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Budget 2021 Impact on SMEs

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For businesses, in particular SMEs, the Chancellor’s spring budget was packed full of incentives to invest and stimulate the UK economy, in a bold bid to fast track the UK’s recovery from the COVID-19 pandemic. The measures announced by Rishi Sunak put SMEs at the heart of economic prosperity and has created renewed motivation for businesses to play a critical role in the UK’s return to growth.

£20 billion has been budgeted to stimulate business investment, as the Government pledges its support to owners and investors willing to start, operate and back UK business against a backdrop of ongoing economic instability.

However, it is critical to the UK’s long-term recovery that the Chancellor achieves a short-term return on his investment in backing business. As such, he has created an effective two-year roadmap for businesses to recover and regenerate, using the reliefs, grants and other incentives at their disposal to enable investment.

Here, we recap some of the key announcements and what they mean for SMEs.

Capital investment

From 1 April 2021 to 31 March 2023 businesses can claim 130% capital allowances on qualifying investment in plant and machinery. The so-called ‘super-deduction’ will apply to investments that ordinarily qualify for 18% main rate writing down allowances. A first-year allowance of 50% also applies on investments that normally qualify for a 6% special rate writing down allowance. These are attractive savings, whilst the Annual Investment Allowance limit of £1m has been extended until 31 December 2021.

Corporation Tax

From April 2023, businesses with profits over £250k will start paying 25% corporation tax. For businesses with profits less than 50k, corporation tax will remain at the current rate of 19%. That means businesses with profits over 250k have a two-year window in which to benefit from a 6% lower rate of corporation tax – and an even lower rate if businesses start take advantage of the two-year window of 130% capital allowances. Losses will be able to be carried forward for longer.

Extended VAT reliefs

For hospitality businesses that are trading, the extension of the 5% VAT rate and the prospect of a 12.5% interim rate thereafter will provide a short window in which they could use any excess cash for investment and take advantage of 130% capital allowances.

Investment in people

Incentives and subsidies to support job retention, job creation, reskilling and apprenticeships were announced. Furlough has been extended to the end of September, with tapered payments of 10% starting in July and again in September. SMEs will be able to reclaim up to two weeks statutory sick pay. £126m is being made available to support traineeships and SMEs can claim £3,000 per apprentice employed.

Readiness grants

In England, cash is being made available to help ensure businesses can reopen. This includes a business rates holiday extension until June, followed by a 75% discount; a £5 billion restart grant for businesses forced to close; £6k per premises for non-essential outlets due to open in April and £18k for gyms, personal care providers and other leisure businesses.

Frozen duties and the Recovery Loan Scheme

Fuel and alcohol duty has been frozen, freeing up cash that businesses can use for investment, and in turn claim the tax reliefs. Businesses of any size can access loans and other kinds of finance up to £10 million and once received, the finance can be used for any legitimate business purpose, including growth and investment, again taking advantage of the 130% capital allowance. The government will guarantee 80% of the finance to the lender and the scheme runs from 6 April to 30 December.

If the Chancellor’s plans work, the UK economy could bounce back sooner than many predicted. However, assuming the economy does recover, 2023 will be a bumper year for the corporate tax collector. In the meantime, extra cash will be squeezed out of the economy by the freezing of inheritance tax thresholds, pensions life-time allowances, annual capital gains tax exemptions, tax-free allowance and the higher rate tax threshold. Dividends are also set to become less attractive as a form of remuneration, which will impact on many owner-directors.

In summary, business owners should take advantage of the incentives whilst they can. The opportunity to support the UK’s return to economic prosperity will be short-lived but offers a lifeline to businesses, in particular SMEs, that after 18 months of difficulties could hold the key to the UK’s long-term fortune.

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