Lockdown one year on: the outlook for UK businesses

by | Mar 30, 2021 | Business, Covid 19

Earlier this month, the Chancellor of the Exchequer Rishi Sunak delivered the UK’s Spring Budget for 2021, neatly marking a year since the Government published its initial action plan for dealing with COVID-19.

The contrast between those dates couldn’t be more stark. On 3 March 2020, there were 55 new known cases of coronavirus in the UK, and most people were encouraged to go about “business as usual”. A year on, more than 4 million people have contracted the virus and the economy has shrunk by about 10%.

Restrictions on movement and limits on the kinds of businesses that can open to the public have been in force, on and off, since the first national lockdown was announced on 23 March 2020.

But with recovery now on the horizon and the vaccination rollout in full swing, we can start looking forward to the gradual relaxation of lockdown measures and, hopefully, returning to some version of normality.

The business impacts of COVID-19

As of 25 March 2021, the Office for National Statistics (ONS) says about 74% of businesses are currently trading, marking a slight increase from 71% in January.

The unemployment rate, meanwhile, stands at around 5%. This has remained relatively low during the pandemic when compared to previous financial crises, largely thanks to the coronavirus job retention scheme.

The scheme, which you can read more about on our COVID-19 resources page, has so far been used by 1.3 million employers to furlough 11.3 million jobs, with a total of £57.7 billion given out in grants.

When it comes to businesses’ financial performance, ONS statistics paint a mixed picture – and as with any major change to the economy, there are winners and losers.

Across all industries, around 40% of businesses said their turnover was unaffected compared to this time last year, while 42% said it had decreased to some extent. Only about 9% reported an increase.

That was very different for those carrying out accommodation and food service activities, 69% of which had seen their turnover decrease.

The arts, entertainment and recreation sector was also hit hard, with 66% of businesses saying their turnover was lower than last year.

On the other hand, around 50% of real estate businesses said their turnover had not been affected, and 15% even said it had increased – possibly due in part to Government incentives like the stamp duty land tax holiday on properties worth up to £500,000.

This set of ONS statistics doesn’t have a separate category for online retail, but that’s another area that has seen increased activity over the last year. Internet sales as a total of all retail climbed to 34.5% by February 2021 – compared to 19.1% a year before.

Implications for the future

Going back to Chancellor Rishi Sunak’s recent Budget, we now have a clearer picture of what lies ahead for businesses as the country comes out of lockdown.

Support measures including the furlough scheme and self-employment income support scheme are set to continue for most of this year, eventually coming to an end in September.

Any employees on furlough will continue to receive 80% of their salary, capped at £2,500, until 30 September – but employers will have to contribute 10% from July and 20% from August and September.

The self-employment income support scheme was also extended, offering self-employed individuals grants of 80% of their average trading profits between February and April 2021, then the same again from May to September for those whose turnover has fallen by more than 30%. Those whose turnover hasn’t been affected as severely will then receive a smaller grant.

A new recovery loan scheme was also introduced to replace the bounce-back loan and coronavirus business interruption loan schemes once they end on 31 March 2021.

So for the time being, most businesses that are impacted by COVID-19 will continue to receive Government support, but the amount available will gradually wind down over the course of the year.

Beyond 2021, the Government’s focus will start to shift towards paying off the amount spent on those schemes. In total, COVID-19 financial support measures cost the Government £280 billion in 2020, and the announcements from the Spring Budget added an extra £65bn to that.

Rishi Sunak has already introduced two tax measures with the aim of repairing the public finances: increasing corporation tax to 25% from 2023, and freezing personal tax thresholds.

The corporation tax increase should have limited impacts on smaller companies, as the new rate will only apply to profits over £250,000, and a 19% rate will be introduced for those with profits below £50,000. Profits that fall in between will be taxed at a tapered rate.

The freeze to tax thresholds, meanwhile, means that while those taxes won’t increase outright, most people will see higher tax bills anyway because the thresholds won’t rise in line with inflation.

This applies to income tax and national insurance thresholds, which will both increase as previously planned for the year 2021/22, but will then be frozen until 2026.

According to the Office for Budget Responsibility, this will raise £8bn a year for the Treasury by 2025/26, bringing 1.3m more individuals into paying income tax and 1m more into paying the higher rate.

This move has been described as a “stealth tax”, although the Chancellor was quick to insist in his speech that he was making no secret of the implications of the measure, and it was “in the Budget document in black and white”.

If you’re a company owner-director, you should factor the new thresholds into your profit extraction strategy for the next few years.

You might also need to consider the way the other frozen thresholds affect your personal finances, such as the pensions lifetime allowance, capital gains tax annual exempt amount and the inheritance tax nil-rate band.

It might also come as a relief to small business owners that the VAT-registration threshold of £85,000 will remain at its current level until at least 2024, putting off any reductions to the turnover level at which businesses must start collecting VAT for at least a few more years.

For tailored, strategic advice on business planning in 2021, get in touch with us on 0115 960 8412 or email advice@rogers-spencer.co.uk

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