Have small businesses been short-changed in the Budget?

It was dubbed the ‘growth’ Budget – but many small businesses have been left in the cold, with little further support in the face of crippling energy costs and higher taxes.

Chancellor Jeremy Hunt confirmed the long-awaited corporation tax rise from 19 per cent to 25 per cent. Although many smaller firms will be exempt, it will leave some with higher costs and could act as a barrier to investment. 

And as the ‘super deduction’ scheme winds down at the end of the month, Hunt offered a new system of ‘full expensing’ in its place.

We take stock of what the Budget means for small businesses, explain the rules around the new rate of corporation tax, and look at what full expensing is and whether it will offset higher costs elsewhere. 

Corporation tax now 25% – but some are exempt 

Even before rising energy costs and supply chain issues, small businesses are facing huge headwinds come April.

Then-Chancellor, Rishi Sunak had introduced a hike from 19 per cent to 25 per cent in March 2021, but it is only now coming into force after a series of ups and downs. 

Kwasi Kwarteng blocked the rise as part of October’s disastrous mini-Budget, before Hunt confirmed the Government’s commitment to a 25 per cent corporation tax as planned.

From 1 April the main corporation tax rate will rise from 19 per cent to 25 per cent for companies with profits above £250,000, while small companies with profits of £50,000 or less will continue paying 19 per cent.

A marginal relief rate will provide a taper for companies with profits between £50,000 – the lower limit – and the higher limit of £250,000.

HMRC has put together a calculator for marginal relief, which will help you work out how much more you’ll be paying. 

The lower and upper limits will be reduced for short accounting periods and when there are associated companies.

If you operate more than one limited company, where one company is controlled by the other, the thresholds are also reduced.

While the vast majority of businesses will be unaffected by the change – 70 per cent of companies will still be paying the 19 per cent rate, according to the Treasury – there are concerns higher taxes will further disincentivise investment.

What is full expensing? 

Along with a rise in corporation tax for some businesses, the ‘super deduction’ scheme, which offered 130 per cent tax relief on companies’ purchases of equipment, will also end on 31 March.

In its place will come ‘full expensing’, which will allow all qualifying capital expenditure to be written off by companies against their taxable profits in the year it’s incurred.

In addition, a new annual investment allowance will also provide 100 per cent first-year relief for plant and machinery investments up to £1million, which will be available for all businesses.

It maintains the targeting of the super-deduction, so it won’t be available to those buying second-hand equipment, and it also applies at a rate of 50 per cent to long life assets.

Chris Sanger, EY’s head of tax policy said: ‘Notwithstanding these constraints, giving £25 back for every £100 spent, is still expected to encourage greater investment, even if in reality it only represents a cashflow benefit.

‘In practice, this represents a very slightly larger cash flow benefit than the super-deduction, which was £24.70 for every £100 spent, since it applies to a corporation tax rate of 25 per cent not 19 per cent.’

This might be welcome news for many businesses, but just how long will it be in place? 

Hunt said full expensing would be in place for three years, but hoped it would become permanent. This is far from the certainty needed by businesses who will be looking beyond three years. 

When the scheme comes to an end in 2026, there may well be a new Chancellor in Number 11, and businesses are unlikely to alter their investment plans based on a three-year horizon.

Even with full expensing at play, how much is this likely to offset the change in corporation tax?

‘Allowing businesses to fully expense investment against taxable profits may only mitigate the impact of other incoming changes,’ says Martin Beck, chief economic advisor to the EY Item Club. 

‘The new investment incentive is time limited, while the corporation tax rise is permanent. 

‘And the overall tax burden is still headed for a 70-year high, aided by the continued cash freeze in income tax thresholds.’

‘The Government needs small businesses’

Steph Douglas, co-founder of online gifting business Don’t Buy Her Flowers has struggled since the start of the cost of living crisis. Responding to the Budget, she said: 

‘We very quickly saw negative customer sentiment reflected directly in traffic to the website – when energy price increases were announced, and the Truss debacle in the autumn – those things understandably cause fear and anxiety, and if customers are anxious about spending, they don’t. 

