SMEs hit by triple whammy of energy, inflation and tax

Mil­lions of house­holds have seen their ener­gy prices and the cost of dai­ly goods increase in recent months and in the pri­vate sec­tor SMEs are fac­ing sim­i­lar chal­lenges. 

The cur­rent nation­al ener­gy cri­sis has been described as an “exis­ten­tial threat” to SMEs by the Fed­er­a­tion of Small Busi­ness­es (FSB) and, with no price cap to pro­tect them, almost two-thirds are spend­ing 20% of their busi­ness costs on ener­gy.

Accord­ing to a sur­vey by SME pay­ments com­pa­ny Tyl, which is part of NatWest Ven­tures, 54% of UK small busi­ness­es are spend­ing more than £3,000 on their annu­al ener­gy bills. Unsur­pris­ing­ly, this is hav­ing a big impact on the abil­i­ty of these busi­ness­es to grow, with many now focus­ing on sur­vival.

On top of this, small busi­ness­es are hav­ing to con­tend with the high­est infla­tion rate in almost 30 years and the loom­ing hike in employ­ers’ nation­al insur­ance con­tri­bu­tions, which are set to increase by 1.25 per­cent­age points in April.

FSB nation­al vice-chair Mar­tin McTague says: “Infla­tion is hit­ting small busi­ness­es hard, with over three-quar­ters telling us their cost of doing busi­ness has risen and is act­ing as a bar­ri­er to growth. Spi­ralling ener­gy costs are caus­ing wide­spread dif­fi­cul­ties, espe­cial­ly for micro-busi­ness­es of few­er than 10 employ­ees, who face many of the same chal­lenges as con­sumers when it comes to nego­ti­at­ing ener­gy deals but with­out the same pro­tec­tions.

“Add in the planned ris­es to nation­al insur­ance and to div­i­dends tax, due in April, and there is def­i­nite­ly rea­son to be con­cerned. The cho­rus of voic­es call­ing for the jobs tax hikes to be scrapped is ris­ing – now we just have to hope the gov­ern­ment is pay­ing atten­tion.”

The trade body is not alone in voic­ing its con­cerns. The Insti­tute of Direc­tors’ chief econ­o­mist Kit­ty Ussh­er claims that the upcom­ing rise in employ­ers’ nation­al insur­ance con­tri­bu­tions rep­re­sents a “real and gen­uine con­cern to busi­ness lead­ers, par­tic­u­lar­ly those run­ning small and medi­um sized busi­ness­es that are the growth engine of our econ­o­my”. 

Accord­ing to the insti­tute’s research, many busi­ness­es are try­ing to find ways to off­set their rapid­ly ris­ing costs, with 38% look­ing to raise prices and 19% con­sid­er­ing cut­ting staff num­bers. McTague adds: “Small busi­ness­es are tough, adapt­able and resilient, but they’re def­i­nite­ly up against it at the moment.”

How have small businesses responded?

One busi­ness nav­i­gat­ing these rapid­ly ris­ing costs is Scot­tish con­fec­tionery and online gifts busi­ness Brad­fords Bak­ers. Its man­ag­ing direc­tor, James McGoldrick, says his busi­ness is fac­ing “astro­nom­i­cal” ship­ping costs, includ­ing a dou­bling in the price of some items the busi­ness imports from Chi­na, and an increase in gas and elec­tric­i­ty prices, which he claims are “ris­ing at a phe­nom­e­nal rate”.

McGoldrick says: “We would nor­mal­ly get a set rate for our ener­gy prices over a three-year peri­od but you can’t get a price quot­ed at the moment, you have to accept that the costs are going to be vari­able and prob­a­bly quite con­sid­er­able.”

The cur­rent ener­gy cri­sis is also impact­ing Brad­fords Bak­ers’ UK-based sup­pli­ers, which have warned McGoldrick of fur­ther price increas­es for their prod­ucts. The busi­ness has already expe­ri­enced a rise in costs of between 7% and 15% and so is like­ly to have to raise its prices — the sec­ond increase in recent months.

The busi­ness has also start­ed bulk pur­chas­ing cer­tain items in order to keep costs down, but McGoldrick admits this is not prefer­able for a busi­ness of his size. “You don’t want to be in a sit­u­a­tion where you’ve brought prod­uct in that you then can’t sell,” he says.

A suc­cess­ful sales peri­od in 2019 means the com­pa­ny is able to absorb the cost ris­es it has faced so far. But McGoldrick adds: “The ener­gy costs are now start­ing to take effect, so we’d like to see the gov­ern­ment step in and cap it to help the econ­o­my and pre­vent oth­er SMEs from going out of busi­ness.”

What support is available for SMEs?

With glob­al ener­gy mar­kets and sup­ply chains so volatile, it is hard to know the best course of action to take. On ener­gy, com­mer­cial, fixed-rate tar­iffs may offer the best secu­ri­ty but with gas prices soar­ing many are now quot­ed at cur­rent rates, mean­ing busi­ness­es are unlike­ly to save by switch­ing.

Ed Whit­worth, head of ener­gy per­for­mance at busi­ness com­par­i­son site Bion­ic, advis­es that “it’s prob­a­bly best to sit tight until prices come back down to a rea­son­able lev­el”. How­ev­er, it’s dif­fi­cult to pre­dict when this will be, with the chief exec­u­tive of Cen­tri­ca recent­ly sug­gest­ing that high gas prices could con­tin­ue for the next 18 months to two years.

The chal­lenges fac­ing busi­ness mean the gov­ern­ment is com­ing under increas­ing pres­sure to alle­vi­ate some of the costs. The British Cham­bers of Com­merce have called on the gov­ern­ment to recon­sid­er the planned increase to nation­al insur­ance con­tri­bu­tions to help reduce the cur­rent squeeze on busi­ness­es, warn­ing that it could place a “stran­gle­hold” on the country’s eco­nom­ic recov­ery. 

Whit­worth adds: “The gov­ern­ment is com­ing under pres­sure to step in and help cus­tomers by way of a VAT cut or a low­er­ing of oth­er charges not direct­ly linked to the whole­sale price of ener­gy, but the only way that busi­ness own­ers can cur­rent­ly shield them­selves from out of con­tract rates and any poten­tial future ris­es is to lock in exist­ing rates as soon as pos­si­ble.”