 3000 SMEs (as the chancellor admitted) and we fully expect most of these to be based in the South East. Fintechs and businesses with Oxford or Cambridge links find it easier to claim. This is not 'Levelling Up'. It is actively discriminating not only against other regions in the UK, but other sectors of science and technology that are not fintech-based (like Life Sciences, Robotics, etc).”
On another front, some experts praised Hunt’s plans, but contended that they were not aggressive enough. Simon Crookston, head of corporate tax at Crowe UK contended that the autumn statement “does not go far enough to act as a catalyst for companies to invest, innovate and grow” – specifically pointing to tax reforms, he believes SMEs would benefit from. The chancellor promised Class 2 National Insurance Contributions for self-employed taxpayers – previously 2.8% - would be abolished, while Class 4, 9% on profits between £12,570 and £50,270, and 2% on profits over £50,270, would be reduced. However, Crookston asserted more action was needed.
“The chancellor should have been bold and reduced the main rate of corporation tax,” Crookston stated. “It is a real shame that the chancellor did not provide incentives to encourage further investment in green initiatives. We need to radically change our approach to environmental and sustainability matters. The chancellor seems to have completely ignored these areas in his statement. While the statement provided support for the self-employed with Class 2 NI being abolished and Class 4 being reduced by 1% - it did not provide enough support to the majority of the owner-managed and mid-tier businesses in the UK."
This was a similar tone to Richard Godmon, a tax partner at Menzies. As the country is now well on the path to an election in which the government looks set to lose its majority, Godmon suggested “the chancellor could have gone much further” in his bid to court SMEs and “kickstart the UK economy into action again.”
Godmon contended, “SMEs are arguably the engine room of the economy, and it was particularly disappointing to see them largely left out of this statement with the exception of the freeze to the small business rates multiplier. Even the headline announcement for businesses – that full expensing will become permanent – only applies to companies, and will not help the many thousands of unincorporated businesses that are crucial to the economy.”
Beyond business
When a government decides to cut the amount of revenue it is going to bring in from taxes, questions of where the money is going to come from to fund that inevitably follow. In Hunt’s budget, pensioners had been concerned that he would back out of the government’s triple-lock promise to boost payments – whichever is highest from inflation, earnings or 2.5% a – but he eventually confirmed the state pension will rise by 8.5%, in line with inflation, in a move worth up to £900 a year.
Instead, the axe looks set to fall as it so often has over the past 13 years of austerity, on welfare recipients across the UK. While benefits will also rise with inflation, despite speculation ministers could have used a lower rate to save money, a slight of hand means that a social security crackdown will make it harder to claim.
The government’s policy will soon mean that those who do not look for work face, after a certain amount of time, having their benefits cut off – including access to free medical prescriptions and legal aid. It is a move which human rights campaigners suggest violates basic rights to life, and legal representation.
At the same time, work capability assessments for those with health conditions and disabilities will be reformed “to reflect greater flexibility and availability of home-working”, in a move that has led charities to hit out at Hunt. Estimates reported by The Guardian suggest an estimated 370,000 people with disabilities and chronic health conditions will be ineligible for incapacity benefits worth £5,000 per-year, and forced to look for work under the chancellor’s schemes.
Sarah Hughes, chief executive of mental health charity Mind, argued the move was founded on “baseless assumptions about disabled people” before urging ministers to rethink the plans. She added that “the reality is that the vast majority of people with mental health problems want to work but are consistently let down by poor support across the board.”