FSB Podcast
FSB Podcast
The Small Business Round-up: December 2022
This episode looks at the latest developments around energy costs for small businesses and the steps FSB is taking to reduce the pain of that, and also unpicks the recent Autumn Statement, to understand the impact of the big announcements on small businesses as well as what more the government should be doing to support SMEs in 2023.
Guests:
Alan Soady, Head of Media and Communications, FSB
Paul Wilson, Policy Director, FSB
Welcome to this latest FSB monthly round-up podcast brought to you by the Federation of Small Businesses and the go to podcasts for news tips and important information for small businesses and the self employed. This episode is our December Small Business Round-up, in which we'll take a look at some of the important issues hitting the headlines at the moment, and which you need to be aware of right now, as small business owners this month will be looking in particular at the latest developments around energy costs for small businesses and some steps FSB is taking to try to help ease the pain of that. And we will also unpick the recent autumn statement to understand the impact of the big announcements on small businesses, as well as what the government should be doing to support small businesses more in 2023. To discuss those issues. I'm joined by Paul Wilson, Policy Director at FSB and Alan Soady, head of Media and Communications. Thank you both for joining. Paul, starting with the ongoing issue of energy costs, which seems like it's, it's going to run for some time, can you give us a sense of how badly these energy prices have been affecting small businesses so far?
Paul Wilson:Sure. Absolutely. And we know from FSB's quarterly Confidence Survey, the Small Business Index, that cost pressures this year have been more severe than any time we've seen before in the last 10 years of doing the SBI. Record numbers of small businesses are reporting cost increases record numbers, saying those increases have been significant, i.e. more than 10% across the year, and energy or utilities is the top driver of these cost pressures cited by 60% of small businesses. Now, it is affecting a majority, the energy price increases are not affecting all small businesses at the moment, I'll explain why that is - 23% of small businesses are in the position where they agreed a fixed contract before prices started rising significantly a year ago. And I guess due to that combination of some good risk management and a bit of good luck as well, that 23% are currently insulated from the price rises until their fixed contract ends. But for those who have seen their fixed contracts come to an end, the impact has been jarring. A quarter have seen their energy cost double. A further 19% have seen their energy costs triple or more as a result of these price increases. And of course, that means small firms have to take a range of difficult decisions in order to try and deal with those. Around half have raised their prices reluctantly, because there's a cost of living crisis at the moment, and they know that customers can't necessarily afford big price increases. FSB has been saying for months now that you can't solve the cost of living crisis without first solving the cost of doing business crisis. And I think this is a classic example of how those two things are linked. In fact, 18% of small firms tell us that they can't pass further price increases on because customers simply cannot afford to pay, you know, take the example of the laundrette that realised they'd have to more than double their prices, just to cover their energy bills, or the pizza restaurant that realised they'd have to increase their charges to £25 a pizza to cover their costs. But of course, they haven't done that because they know their customers simply couldn't afford it. Other firms are taking another decision. So around a third of cutters scale back investment plans, which of course will affect their chances of growing their business. And we've heard about companies protecting the decision to import or as previously, they'd have made stuff in the UK. So a manufacturer told us that they did used to make the plastics that they used in their processes, but now they're going to have to import them from abroad. So these are really difficult decisions. And the fact is that the price increases that many firms have seen are too severe to deal with. And that's why FSB lobbied government to introduce the energy bill relief scheme, which runs to the end of March 2023.
Jon Watkins:Yes some startling statistics around how you know, the numbers of firms that are going to have to pivot their strategies or indeed, that are completely at risk as a result of some of these pressures. And a lot of the rhetoric, Paul, I think has been about, you know, winter, it's kind of getting us up to and through winter in terms of sort of government support, but how important is it for that energy to support from the government to continue beyond the winter period? And what would you like that to look like?
