“There are decades when nothing happens; and there are weeks where decades happen” – Vladimir Ilyich Lenin
Last week felt like one of those momentous weeks when you look back and can pinpoint it as a pivotal moment as so much happened during it that we need to take a little time to work through the ramifications of all the individual announcements including a government announcement on energy support for businesses, another rise in interest rates and the new Chancellor of the Exchequer Kwasi Kwarteng delivering a “mini” budget.
Energy Support
The business secretary Jacob Rees-Mogg announced the details of an emergency package of support with the main announcement being a cap on the price businesses pay for energy coming into effect from October 1st initially for six months.
This discount on wholesale energy prices will apply to charities and public sector organisations such as schools as well as businesses. Certain vulnerable industries such as hospitality may be offered further help after March 31st 2023.
The new supported wholesale price is:
| Price per Kilowatt per Hour | Price per Megawatt per Hour | |
| Electricity | 21.1p | £211 |
| Gas | 7.5p | £75 |
This price level is double the price from a year ago in October 2021 but just over half the forecasted winter price level.
The scheme will be applied automatically to new contracts from the start of next month and to any fixed business energy contracts taken out since April 1st 2022.
Businesses on default, deemed or variable rate tariffs will receive a per-unit discount on energy costs up to a maximum of the difference between the supported price and the average expected wholesale price over the six month period of the scheme.
This discount is likely to be the equivalent of £405 MWh for electricity and £115 MWh for gas use and roughly equivalent to the £2,500 per year “energy price guarantee” already announced for households. Businesses on flexible purchase contracts will receive a level of reduction calculated by suppliers according to the specifics of the contract.
Additionally business bills will be reduced through the removal of green levies for non-domestic energy customers that was already cut from household bills.
The government intends to publish a review of the scheme early in January after three months’ operation to inform whether extended support beyond March 2023 will be required.
Response from business is generally welcoming but each sector will have its own challenges.
Stephen Phipson, chief executive of Make UK, the manufacturers trade body, said the support was timely but warned that as wholesale energy prices were likely to remain high that “Industry will need support for a longer period to protect jobs and remain competitive, so the further announcement of a review on future support at the three-month stage is reassuring.”
There is some worry that an artificial cliff edge has been created for the end of March and some additional worry that the scheme could have been better targeted.
The Resolution Foundation pointed out that companies on long-term contacts already paying less than the new cap wouldn’t qualify for any savings and Darren Jones MP, Chair of the Business, Energy and Industrial Strategy Committee Chair said: “Capping the price for all businesses is a waste of taxpayers’ money, which should be targeted at those that need it the most.
“Why should British taxpayers collectively get into even more debt to hand over public funds to Amazon?”
Interest Rates
The Bank of England’s Monetary Policy Committee (MPC) voted to raise interest rates by 0.5 percentage points from 1.75% to 2.25% – its highest level since 2008 in order to tackle inflation that was running at a 40-year high.
Acting after a 0.1% drop in GDP in the second quarter of 2022, the bank admitted that a further 0.1% decline was expected amid weaker manufacturing and construction activity and a downward turn in consumer spending.
If this forecast is accurate then the UK will officially have entered a recession – where two consecutive quarters of negative growth are recorded.
Three members of the MPC voted for a larger increase of 0.75 percentage points, five backed the half point rise and one backed a quarter point rise.
The Bank said that the energy price guarantee would prevent a higher peak for inflation than forecast earlier in the year with a headline rate expected to reach just below 11% in the autumn although it has not been this high since the 1980s and remains at almost five times the Bank’s target rate of 2%.
On the impact of the energy support measures on inflation the Bank said: “While the guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak which would add to the inflationary pressures in the medium term.”
The next rate setting meeting is due to take place on November 3rd although based on the reaction to the “mini” budget that took place 24 hours later, there is some speculation that an additional one might be required before this.
Mini Budget
There was lots of news and pertinent details in the mini budget last week that is still being analysed.
Corporation Tax increase abandoned
In the Spring Budget in March the then Chancellor Rishi Sunak announced he was raising corporation tax from 19% to 25%, effective from April 1st 2023. This was cancelled in the mini budget.
This might seem pro-entrepreneurial at first glance but remember that the increase would only have applied to businesses making profits of £50,000 or more, which is approximately 70% of UK companies.
Many small and medium sized businesses would not have been affected by this as their profits would not have reached the threshold.
National Insurance rise cancelled
A rise in National Insurance Contributions that began in April and saw workers and employers pay an additional £1.25 in the pound will be reversed from November.
While some businesses may welcome less essential expenditure, they won’t look forward to the additional administrative burden that adjusting to two National Insurance changes within a year will bring for their payroll teams and HR departments.
This is in addition to changes announced to the top rate of income tax being scrapped from being 45% on earnings over £150,000 and the basic rate being reduced to 19% as income tax is reduced by 1p in the pound.
Tax Relief
Tax reliefs were extended for venture capital trusts and enterprise investment schemes (EIS).
The amount companies can raise through Seed Enterprise Investment Schemes (SEIS) will rise from £150,000 to £250,000 and the annual investor limit will double to £200,000. The gross asset limit will rise to £350,000 and the age limit will be extended from two to three years.
Investment Zones
Up to 40 new “investment zones” could be created in England which will provide a series of tax breaks for companies opening within their boundaries.
These will include 100% tax relief on investments in plant and machinery with no National Insurance Contributions will be payable on the first £50,000 earned by new employees.
IR35 Removal
We’ve written extensively about IR35 previously here and here but most simply, IR35 is a tax law that requires the end client, not contractors they hire, to decide if the working relationship between them is a self-employed engagement or actual employment – with the associated costs that arrangement entails.
The Chancellor announced that the IR35 reform will be repealed from April 2023 so that any worker providing their services via an intermediary such as a personal service company, will once more be responsible for determining their own employment status and paying the appropriate amount of tax and NICs.
Some of the changes announced last week had immediate effects but others will slowly start to assert themselves over the coming weeks and months along with other events and the natural rhythms of business and trading.
So even the most careful business planning will find itself subject to changes and unforeseen pressures bubbling up in the short and medium term – some of which could be serious enough to throw even the most stable company off course.
This is why it is so important to make sure your company is in the best possible shape going into an uncertain autumn.
We offer a free consultation to any director or business owner who wants to make necessary changes to their business while they still have time or to explore what options they might have to move forward.
Our expert advisors will be able to outline what they can do immediately and in the medium term to help their prospects and strengthen their business before getting advice and making changes goes from being a good idea into a survival necessity.