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How can the UK government help SMEs to survive the pandemic?

Small businesses face some major challenges, both today and over the coming months

The UK economy should slowly start to recover from the COVID-19 pandemic during 2021. But an economic recovery is a notoriously dangerous period for businesses – which can be more at risk of failing during this time than at the height of a recession. 

With this particular recovery, the dangers are amplified due to the specific circumstances of the pandemic. To survive the lockdowns, many businesses have taken out government loans, which they will have to begin repaying after 12 months. Then there is the additional disruption posed by Brexit to manage.

Representatives of the Members in Practice Panel discussed the challenges facing UK SMEs at their latest meeting. They also shared their suggestions for how the government can help small businesses to survive into the future. Their main observations were as follows:

  1. Business owners are feeling the strain
    The last 12 months have been a punishing period for small business owners across the UK. Many are suffering from exhaustion and mental health issues. Additionally, the imposition of a third national lockdown has resulted in a rise in business closures, either because they’ve run out of money or their owners have had enough. 

  2. Liquidity and cashflow are growing issues
    A shortage of funds is making liquidity a challenge for many businesses – even those that had cash reserves going into the pandemic or have taken out government loans. At the same time, SMEs are experiencing cashflow issues, due to customers not paying them on time. For this reason, the government has strengthened the Prompt Payment Code so that, from July, the 3,000 companies signed up to it should pay the majority of their small suppliers within 30, rather than 60, days. Unfortunately, however, this is unlikely to prevent an expected surge in small business collapses during the second half of this year.

  3. Tax needs careful handling
    The chancellor is reputedly considering a corporation tax rise as a way to start repaying the cost of the COVID-19 pandemic. While there is a case for a corporation tax increase – especially where businesses have prospered over the past few months this needs careful consideration to avoid hitting the recovery hard. Some sort of “taper relief” could help SMEs in an environment where corporation tax rates increase. What the government can do to help is to provide as much certainty as they can on tax policy, ideally looking forward over the next couple of years. A lack of certainty is affecting SMEs investment and corporate decisions. It could also impact inward investment into the UK at a time when it is needed more than ever.   

  4. Brexit is a headache
    Brexit is creating considerable logistical challenges for businesses that import into the EU, or export from it. The last-minute timing of the UK-EU trade deal meant that many businesses could not prepare adequately for the border disruption that was to follow. At present, there is a lot of confusion about paperwork and VAT. Courier companies are struggling to understand the correct processes and are hampered by software that is not fit for purpose.

  5. The UK’s entrepreneurial culture is under threat
    The events of the past 12 months have undermined the appeal of entrepreneurship. Trading conditions have been extremely challenging for SMEs in certain sectors. Furthermore, many business owners are concerned about the prospect of a corporation tax rise when they are struggling to get back on their feet. Some have suffered real financial hardship because they have effectively been excluded from the Self-Employment Income Support Scheme and the furlough scheme. Significantly, where business owners have closed a company due to COVID-19, they can’t claim back any losses through an entity that they set up at a later date. 

Balancing act
Going forward, the government will have to perform a formidable balancing act. It must repay the cost of the crisis while ensuring that the burden of that repayment falls on those with the means to pay it. It will also need to think of creative ways to incentivise people to start businesses and export goods and services overseas. Our long-term prosperity depends on the government getting this balance right and outlining a long-term strategy for the future.

Andrew Harding, FCMA, CGMA
Chief Executive – Management Accounting 
Association of International Certified Professional Accountants