Small businesses have managed better than expected during the downturn. Even zombie companies, laden by debt, have managed to survive, if not prosper, aided by a reasonably strong UK economy, low wage growth and cheap borrowing costs. However at the recent CBI Conference, Dave Lewis, CEO of Tesco plc, warned of a potentially lethal cocktail of business rates and the national living wages.
How might these affect your business?
Business rates are a tax levied on the estimated market rental value of non-residential properties, including shops, offices, warehouses and factories, and are normally payable by occupiers of the property, rather than owners. Business rates raise a substantial amount of revenue – forecast £22.4 billion in 2014-15.
In January last year, the Prime Minister told the Federation of Small Businesses that business rates were businesses’ – particularly small businesses – number one complaint. This is no small wonder given that businesses, struggling to make ends meet during the downturn, were being asked to make payments based on an arbitrary multiplier applied to out-of-date rental valuations, in many cases long after those values had slumped to the point at which the rates were a higher cost than the rents and significantly more than corporation tax.
There were a number of policy changes in 2014, with the Government targeting support at small businesses and the retail sector. However, the PM added that he was aware of the need for longer-term reform and the Treasury commenced a review of business rates in March this year.
The Chancellor, at the Conservative party conference, announced that from sometime before the end of this Parliament, local authorities will keep the proceeds rather than remitting half of it to the Treasury, and will be able to cut business rates if they think that will attract new business investment and hence total revenues.
The Chancellor confirmed these plans in the recent Autumn Statement as part of a package of measures aimed at rebalancing the economy and devolving power back to local leaders. In the meantime relief for small businesses was maintained.
Whether this assists or merely moves the heat from central to local government is yet to be seen. No doubt, the devil will be in the detail and businesses’ responses to date have been lukewarm.
The second part of the cocktail is the National Living Wage. This is different from the Living Wage, which is an hourly rate set independently by the Living Wage Foundation, updated annually, and calculated according to the cost of living in the UK.
The National Living Wage was announced by the Chancellor in the 2015 Budget in March. The intention is to introduce a compulsory minimum wage for all staff over 25 years of age.
The rate will be set in April 2016 and will be calculated by the Low Pay Commission on the basis the wage premium should reach 60% of median earnings by 2020. This currently looks like a rate of £9 per hour by 2020. This is effectively a higher National Minimum Wage and not a living wage. Even the current London Living Wage is £9.15 per hour.
This is part of a concerted effort by the Chancellor, confirmed in the Autumn Statement, to move Britain to a higher wage, lower tax, lower welfare society. Those on the current National Minimum Wage and benefiting from the introduction of the National Living Wage can expect to see their wages rise by around 40% over the next five years.
However, there may be some corresponding benefits. The Living Wage Foundation cites an independent study that claims that 80% of employers who had implemented a Living Wage policy in London believed it had enhanced the quality of the work of their staff. Absenteeism in those firms had fallen by approximately 25%; 75% had reported a significant positive impact on recruitment and retention; and 70% felt the organisation’s adoption of the Living Wage had contributed to consumers viewing the organisation as having a commitment to being an ethical employer.
By David Clark, Partner in the Corporate and Commercial team at IBB Solicitors