01 September 2022
As businesses still try to recover from the impact of national lockdowns implemented to tackle the coronavirus pandemic, they are now faced with new financial challenges as energy prices continue to soar amidst the cost-of-living crisis. With media conversation focusing on what these staggering energy hikes mean for households, and much of the proposed financial support from candidates in the Conservative leadership race aimed at households, businesses may feel excluded from the proposals. Households have the protection of the energy price cap, although this is set to increase by 80% in October, but businesses are not afforded this security.
Ahead of the new prime minister being appointed in September, urgent support is needed for businesses. The introduction of energy price caps for businesses or similar measures could take too long to implement when action is needed immediately, especially in energy-intensive sectors such as real estate development and construction. The construction sector is also facing employment shortages and disruptions to global supply chains.
So, what immediate support could the new prime minister provide? A potential short-term solution could be to implement an immediate and significant cut in the VAT rate for consumer businesses, which would help to alleviate some financial pressures, while avoiding passing on inflationary costs to the consumer. A similar approach was previously adopted, with certain businesses in the leisure and hospitality sector benefitting from a temporary reduced VAT rate up until 31 March 2022.
The new prime minister could also consider implementing business rate rebates or holidays, which for businesses eligible, could provide significant relief. It is, however, a potentially costly approach for the Treasury, with the former Chancellor Rishi Sunak previously confirming that the business rates support provided in response to the pandemic cost over £16 billion.
To help businesses reduce their energy consumption, another route could be to provide grants to finance energy efficient investments, encouraging them to adopt more environmentally sustainable technologies.
Lastly, the recently introduced national insurance increases could be reversed, as well as the health and social care levy planned for next year. Employment costs and demands for pay rises, due to the cost-of-living crisis, are significantly increasing employee costs for employers and without support they may need to reduce their workforce to survive. The government could increase the threshold at which employers’ national insurance become payable to reduce employment costs for employers.
If the government continues to delay action on tax support for businesses, we may see a significant uptick in closures, especially in the leisure and hospitality industry. Between January 2020 and 2021, there was a 10% fall in the number of hospitality business in the UK and the concern is that more could face a similar fate without support. The UK hospitality industry employs approximately 10% of the UK workforce and represents approximately 5% of the UK’s gross domestic product (GDP), so the government will need to seriously consider immediate action on the taxes businesses face now, to try and alleviate the challenges they face and mitigate the broader economic impact presented by widespread business failures.