The Small Business Round-up: January 2023

A deep dive into three issues impacting small businesses at the moment. 
Paul Wilson, FSB’s director of policy, talks us through the very recent announcement of changes to the government’s Energy Bill Relief Scheme.
Lucy Monks, head of international affairs at FSB, explains how small businesses can benefit from free trade agreements. And Ben Butler, senior policy advisor at FSB – looks at the situation around increases in business rates in England and what FSB would like to see happen to support firms in the face of those.
Guests:
Paul Wilson, director of policy, FSB
Lucy Monks, head of international affairs, FSB
Ben Butler, senior policy advisor, FSB

Transcript

Jon Watkins: 0:10

Welcome to this latest FSB monthly roundup podcast brought to you by the Federation of Small Businesses and the go-to podcast for news, tips and important information for small businesses and self employed. This episode is our January 2023 Small Business Roundup, in which we'll take a look at some of the important issues hitting the headlines at the moment, which you need to be aware of right now as small business owners. This month we'll be diving deep into three issues, specifically impacting small businesses at the moment. To kick us off, Paul Wilson FSB's, director of policy is going to answer some questions around the very recent announcement of changes to the government's Energy Bill Relief Scheme (EBRS); energy such a big topic right now. Lucy Monks, head of international affairs at FSB is then going to explain how small businesses can benefit from Free Trade Agreements and take advantage of some of those, and there's some practical tips in there. And then Ben Butler, senior policy adviser at FSB will explain the situation around increases in business rates in England, and what FSB would like to see happen to support firms a bit more in the face of those. So thanks, all of you for joining me, Paul, let's kick off with this recent very recent development around energy bill relief for small businesses now, we already had energy relief in place for small businesses, didn't we? So what's changing now?

Paul Wilson: 1:41

Hi, Jon. So yes, that's absolutely right. The current scheme, the energy bill relief scheme, is in place and will remain in place until the end of March. And that scheme means that businesses on variable tariffs or on fixed tariffs that were agreed after first of December 2021, can be confident that they shouldn't be charged more than 21p per kilowatt hour for electricity, or 7.5p per kilowatt hour for the gas part of their bill. Now, I've slightly oversimplified that to avoid sending listeners to sleep. But the upshot is that the current scheme gives small businesses a fairly high degree of confidence that even if wholesale gas or electricity prices go up again, they won't see huge bill increases, and given how high prices have been at various points over the past few months, EBRS has been a lifeline for some businesses. However, on Monday, this week, the government announced what would succeed EBRS after the end of March this year. The new scheme is called the Energy Bill Discount Scheme. And it's extremely disappointing. And there are two elements to the new scheme. There's a universal discount that any business can qualify for. And there's a more generous discount available for certain energy intensive sectors, which are exposed international competition. I'm going to talk about the universal scheme, which will be the one that will apply to the vast majority of small businesses. But if you're in manufacturing, in particular, you might be eligible for the energy intensive scheme and it is worth checking. So how does the new discount scheme work? Well, unfortunately, it provides only a fraction of the discount that the current scheme does. The maximum discount a business will be able to receive after the end of March is 2p per kilowatt hour for electricity, and 0.7p per kilowatt hour for gas. And those discounts only kick in when your prices go above 30p per kilowatt hour for electricity, and 10.7p per kilowatt hour for gas. So it's extremely ungenerous by comparison to what we've had.

Jon Watkins: 3:34

Yeah, that's interesting. And so we had a scheme, they've introduced a new scheme, which you guys are saying is less impactful, less supportive? You've talked about some specific numbers around around cost there, but can you put it into context for us just how big a reduction in support is it?

