Budget 2020: Rise in Borrowing to Support SMEs

It was pleasing to see the UK government announce a £30bn package of investment, which the Chancellor declared will “support British people, British jobs and British businesses”.

This spending has been enabled by the government expecting to borrow almost £100bn more in this Parliament (before mid-2024) than was expected in the last forecast. That does not even include the £12bn to be spent on getting the economy through the coronavirus outbreak.

The ability to significantly increase this long-term borrowing is due to the “multi-decade low” interest rates of 0.25% announced by The Bank of England on Wednesday, which are likely to now be locked in for the long term.

Underneath it all, it’s clear the budget is largely designed to reassure small and medium-sized business (SME) owners.

Firstly, statutory sick pay is to become available for all those advised to self-isolate from day 1 rather than the typical day 4, even if they have no symptoms. Ostensibly, this should increase the burden on SMEs.

However, the government has alleviated this concern for SME’s by announcing that it will cover the costs for up to 14 days per employee, for businesses with fewer than 250 employees. This is a huge boost to SMEs as we enter the coronavirus pandemic.

Secondly, it was announced that business rates for the hospitality, leisure and retail industries would be eliminated for one year, meaning around 50% of all UK businesses won’t be taxed on their premises for one year.

This will come as welcome relief to retailers, not only because of the expected decline in footfall in the coming months, but also because of the increasing threat of online competition that has transpired in recent years.

Thirdly, the Chancellor said that he would increase the Employment Allowance from £3,000 to £4,000 from April, cutting the tax bill for almost half-a-million small businesses.

Fourthly, SMEs can now apply to the new coronavirus disruption loan scheme for government-backed loans of up to £1.2m and very small businesses will be eligible for a one-off £3,000 cash grant. Around 700,000 firms will be eligible for this scheme.

In this current situation, policies that can actually increase sales are far-fetched. It makes much more sense to concentrate on policies which eliminate debts and expand the payment period on bills, which can help businesses to maintain the cash-flow necessary for their survival.

Other government spending which will benefit SMEs more indirectly, includes: £5bn on providing the most inaccessible places in the UK with gigabit-capable broadband, an extra £900m for research into nuclear fusion, space and electric vehicles, and an end to VAT on digital publications, including newspapers, e-books and academic journals, from December this year.

Of slight concern for SMEs is the cut to entrepreneur’s relief. Previously, the government enabled entrepreneurs to pay capital gains tax on the sale of their company at a rate of 10% rather than the typical 20%, up to a lifetime allowance of £10m. This will now be cut to £1m.

This was expected nonetheless, because there is insufficient evidence to suggest the relief actually helps new entrepreneurs to start-up. In fact, there is evidence to suggest the opposite – that it motivates entrepreneurs to hold large amounts of cash within the business, essentially turning potential income into capital for tax purposes.

Ultimately, many have seen this as an ineffective government policy and cuts to this allowance should not be a significant loss to small-business productivity.

Instead, the government is focussing on policies which help and reward daring entrepreneurs who are willing to risk their own capital to create a business.

Overall, this budget represents the government supporting SMEs during the current coronavirus uncertainty, which is crucial since 60% of private sector workers are employed by firms with fewer than 250 employees.

Become a member – follow the lead of experienced investors. Sign Up

Related Articles