Paul Wilson:Well, for many small firms, it's just absolutely vital that some form of support continues beyond March 2023. We asked small firms what they would have to do if the support were to run out in March next year, this sort of cliff edge type scenario, and really starkly, 24% of small businesses said they would need to either close, downsize or radically restructure if the support ends and there's no successor. And for some sectors that goes even higher, so look at accommodation and food, 42% of small firms, so they'd have to close, downsize or restructure. That's the size of the risk here, if government doesn't get the decisions right on the successor scheme. So what we're asking for is some sort of continuation of government support beyond March 2023, at least for the smallest firms. And you might think: 'well, FSB, you would say it's the smallest firms who need it more'. But we have good reasons for that. Small firms are frankly, unable to protect themselves against the impact of these price increases in the way that bigger businesses can. Small firms tend to have much lower cash reserves, their ability to invest in things like energy efficiency measures is lesser, and they have no ability to negotiate with big energy suppliers or indeed, hedge their risk. So we think the government did a good job with the design of the energy bill relief scheme. And FSB is proposing they use a similar model for the successor, even if it only applies to smaller firms. And the good thing about the Energy Bill Relief Scheme, or EBRS is that it's applied directly to bills. So small business owners don't need to do anything to make sure that they benefit from it. It's also quite well designed from a taxpayer perspective. And we know that the government have to be careful about how they spend their money. But the way that the scheme is designed, it means that a reduction won't be applied to a company's bill, if they happen to be on one of those longer term, fixed contracts. That's a reasonable price that I mentioned earlier. So that's what we're calling for.
Jon Watkins:Yeah, that's the call on government. And we talk a lot on this podcast about what we would like to see from the government. But I understand FSB has been writing to some of the big energy companies as well with your concerns about the experiences as some of the small businesses in the FSB network, what what is it that you're hoping to achieve with that?
Paul Wilson:Well, this comes back to that point that I mentioned about the imbalance of power between small business customers have very large energy companies. And we're very conscious of that. So we've asked for a few things. And the first is to explain how the discounts are being applied on customer's bills. The energy bill relief scheme is a good scheme, but it is also complicated. So we've called on energy companies to explain to customers how discounts are being applied to bills. And you know, just looking at my household energy bill, I've had some pretty good comms from my energy supplier as to how the government discounts have been applied, we want the same for small business customers. Next, it's fair to say that some charges are not covered by the government scheme. So things like daily standing charges aren't kept. But FSB is called on suppliers not to increase those charges, even though technically they can, as it would completely undermine the purpose of the energy bill relief scheme and add further pressure to energy bills. And lastly, even with the support of the energy bill relief scheme, we know that this winter is going to be very tough for many small businesses and indeed households. What we don't want to see is energy companies making unreasonable demands of small business customers. And you know, what, what type of thing am I talking about there? We heard from a laundry business who had a good credit rating and who was nonetheless asked for a£16,000 deposit by their energy company that sort of request for a huge upfront deposit risks putting firms out of business and undermines the good work that the government's put in with the support with Bill. So the point of FSB writing to the energy companies is to ensure that they do their utmost to support their small business customers and give the small business customers the best possible chance of surviving the winter. And also to let the energy companies know that FSB is watching as I'm sure government and Ofgem are too.
Jon Watkins:Yes well, let's hope that multi-pronged approach has some some impact. Thanks very much, Paul. That's really, really good. Good insight into the current situation around the the ongoing energy challenges. Alan, Hi, thanks for joining. I also want to cover off the fallout from last month's Autumn Statement, if we can and also to look forward to what comes next. And what FSB would like to see from government going forward. Let's start with the big takeaways. What were the big announcements for for small businesses in that statement?