Paul Wilson: 3:53

Well, it's a huge reduction. And that's why we're so frustrated. The current scheme cost the government 18 billion pounds over six months. And this new scheme, both the energy intensive part, and the universal part is only worth five and a half billion, and that's spread over a year. So by my reckoning, that means it's worth only 1/7 as much. But actually, it's worse than that, because the current scheme gives small businesses planning certainty. And the new scheme doesn't do that at all. It transfers the risk of global fossil fuel prices rising from the government to small businesses. And that can't be right. It's the government who makes choices about how the energy market should operate. It's the government that should be responsible for providing a secure and affordable supply of energy to the country. And it just seems wrong to transfer the risk of them not being able to do that to the small business community.

Jon Watkins: 4:41

Yeah, and it's a complex area, I just want to make sure our audience can really kind of understand it from from their point of view and the impact on them. Can you sort of put that in the context of a real business and how an individual small business might be impacted?

Paul Wilson: 4:55

I can, but I should say by way of sort of health warning the impact will be very variable as it very much depends on whether the business is on a fixed tariff. And if they are, what rates, they fix that I'll give you an example. So let's assume that a pub fixed their tariff in August last year when prices were at their highest. And let's assume they use just under 200,000 kilowatt hours of gas a year, and just under 50,000 kilowatt hours of electricity, which is quite a lot, but is a sort of reasonable example, under the current scheme, that pubs costs will be around 25,000 pounds a year for electricity and gas, that's under the current scheme, under the new scheme the pub's costs will go up to over 80,000 pounds a year. That's a huge increase and sort of illustrates, at an extreme what the difference is between the really good protection that the current scheme provides, and the very minimal discounts that will be available in the future, then the question for that pub is, of course, can customers afford to pay those extra costs, we know that a lot of businesses have passed on cost increases as far as they can, and customers can't necessarily afford to pay more. And if they can't, that pub's left with a choice of operating at a loss, or raising prices to a level that might start to drive customers away. So that's one example. It is an extreme example, and it won't be as bad as that for most small businesses. But that shows the difference between the two schemes.

Jon Watkins: 6:20

Yeah, and I guess not all small businesses have the opportunity to pass costs on to customers, either. Those are some big numbers in terms of the potential impact at albeit at an extreme to, to small business, what do you think the impact is going to be on the small business sector overall, what pressure do you think it's going to put on the market?

Paul Wilson: 6:42

Well, it's going to be really hard. You know, in November, when we surveyed small businesses on this 24% of small businesses told us, they'd have to think about closing, downsizing or radically restructuring, if support came to an end at the end of March. And if energy prices remained high. So I would say that the replacement scheme is fairly close to support coming to an end. So I think that's up to 24% of businesses who will be thinking hard about their future now. And I would anticipate that we'll see a significant number of business closures as a result of the decision to cut back the government support. However, there is a potential silver lining, the biggest variable that we have here is what happens to global energy prices. And the glimmer of hope is that they have dropped significantly in recent weeks. So if global energy prices stay low during 2023, which I think is what the government is gambling on here, then the damage should be a lot less than the sort of 24% figure that we're talking about. It'll be scant consolation to some businesses like the pub I just used in the example, who fixed it a high rate, but those on variable rates might then be alright.

Jon Watkins: 7:51

Yeah, let's hope that glimmer of hope comes through. Where do we go from here, Paul? You know, what can small businesses do? And what do you want the government to do from here?

Paul Wilson: 8:02

So business owners, you keep doing the sensible things that you have been doing, keep considering how to use less energy to become more energy efficient. If you're on a variable contract, keep looking at the possibilities for fixed tariffs. And if they you know, start to be at a rate that you can afford going forward, that could be a good way to give your business the certainty it needs by fixing your tariff, if you can afford to do so. And then looking at the government, well FSB has made clear to the government that it's made totally the wrong decision here not to provide more protection to small businesses who need it the most. And I would argue, and we are arguing that government now has an even greater responsibility to provide meaningful support for energy efficiency measures in businesses. So that's something that we'll be calling for going forward.

Jon Watkins: 8:47

That's brilliant. Thanks very much for that update Paul.

Paul Wilson: 8:50

Pleasure.

