The most important budget for business in a generation. This is the verdict on this week's budget by the BBC's business editor, Simon Jack. Given the elongated economic headwinds businesses have been battling since the onset of the Covid-19 pandemic, the contents of Mr Sunak's red despatch box will surely provide some welcome respite for businesses who have been looking for clarity from the Government on how they will support businesses and stimulate the economy as we move out of lockdown.
The welcome features of the budget, including the following support for businesses:
- The Coronavirus Job Retention Scheme; dubbed 'furlough', has been extended until the end of September 2021.
- A new £5 billion Restart Grant scheme has been announced for some of the hardest hit sectors. Under the scheme non-essential retail businesses will receive grants of up to £6,000 per premises and hospitality & leisure businesses will receive grants of up to £18,000.
- A new Recovery Loan Scheme has been announced to replace the Bounce Back Loan Scheme and Coronavirus Interruption Loan Schemes which end on 31 March 2021.
- The VAT cut has been extended for the hospitality sector. The discounted rate of 5% will continue to apply until the end of September 2021. Thereafter, it will increase to 12.5% for six months, before returning back to the normal rate of 20%.
- The business rates holiday for gyms and other non-essential retail premises has been extended for another 3 months.
Despite many of the welcome features of the budget, the road ahead for businesses is far from clear and significant challenges remain. The withdrawal of the furlough scheme still looms on the horizon and we have yet to receive any clarity from the Government on how it intends to lift the significant restrictions on landlords or tackle the high levels of accumulated debt within the UK economy.
Whether the budget goes far enough to prevent the cascade of company failures that many commentators are predicting remains to be seen. UK businesses have accumulated large amounts of debt and it is unclear how this long-term debt will be repaid. There is also good evidence to suggest that some businesses are only surviving because of the availability of cheap government backed debt. Company insolvencies have remained low throughout the pandemic. Insolvency Service figures show the total number of company insolvencies in January 2021 was 50% lower than in the same month in the previous year. In fact, the only month since March 2020 in which overall company insolvencies were higher than in the same month of the previous year was December 2020. These low levels of company insolvencies are unsustainable and will hinder the UK's economic recovery in the long term by negatively impacting on productivity and economic growth.
Businesses are likely to face greater scrutiny of their business plans as we move out of lockdown. The new measures announced in this week's budget show the government stepping away from the Coronavirus Interruption Loan Schemes and Bounce Back Loan Schemes, which have been described as a "giant bonfire of taxpayer's money", and a renewed emphasis on viable business models. Under the new Recovery Loan Scheme businesses will be required to demonstrate viability to be eligible for financial support. The terms of the Recovery Loans are also expected to be less favourable than the earlier Interruption and Bounce Back Loans. Businesses with high levels of accumulated debt may struggle to meet the viability threshold.
Despite the welcome features of this week's Budget, business owners face real challenges in the year ahead. Maintaining adequate levels of cash flow, planning for a range of scenarios and remaining agile will remain important. Demonstrating a viable long-term business model, including the ability to repay any commercial rent arrears and long-term debts, will also be key.
If you have any questions or concerns about the issues raised in this article, please contact Vernon Dennis or Rachel Brown.