Struggling with high inflation rates and facing a potentially long recession, it is a critical time for entrepreneurs, who are one of the most important drivers of economic growth in the UK.
With the economic turbulence from budgetary U-turns, and the long-term effects of Brexit and geopolitical tensions, it is also an uncertain time for those who want to start businesses and those who might invest in them.
What, then, are the opportunities and challenges facing SMEs as we move into 2023?
The government ushered in a mix of spending cuts and tax rises in the latest Autumn Statement, which will affect start-ups and SMEs in a variety of ways. The rise in inflation and the likely use of higher interest rates to combat this are also worrying for entrepreneurs.
More generally, the cost-of-living crisis is a worry for many people. There is a fine balance between plugging the financial gap and overburdening people with tax rises restricting growth, especially with the Office for Budgetary Responsibility predicting a 1.4% contraction in the economy next year.
Entrepreneurs clearly need stability for planning for their own costs. On top of that, stability is also important to see how their potential market might be affected by the government’s long-term plans, with sometimes unintended consequences of policies taking longer to manifest themselves. SMEs with smaller amounts of assets and cash reserves are, of course, more likely to be affected by any negative changes more quickly than larger organisations.
Wages and taxes
In their attempts to stabilise the economy, the government have made a number of changes to taxes and wages, due to come into effect next April. These will have an impact on entrepreneurs.
A national minimum wage and national living wage increase of 9.7% may mean welcome higher wages for some staff. With the 1% cut to basic rate income tax now also scrapped, entrepreneurs might think about how that affects their staff who are already feeling cost of living increases and offer pay rises to compensate irrespective of the rise in minimum wage.
The threshold for the 45p top rate of income tax has dropped from 150k to 125k capturing more people, and Corporation Tax will rise to 25% for businesses with profits of more than £250,000.
The outlook for physical retailers
The government’s decision to scrap VAT-free shopping for foreign tourists will be hugely disappointing for physical retailers. Added to this, the decision to allow alcohol duty to continue rising will make drinks from the many new craft breweries and distilleries less affordable to customers, particularly with businesses already under pressure due to rising energy costs and grain prices.
Some good news for the hight street, with shops and hospitality under severe pressure, is that business rates will be re-evaluated from April 2023. This is expected to reduce rates for many, with additional support as part of a £13.6bn package. However, an online sales tax to narrow the cost advantage online retailers have over the high street is unlikely to happen in the near future.
R&D, red-tape and public spending
Public spending plans will continue until 2025, which is good news if you are working government projects.
In terms of investment, the government has announced an overall commitment to increase R&D spending to £20bn by 2025 to aid growth. There has been a slight widening of eligibility to apply for the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). R&D Expenditure Credit (RDEC) is also increasing to 20%, although the enhanced R&D expenditure rate for SMEs is decreasing from 130% to 86%, and the SME tax credit rate is reducing from 14.5% to 10%.
In addition, Sir Patrick Valance, better known for his Covid news conferences, has been tasked with reviewing regulations and red tape which may be holding back emerging technologies such as in green tech, digital and life sciences. This is especially important for helping entrepreneurs address these ready-made markets with their technology and innovations.
There was less good news for some green initiatives however, with electric vehicles paying road tax from April 2025 and with renewable energy generators now paying the temporary “extraordinary profits” 45% tax from January 2023. The energy profits levy on oil and gas will also increase from 25% to 35%. Hopefully, this won’t disincentivize innovators in this field where the UKs research into renewables and energy storage is strong. The government seems also undecided about investment zones, but it is clear they will not be going ahead in the manner described in Liz Truss’ original announcement.
The challenges ahead
The near future looks challenging for SMEs. Inflation is set to peak before the end of the year, intensifying the cost pressures on entrepreneurs, and the CBI have warned that the UK could face a year-long recession in 2023.
Government policy for the year has acknowledged the importance of SMEs, with financial support in key areas of innovation funding, energy support and business rates. It is, however, likely to cause problems for SMEs if increasing interest rates are used to bring inflation under control, with debt funding becoming more expensive and customers having reduced disposable income.
The stability provided by the Energy Bill Relief Scheme only lasts until April 2023. This leaves business with some uncertainty, especially about next autumn and winters bills, a recent British Chamber of Commerce survey suggesting 47% of businesses will have difficulty paying if support ends. Some of the most important innovations from SMEs in the coming year could be those that are able to cut costs and find a more sustainable business model.
Dr Robert Phillips, senior lecturer in entrepreneurship at Alliance Manchester Business School
Uma Rajagopal has been managing the posting of content for multiple platforms since 2021, including Global Banking & Finance Review, Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune. Her role ensures that content is published accurately and efficiently across these diverse publications.