‘The difference is that small businesses have smaller reserves to fall back on and it’s been really tough.

‘What I can’t see from this Budget is any cut in business rates, and while there’s a mention of reducing paperwork for international traders, does that make it any easier for small businesses to ship to the EU, which is currently near impossible and reduces our potential market? 

‘As a small business, we don’t have the resource to pore over red tape or someone telling us exactly what Budget statements mean for us – we have to figure it out. In this way often SMEs are overlooked, despite employing 44% of the UK workforce and contributing 52% of GDP. 

‘The Government needs us to grow the economy.’

Small business rates are also set to increase on 1 April, another unwelcome tariff for small businesses. 

English firms can claim for Small Business Rate Relief if their property’s rateable value is lower than £15,000, despite the FSB’s calls to increase this to £25,000.

Danni Hewson, head of financial analysis at AJ Bell said: ‘Full capital expensing is pretty headline-grabbing, but the problem is it replaces the super deduction which at 130 per cent was a tad more generous. 

‘Businesses are also having to factor in the increase in corporation tax, so it feels a bit like they’ve been short-changed on this one.

‘Getting businesses to look past the current economic uncertainties and increased costs for things like energy and labour is a must if the economy is going to achieve even the 1.8 per cent growth the OBR is forecasting for next year, and there will be some sectors taking a long hard look at the small print to see exactly what investments are covered by the scheme.’

A glimmer of hope?

The Chancellor struck an optimistic tone in his statement, as he revealed the OBR had forecast the UK would not fall into a recession this year.

A better-than-expected economic forecast will be some consolation for small businesses who have no doubt struggled with low consumer confidence and spending for over a year.

News of ‘returnships’ for the over-50s, as well as significant reform to childcare, will go some way in helping to fill vacancies and push up productivity.

Business groups, including the FSB and Enterprise Nation, have long called for support for the over 50s, as well as a Kickstart-style scheme to encourage people who’ve been out of work for a long time back into employment.

Elsewhere, UKHospitality boss Kate Nicholls welcomed further energy support and frozen fuel duty which will ‘help hard-pressed households and increase disposable income, which will be a huge boost for venues in desperate need of trade.’

After calls for support since the pandemic, the hospitality industry will be pleased that duty on beer in pubs will be up to 11p lower than in supermarkets.

The hospitality industry will be cheering changes to draught duty which mean beer will be up to 11p cheaper than in supermarkets

But Emma Jones, CEO of Enterprise Nation, said while news that returning mothers and ‘returnships’ for the over 50s might help fill vacancies: ‘No amount of tax tinkering can make up for the incremental rise in corporation tax that hits well before £250,000 in profits and effectively slashes [businesses] incomes, especially when energy costs are still high.

‘This was a Budget for the high-growth industries and returning workers. It makes the case for the Government to see businesses as distinct; those with 0-10 employees who make up the majority of the economy, and the rest.’

No further energy bill support 

Despite an extension of the energy price guarantee for domestic households, small businesses were left in the lurch again with no further support, other than the previously announced Energy Bills Discount Scheme, which will come into effect on 1 April.

The new, less generous scheme offers businesses a discount on the unit price of gas and electricity and is available to those on fixed-price contracts that were agreed on or after 1 December 2021, as well as deemed and out-of-contract rates.

> Read our guide to the new discount scheme and when bills will start to go down for businesses

A recent poll by insurance provider Simply Business shows that over a quarter of businesses believe they won’t be able to pay their bills this year.

Martin McTague, national chair of the Federation of Small Businesses, was less than happy with today’s Budget, saying the support for small firms in critical areas was ‘glaring’.

‘Action is what counts if we are to reverse the 500,000 small businesses lost over the last two years. It’s high time the Government put small firms at the top of the agenda and lend them the necessary support on the path to economic recovery.’