Jon Watkins: 8:51

Lucy, I want to turn to you to chat about free trade agreements. Now, there's been a lot of talk about these, following Brexit and talk about how the UK is building agreements with other countries to make trade easier and cheaper. Can we start by getting an understanding of what Free Trade Agreements really are, though? What exactly are they and what do they do for small businesses?

Lucy Monks: 9:15

Yes, so free trade agreements are agreements between two or more countries that aim at supporting trade through the reduction of barriers, or by introducing initiatives that support access to other markets. So there are loads of barriers that can develop intentionally or unintentionally which halt active economic activity of the businesses that are trying to operate in other areas. So it's not unusual for a country to develop their own public procurement requirements. They set up their own immigration rules, regulatary systems all of the other the bits and pieces a country can decide to do as its own kind of sovereign economy. The purpose of the FCA is basically to support the reduction of those barriers where there might be clashes between the way that countries have done things differently, of course, you've got those kind of intentional barriers. So things like tariffs that make exporting or importing certain goods into different areas more expensive. So the general view that underpins the development of FTAs has traditionally been that open global trade is good because it reduces costs for businesses and consumers and is a way of developing peaceful cooperation between states. But I don't think I need to tell anyone listening that this view has been subjected to quite a lot of political debate over the last few decades, from all sides of the political spectrum. But if I dare to put the politics aside for the moment, you know, the government has been, as you rightly pointed out set on the path of negotiating new Free Trade Agreements, especially after the result of the Brexit referendum and the UK formally leaving the European Union.

Jon Watkins: 11:06

Right, and what are the overarching benefits of FTAs- how are they designed to support small businesses, specifically.

Lucy Monks: 11:14

So we've just, we're nearly at the point where the trade agreements that UK Government struck with Australia and New Zealand are to be signed off, they still have a little bit of time, they need to be signed off through our respective Parliaments, but when they do, they're really two really clear examples of a way FTAs can support small businesses. So basically, both of these trade agreements contain chapters that have rules and initiatives specifically designed to support small businesses. So these include things like promises to support access to finance for trading initiatives, clearer guidance for businesses, in securing things like prompt payment for goods or services. So when we talk to our members about the kind of top barriers to trading in other countries, those kinds of things that the information point, payments, risk are the issues that tend to come up top. So those are the areas that are kind of specifically covered in the Australian, New Zealand free trade agreements. And we've been really supportive of those. And obviously, we're lobbying extensively to support those kinds of initiatives within the free trade agreements. Past that there are chapters within those deals that handle issues that could affect a range of businesses in different ways, depending on what your business does, or what you want to do in another market. So for example, there are rules about ensuring level playing fields on accessing public procurement regimes, if you're particularly interested in getting in with provision of public services, in a particular territory, removal of tariffs on goods, and a reduction of some of the administrative burdens, for example, and accessing visas for business purposes. So it depends on what your area of activity is, and how you seek to engage with that country. But there are a wide range of provisions that might support you.

Jon Watkins: 13:15

Yeah, the rhetoric we hear is that this is, you know, these speed up trade and they reduce costs for for small firms. How exactly do they speed up trade?

Lucy Monks: 13:26

I think one of the areas where trade has been particularly bad - trade policies could be particularly bad - is in the area of digital. Because technology has vastly outstripped the kind of trade agreements or set of rules that were set, you know, even a decade ago, they're quite out of date with how technology and modern practices are working in the real world. So for example, there are a fair few requirements across the world for things like wet ink signatures, which means literally having a pen and a piece of paper to confirm or sign off. Whatever it is, you need to confirm or signed off. But we now live in a world where there's actually many more secure ways to digitally secure agreement on things and to prove agreement on things so and to fight fraud. So there is a real goal within any FTAs for example, to ensure that these kinds of technologies are better understood and enhanced through the policy and the political decisions that go underneath them. So that's one area. There are other areas such as the recognition of professional qualifications, a particularly high priority area for people working in service provisions, where regulators now have an opportunity again for the New Zealand and Australia FTAs to to allow professionals basically to register and operate in a different territory. on the same basis that someone originally from that territory can, which can in some instances cut down the bureaucracy associated with registration and operation by years. So there's a lot of potential there to cut down on the time that it takes to access markets.

