Key business takeaways from the spring statement

Megan Bray March 25th 2022 - 4 minute read

With the UK facing a tight squeeze on income, the Chancellor’s Spring Statement was a major event in the UK economic calendar.

As expected, Rishi Sunak unveiled a range of new measures in his mini-budget, as well as confirming changes due to take place in April that some had hoped he’d axe. The response from economists and industry was mixed but mostly negative, with many feeling that Sunak’s support for UK households and businesses didn’t go far enough.

So, how could these changes affect UK businesses and the country’s economy at large?

Consumer spending

The Office for Budget Responsibility’s (OBR) economic and fiscal outlook, released alongside the Chancellor’s statement, warned that ‘living standards are set for a historic fall’ as the squeeze on real income tightens.

Sunak announced new measures aimed at alleviating the cost-of-living crunch for households, but the OBR says this will only offset one third of the fall in living standards.

Others have argued that the measures brought in will disproportionately benefit top- and middle-income families, while lower-income families and those on benefits or pensions could suffer the most.

What this means for businesses:

As the squeeze on income intensifies, we could see a fall in consumer spending. Shoppers may seek to spend less, perhaps by limiting luxury items or focusing on value.

Needless to say, concerns that poorer households will be worse off are very troubling. But a boost to middle-income households might help to reduce the drop in demand for non-essential goods and services.

Business investment

Sunak also announced changes to business investment, though details are sparse.

One thing we know for certain is that the Employment Allowance for small firms will rise from £4,000 to £5,000 – a tax cut of up to £1,000 for half a million small British businesses. This will come into effect in April.

The Apprenticeship Levy will be reviewed with the aim of increasing flexibility in how funds can be used. Sunak says this will help to incentivise investment in training employees.

The Treasury will also set about reforming research and development (R&D) tax credits. Sunak said he would consider a ‘more generous’ approach to credit for R&D expenditure in the autumn budget. The scheme will be expanding to include data, cloud computing and pure maths as of April 2023.

Finally, the Chancellor added that he would cut tax rates on business investment in the autumn budget.

What this means for businesses:

The increased Employment Allowance is welcome news and should help some small firms retain staff and weather rising costs. The government estimates that 30% of all UK businesses will benefit.

The other announcements are harder to gauge since they’re merely potential future policies at this stage. Expanding the R&D credit scheme could be good news for some tech companies, but none of this will help businesses through the trying months ahead.

National Insurance

Unable or unwilling to pull a full U-turn on the unpopular National Insurance hike, Sunak found another way to cushion the blow. The threshold for employee National Insurance contributions will rise by £3,000, versus a planned £300 rise.

Unfortunately, this is only for employees and not employers, so businesses still face the full 1.25-percentage-point rise in NI contributions.

What this means for businesses:

While the increased threshold could help boost consumer spending, businesses will not benefit. As a result, talent retainment and recruitment could become increasingly difficult and the cost of employment will increase.

Rates relief

For many businesses, the meat of the Spring Statement comes in the tax and fiscal reliefs that Sunak announced, brought forward or confirmed.

First off, the planned 50% business rates relief for eligible hospitality, leisure and retail firms – capped at £110,000 per company – will go ahead in April. This could provide a lifeline to some of the businesses that have been hardest hit by the pandemic.

One well-telegraphed move was the Chancellor’s 5p cut to fuel duty, while a reduction in VAT should see fuel fall by 6p per litre. However, with energy prices continuing to soar, these savings could be eaten up in no time at all.

Sunak also brought forward a business rates exemption for companies investing in on-site renewable energy generation and storage. The exemption was initially due on 1 April 2023 but will now come into effect a year earlier. Eligible low-carbon heat networks that have their own rates bill will also get a 100% relief.

What this means for businesses:

The fuel duty cut is a popular policy, although soaring energy costs remain a concern. This cut will be a boon to self-employed professionals who rely on their vehicles and could help reduce transport and trade costs.

The green technologies relief seems to be a mixed bag. It’s great to incentivise sustainable business practices, but this could potentially only benefit firms who are in a position to invest in the technology. Companies struggling with the current squeeze might not be able to take advantage of the scheme right now.

VAT rise

This one’s more about what the Chancellor didn’t announce. VAT on food and drink will return to 20% in April, as laid out in the autumn budget, despite the growing momentum of the hospitality industry’s #VATsEnough campaign. Industry leaders had been pressuring the Treasury to maintain the pandemic-era reduced VAT rate of 12.5%.

What this means for businesses:

Kate Nicholls, the CEO of UKHospitality, was scathing about the decision:

‘This is a real setback for thousands of UK hospitality businesses still suffering the devastating effects of Covid, and facing a tidal wave of rising costs. For many businesses, the removal of the lifeline of a lower rate of VAT might prove fatal. For a heavily, disproportionately taxed sector a return to 20% dashes the hopes that many businesses could begin to recoup some of the losses of the last two years.’

The VAT increase could also see higher prices passed on to consumers, pushing inflation higher and worsening the living-standards squeeze.

Overall outlook While Sunak’s statement definitely contained some welcome announcements, there are choppy times ahead. The title of the OBR’s economic and fiscal outlook speaks volumes: ‘Spring Statement uses fiscal windfall to cushion historic hit to living standards’.

The OBR cut its growth forecasts for 2022 and 2023 from 6% to 3.8% and from 2.1% to 1.8%, respectively. Sunak added a sobering warning: ‘The OBR have not accounted for the full impacts of the war in Ukraine and we should be prepared for the economy and public finances to worsen – potentially significantly’.

So, while the economic outlook isn’t great, hopefully Sunak’s announcements will help alleviate some of the pressure on businesses and households, with more support coming in the autumn. In the meantime, now is as good a time as any to work on building business resilience.

Written by
Megan Bray

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