Alan Soady:Well, there was a lot of stealthy tax rises in there, a lot of talk of thresholds being frozen, which in effect actually means in real terms, taxes going up for a lot of small businesses. One good thing that for me to pick out here is that the planned rise in National Insurance contributions for employers, for self employed, for employees, that happened earlier this year, that was reversed that was something FSB had campaigned a lot on to achieve that it had been something that was announced at the time that Liz Truss was briefly Prime Minister and that was one of the very few things from her brief era, that actually stayed when we got to the Autumn Statement, so that was good. However, there's always a but isn't there with budgets and Autumn Statements and things. There was a freezing of the threshold thresholds again, for employer National Insurance, and that, in effect is a stealthy rise in what we call the Jobs Tax, because it's at a time of where wages are going up. If you freeze the point at which the tax on the National Insurance tax kicks in, through employers, then it means that they're having to pay a bigger proportion in tax for their employees. There was a saving grace that the employment allowance was kept at its current level that was something hard fought for by FSB, first of all, to get the employment allowance in the first place a few years ago, but then for it to be increased along the way. And we were very pleased that we were listened to on that, and it stays at £5,000. I do want to touch on directors of limited companies who are paid mainly through dividends, this was not a good, awesome statement for them. Because unlike employer, employers, self employed, they were not taken out of the increase in National Insurance or rather the equivalent for them, at least. And also there was a cut in the allowances for dividend taxation. That in effect, again, is a tax rise for them. And let's bear in mind that this is the same group who, during the earlier days of the pandemic were left out and excluded from direct financial support from the government. So I think they will, that group would have been left feeling pretty bitter by some of this in that Autumn Statement. Quickly on business rate, it was actually reasonably good news, but in the sense that there's not going to be a massive of 10% plus inflationary hike. The revaluation that underpins what your business rates actually are, is going to go ahead next year. But the winners from that will be I know, this sounds like I'm stating the obvious will be those whose valuation goes down and therefore their their rates bill goes down. Obviously, that's good news in itself. But there's also been a change in the way that's administered. So that reduction will happen in full from year one, whereas previously, it came in gradually, over the course of a few years, there was also an expansion of rates relief for retail, hospitality, and leisure. So good news for businesses in in those sectors. But then shall I shall I end, this bid on another negative there was the freezing of the VAT threshold. Now, that is another stealthy measure more small businesses will be dragged into VAT, or for others, it will act as a deterrent to growth already, we knew from our research that nearly a quarter of small firms and self employed are held back by the VAT threshold. And this really is an anti-growth decision such as to freeze that at a time when costs and prices are going up.
Jon Watkins:You know, Thanks, Alan, you mentioned that sort of VAT threshold being a sort of stealth move. Why is that so significant? Have you got an example of that?
Alan Soady:Yeah, I mean, if you're below that threshold, and particularly if you're just below you, a lot of small businesses do not want to get dragged to profit, partly because they then have to charge that 20% tax and potentially put their prices up make themselves less competitive. There's also both the admin and the costs around administering being part of VAT, we estimate it takes about on average, about a week a year to do the admin for that. So let me give you a couple of examples. And these are absolutely real life examples of FSB members facing this right now; let's take the fish and chip shop. That is at the moment in terms of the amount that it's taking, it stays below the VAT threshold, but not usually much below. In the course of a typical year. Now their prices like everyone else's for what they have to buy for the everything from the fish to the energy it takes to cook it has been going up. But if they pass on those extra costs in the form of higher prices to their customers, that means their turnover goes up a bit. And that pushes them above the VAT threshold, suddenly, they've got to add another 20% onto the price of a cod and chips that makes them less competitive than the fish and chip shop down the road. And they've got all the tax costs and admin that would go along with that they're dealing with that scenario right now. I was also talking to one of our members who runs a small hotel in the Lake District and I say how's it going? He said,'Well we're shut at the minute'. I said, 'Do you normally close for the winter? Is it just you know, out of season?' They said no, no, you get a lot of visitors to the Lake District through through the winter. A lot of people like going walking in the hills when it's a bit you know when the weather is colder or they'd like to come and see see the lakes in the snow and the and the frost because it's beautiful. But so far in this financial year, he's already taken enough in that brings him close-ish to the VAT threshold. He's taken 70 odd 1000. He's got a few bookings for March. So that's still going to be within this financial year. He was saying if he does any more this because he's had to put the costs up himself to cover his own increasing costs. It's going to push him over that VAT threshold. So in other words, if he stays open over the colder months of the winter, he's got all the costs and the hard work of doing that. But in effects that does it for absolutely nothing because come April he's then dragged into the VAT threshold has to put his prices up, might get fewer bookings as a result next year, and also has all that tax costs and admin to do as well. So two real-life examples there, where you can see it's actually a deterrent for a business to grow and take more money.
Jon Watkins:Yeah, that's a really good example. Actually, we've talked there a bit about the things that were announced. What was FSB disappointed not to see perhaps and what would you like to see the government prioritising in the next period?