Jon Watkins: 15:18

Right, and what about reducing costs? Are they they reduce specific trade costs as well, for small businesses?

Lucy Monks: 15:25

Yeah, so the potential costs associated with accessing another market is probably the biggest barrier to entry for traders. And this is particularly true for people that might be in the beginning of their exporting journey, whether that's within a particular market or haven't had that much experience in exporting at all. FTAs are, especially the ones that work well, are the ones that kind of reduce costs from the get go. So that might be from everything from trying to understand the rules and the laws in operating in a new territory, which means you don't necessarily have to go off and find someone with particular expertise and operating in a particular market or a partner, but might be able to be more confident in going ahead yourself and understanding those rules. But they're also more obvious and clear measures. So you mentioned tariffs earlier. So for example, the New Zealand trade agreement eliminates tariffs, the 10% tariffs associated with export of clothing, which means it will be cheaper for businesses to move their clothing, whatever those goods or services are into those territories and either reduce that cost to the consumer or reduce that cost for themselves and ensure that they're more competitively priced with domestic products.

Jon Watkins: 16:44

Yeah, brilliant. You've referenced New Zealand there and some other specific FTAs that the UK has, what other countries does, the UK have FTAs with and are there other others coming soon?

Lucy Monks: 17:00

There should be so the government is, so the Australia and New Zealand FTAs were the first kind of from-scratch agreements. There is a couple of, a number of, other rather agreements that were signed off by the UK government. There were essentially rollover agreements from when we were members of the European Union. So it's areas of the European Union, have struck agreements. But separately, the UK government now has its eyes on striking free trade deals with India, you might have heard about that in the news, a fair amount. It was supposed to be signed off by the end of last year, but I think it was the time was probably too tight for what was practically possible. But obviously massive economy, huge potential for people that are looking to import or export from the country, and an area for real significant potential. Another massive economy that's under a lot of interest by FSB members in particular is the United States of America. So what's interesting about that is that it seems unlikely that we're gonna have a proper free trade agreement process starting anytime soon, mostly because of the politics of the situation. But there have been a number of meetings between UK Government and US political leaders on what could be possible outside of free trade agreement, because not everything has to be done directly through a free trade agreement. And one of the areas that both sides have agreed on as a matter of priority is, how do we make it easier for small businesses on both sides of the pond to to export and take up new opportunities. And one of the biggest barriers that has been picked up by our members is actually how technically complex the US system is in terms of regulation and laws. Obviously, they have huge amounts of domestic state laws and federal laws and regulators. And it can be really difficult for a small business to get their head around when entering into the US as a substantive market. So trying to get some of the information gathered in such a way that's actually much more accessible to small businesses is one of the priorities. And we're really closely working with political leaders on both sides to see what else could potentially be achieved outside of a free trade agreement.

Jon Watkins: 19:31

That's brilliant. And just finally, on this, you know, you talked about complexity there. Lots of small businesses maybe won't even have considered exporting before but might want to make use of FTAs to start doing that, where can they get some support and guidance on how to start seizing these opportunities.

Lucy Monks: 19:48

So there is some guidance available on the FSB website and we're always looking to improve our offerings. So if there's something in particular you think would be useful, and would like us to explore further obviously get in touch. The UK government is doing a huge push on providing support for small businesses, especially those ones at the beginning of their journey, so the gov.uk website is offering a range of advice and guidance, I would say that it's an area that they could work on a little bit better. And we are pushing them to do that and working with them to kind of provide better advice or better quality advice, but they also have helplines that they're constantly improving. So there are a number of contact points to the UK Government that you might want to take the opportunity to utilise. And what I would say to anyone listening to this, is that if you are interested and looking to export as I said into new territories, or it hasn't been something you thought about at all, but may be an area of interest, and you're not really sure where to go, you can always get in touch with the FSB. Or if you think the kind of information out there isn't quite what you need, then, you know, please feel free to get in touch and we'll always do whatever we can to support you.

