Mike Cherry interview: Now is not the time to saddle small businesses with higher taxes

The pandemic has been a bumpy ride for Britain’s entrepreneurs and small businesses.

Trying to navigate the choppy waters of the government swinging between tougher and looser restrictions to tame Covid-19 has been fraught with risk and uncertainty.

But, one thing seems for sure: the looming heavier tax burden will weigh heavily on small firms, Mike Cherry, national chair of the Federation of Small Businesses (FSB), tells Morning Wire

Last September, the government announced employers’, employees’ and self-employed people’s national insurance contributions (NICs) will climb 1.25 percentage points April.

Worryingly, the decision to launch plan B restrictions just before the bumper Christmas trading period, compounded by higher tax bills, will push some small businesses over the edge.

“It is highly likely some businesses will take the decision we’re either going to cease trading or we’re going to fold” as a result of lost Christmas income and the NIC hike, Cherry warned.

Fresh figures released by the Office for National Statistics this week illustrate the public finances are in a much better position than thought.

Borrowing – for the financial year so far – has been £13bn lower than forecast by the Office for Budget Responsibility, igniting a flurry of calculations from City economists suggesting Chancellor Rishi Sunak has enough fiscal room to scrap the planned NICs rise.

“​​Our forecasts imply the Chancellor would have enough fiscal room to cancel the scheduled increase in NIC taxes on 1 April,” Bethany Beckett, UK economist at Capital Economics, said.

The upbeat forecasts reinforces the FSB’s position that it is an inappropriate time to be adding to small firms’ costs.

“We all know the public finances need to be brought under control.”

Mike Cherry

“People don’t mind paying tax when they can afford it. What they resent is when they have more taken away when they can’t afford it.”

NICs raise the cost of retaining existing staff and hiring new talent, which can act as a drag on employment.

As a result, there is a risk the Treasury could produce the unintended outcome of shrinking their tax take if the NICs rise holds down employment rates.

Fewer people in work would hit not just national insurance receipts, but also income tax receipts, potentially resulting in a net loss to the public coffers.

“It’s almost self-defeating,” Cherry warned.

Other headwinds

Meanwhile, several other headwinds are swirling above small businesses that threaten to swell their bills.

It is not just households that have been pinched by inflation.

Businesses feel the shock of higher energy costs harder than consumers as they are not shielded from the worst effects of elevated wholesale gas prices.

“Rising energy costs are going to have a negative impact on small businesses who don’t get the same level of protection as consumers,” Cherry said.

Moreover, much like poorer households absorb a bigger hit to their finances from higher energy bills as they represent a greater proportion of their income compared to wealthier households, small businesses have less capacity to absorb rising energy costs compared to large corporates.

Any rise in costs has “a massive impact when most small businesses are operating on wafer thin margins,” Cherry said.

The global supply chain crunch has added to rising domestic costs for small firms.

Higher shipping rates are knocking the competitiveness of SMEs that export due to it limiting room to charge lower prices for products.

A relative lack of a financial cushion at smaller firms is being exacerbated by an entrenched culture of larger businesses paying micro firms late.

Late payments extracts money that could be used to invest in the future. But, it also reduces the liquidity position of smaller businesses, meaning they may struggle to pay liabilities on time, increasing the risk of collapse.

The FSB has called on the government to root out this late payment malaise.

Cherry recommended the government tell “the audit committees at large corporates to be responsible for making sure the supply chain is functioning fairly”.

Small businesses tend to drag the UK out of periods of weak growth following a recession through driving job creation and productivity gains, as demonstrated after the financial crisis.

Saddling them with a higher tax burden in a bid to repair the public finances seems a risky move from a government that is shooting for a high wage, highly productive economy.