Alan Soady:Overall, there was a lack of pro-growth, pro enterprise strategy underpinning this autumn statement. And of course, there'd been a lot of political turbulence, a lot of economic turbulence leading up to it. And the government had wanted to steady the ship. But what was missing was how to get the growth in the future. In terms of the policies, yes, there were a few glimmers of good news in there, but nowhere near enough given the economic situation that we're in. And even worse than that there was actually something in there that was willfully potentially going to stifle innovation and growth. And that was basically gutting the research and development tax credit system for small businesses, that potentially could lead to 1000s of small businesses that are R&D heavy, from no longer existing. And part of the argument for that was, oh, well, some of the people claiming these R&D tax credits is fraudulent. Now, our response to that would be if the system is not robust enough, and the government is not capable of policing its own system. Is it really fair to penalise the majority by getting rid of it completely? And taking a sledgehammer to it? Surely the answer is to address the problems that allow any fraud to happen. So the vast majority, who actually have benefited from this, been using this in their businesses been using it to drive growth not only in their business, but in the economy as well, and driving innovation, to just take that all away at a time when surely innovation and growth is needed most.
Jon Watkins:Yeah, brilliant. Thank you. And look, you know, while I have you here, it would be remiss of me not to ask you, as we move towards a new year to highlight one or two things that you think are going to be particularly important for small businesses going into 2023, and that you think might dominate the early part of the year.
Alan Soady:Well, unfortunately, I think this cost of doing business crisis is going to be the dominant thing. Still, it shows no signs of going away. And that's why it's very important that the government when it comes to the budget in the spring, take steps to address that and to get growth going in the economy. And Paul talks about the the energy situation again, that is not going away. Even you know longer, longer term, there are no signs of energy prices likely to come down anytime soon to anything like what they weren't before, they will still be unaffordable. I think also, access to finance is looking like it is going to be a growing issue or at least access to affordable finance with interest rates going up. And with firms, you know, more and more of them having to turn to finance just for cash flow. Just just to keep the finances going day to day, I think that is going to be a focus, we are seeing an increase in late payments. In some cases, bigger businesses paying their smaller suppliers late again, as belts are being tightened. And the financial squeeze is felt by businesses big and small, there will be a temptation by some of the bigger businesses to hold back payments even more so and that could become an even bigger problem unless it's addressed. That's why we're saying to the government, this is something that actually would not cost the taxpayer anything but would be pro growth for you to address to crack down on that. The strikes have been yet another thing thrown at small businesses, particularly recently, things like the the postal strike with Royal Mail, rail strikes have been hitting certain kinds of businesses from those in online retail, those whose supplies are being interrupted through disruptions to deliveries. And then particularly a hospitality, for example, with the rail strikes in that run up to Christmas, really hoping to have a good and lucrative period, particularly with Christmas parties and so on. And yet when the trains are on strike, in some cases, some of those Christmas parties are being cancelled. But also, if you look within small business employers themselves, there have been difficulties throughout much of this year with recruitment and retention with staff shortages with skill shortages. Again, that looks likely to continue and there will be a challenge I think for a lot of smaller employers to perhaps find other ways other than wage increases or bigger wage increases other ways of of improving recruitment and retention of staff into their businesses through perhaps non wage benefits from cycle to work schemes to discounted gym memberships, that kind of thing, for example, that often in the past with something only bigger businesses were able to negotiate an offer. There are ways now that smaller businesses can source that without having to do it all individually, themselves and actually at FSB, that was something we recognised a little while ago and have recently introduced something that our members can access if they if they want to go down that route if they think it would help to be a benefit for the recruitment and retention of staff. So I think that is another challenge that is still going to be there as we go into 2023.
Jon Watkins:Yeah, brilliant, lots of challenges, but also plenty of solutions, ideas and lobbying going on in the background, Paul and Alan, thank you so much for for taking us through the key Small Business announcements in the headlines right now as part of our monthly small business round up podcast series. That was really good. Thank you also to our audience for listening to this episode. While I have your attention, I would just like to remind you that you can subscribe to the FSB podcast to receive regular updates and guidance on the big issues affecting small businesses. And do please also remember that you can find a whole host of additional webinars, podcasts and other content at the first voice website at firstvoice.fsb.org.uk and on the FSB website fsb.org.uk Many thanks for listening.