Jon Watkins: 21:10

That's brilliant. Thanks, Lucy. That's a really comprehensive overview of Free Trade Agreements and how they might help small businesses to expand. Thank you. Ben is also here with us. And Ben's going to talk about another really topical issue at the moment, which is business rates, and some latest developments around those. Can you start by telling us why business rates and bills are changing? And what the latest developments are for small businesses Ben?

Ben Butler: 21:39

Yes, hello there. So yes, for the majority of businesses, their rates will be changing to at least some extent, most likely. And that's really because you know, business rates are property tax on commercial properties and the valuation office who value how much they are worth and how much your rate of value is have done a revaluation in this last year. And the impact of that is that the new bills based on those revaluations will come in Spring. And so and that hasn't been done since 2017. And so the updated valuation of commercial properties will be reflected in those new bills. Those bills coming in at the end of March will be quite varied for a lot of small businesses. But because a revaluation hasn't been done since 2017, there's quite a variation in how businesses are impacted. Valuations are a routine part of business rates, but as this is valuation hasn't been been done since 2017, some businesses may even be seeing almost a doubling or more in their rateable value. And this is just a reflection of because it's linked to the rental value of properties. This is just quite a change since since the six years it's been done. It's important to know that that variable value won't necessarily be the bill they get in the post as it were. So your bill depends on quite a few things. There's a rule of thumb that rates for small businesses are charged at 49.9p for every pound of value. So you can get an estimate, you can half your overall valuation and get an estimate of what you're likely to get in the post as your bill. But, there is a lot of other factors out there in terms of support that you can get for for business rates. And if you're under the threshold of£12,000 of rateable value, you most likely won't see a bill in your post for business rates. This is a particularly important time for those who may not have ever paid business rates, who are now above that threshold to know what support is out there. And there is a transitional phase from when you start paying business rates or have an increased bill to what that full bill will come in as. And that's for around three years. But there is other support out there.

Jon Watkins: 24:21

Yeah, that's brilliant. Thank you. I understand there's also temporary relief for some businesses around business rates. Can you just explain what that is and what businesses might need to do if they if they want to obtain that?

Ben Butler: 24:36

Yeah, so as business rates can be a very considerable cost to small businesses, it is important to look out for what support may be available. As business rates are collected by local authorities, they're the ones who are also administering the support available for businesses. So as I mentioned before, that the threshold for paying business rates is£12,000, and that's linked to what's called a small business bonus. So that's one type of support. So if your property is worth less than that, then the support is out there for you not to be paying that. In the autumn statement, we also saw and welcomes a continuance of the 75% discount for those businesses in retail, hospitality and leisure. There are other more particular discounts out there and support available for certain types of businesses, depending on the types of investment you need in your property. So for instance, that might be certain types of machinery or equipment that you might need to run your business that might increase the rental value of your property. But that's supported through some schemes. It's important to note that the some of these support schemes may not be automatically applied. So it's important to check with your local authority, usually on their website, or if you've already got correspondence with them about business rates, use that as well. And also, this does depend regionally as well. So a lot of the details I've been talking about do apply for England, but also in Scotland, Northern Ireland, Wales, which might have slightly different support offerings available. But yeah, the most important thing is to you can look at your rateable value on the government website, via the valuation office. But to check any support you're available eligible for, it's important to go to your local authority, the one that is actually collecting your bill.

Jon Watkins: 26:42

Yeah, that's good advice. And how much of a burden is this now going to be on top of other pressures that businesses are currently facing when we're talking about energy costs and other rising costs of doing business?

Ben Butler: 26:54

Yeah, as we've already been hearing that, you know, there was a lot of outside pressures for business and rising costs of doing business, as you say, with inflation. And, and frankly, a lot of businesses are still kind of recovering from COVID-19. And though there was a lot of good support out there, at that time, I think there's still a long way back for businesses to properly recover from that. And business rates do continue to be a significant cost for small businesses. You know, outside of the support that we've talked about already, business rates take into account your properties and your rateable value, they don't necessarily take into account your ability to pay, your turnover or your profit. And so with that kind of bulk cost there, it is difficult for small businesses to plan and grow. You know, having said that, you know, it was good to see, as I said about COVID-19, formal discounts applied to businesses for much of the pandemic. And as I mentioned, it's good to see the support for retail, and hospitality continues at 75% discount. This support is really crucial for many small businesses. And many of these businesses make up our high streets, and are a core part of our local towns. And so you know, that support is really vital to them. Lots of local authorities, over that COVID period used their information on local businesses really well, to be able to, to actually provide the support to business rates or other costs to small businesses and provide the support through that mechanism. And we did see the flip side of that where some local authorities connection wasn't as strong with small businesses or local businesses and their high streets, that it was more difficult to get that support to small businesses. You know, overall, though, in terms of November's Autumn Statement, the overall package was quite positive and echoed quite a lot of the asks that FSB have been lobbying for consistently for a while now. The announcement overall was a £13.6 billion package, which included that discount, 75% discount for retail, hospitality and leisure, we already talked about, but was mostly comprised of a freezing in the multiplier that calculates business rates. So that's that 49.9p for every pound, of rateable value for small businesses. That was frozen to protect against inflationary rises, it could have been, you know, over 52p of every pound that they were paying, if that was matched with inflation, but very happily, this was frozen to protect against inflation.

Jon Watkins: 29:55

Okay, and what would you like to see happen? Going forward? Would you like more support from government on this.

Ben Butler: 30:02

Yeah, definitely more support, I think, is also good to give credit where credit's due of, you know, where where support has been good. So that includes the 75% discount for our high streets to retail, hospitality and leisure businesses on our high streets. And for us, that's a first point I wanted to make is that it is vital that that continue, or our high streets really will struggle. Overall, though, I think a main ask of ours that has been there for a while now, that we've been continuously pushing government on is increasing that threshold from when rates will kick in from£12,000 to £25,000. And our estimates here are that this would lift more than 200,000 businesses out of paying business rates. And as I've said, you know, this is a main cost of businesses and removing them outside of the rate system would help these businesses to plan and grow. There is a longer term view, there's been a business rates review from the government relatively recently with a view to introduce reform legislation eventually, but this will take time. As part of that would be to move revaluations to every three years instead of you know, as I mentioned earlier, every six or seven, as we saw with this revaluation not taking place since 2017. We've been asking for that for a while now. Because that would enable businesses to plan, you wouldn't see the large fluctuations in value that see these shocks of you know, for some businesses almost doubling their business rates. And in the long term, along with that revaluation, hopefully this will fit with a longer view to seeing business rates being part of making tax digital. And hopefully, we'll see that that will link then to the information from businesses about their turnover. And hopefully, that will have the potential to see, you know, that's been taken into account ability to pay being taken into account and better mechanisms to be able to get support out there when that's needed. And that's my main point I want to end on really is overall business rates are a real concern for for small businesses. We want to see them moving away from just a bulk cost that's linked to their property value, and actually take into account you know, ability to pay. A maintenance of the mollify or freeze is a crucial thing in the short term. But over the long term we want to see this tax reformed and to make sure support is out there for businesses for as long as possible really. Thank you.

Jon Watkins: 32:44

Excellent. Thanks, Ben. And thank you to all of you, Paul, Lucy and Ben for taking us through those key small business announcements in the headlines right now as part of our monthly Small Business Round-up podcast series. That was really good. Thank you also to our audience for listening to this episode. While I have your attention, I would just like to remind you that you can subscribe to the FSB podcasts to receive regular updates and guidance on the big issues affecting small businesses. And do Please also remember that you can find a whole host of additional webinars, podcasts and other content at the FSB website which is fsb.org.uk and at the First Voice website, which is first voice.fsb.org.uk Thanks very much for listening.