The UK is slowly adjusting to living and doing business amidst a global pandemic. Social-distancing rules still apply, local lockdowns are happening, and people are getting used to wearing masks in shops and on public transport.
Something else that is happening comparatively slowly is the UK’s economic recovery from the COVID-19 shock. In early August, the Bank of England forecast that UK GDP would not return to its pre-pandemic level before the end of 2021. This forecast came after the Office for Budget Responsibility predicted in July that the UK’s GDP during 2020 would fall by between 10.6% and 14.3%.
Against this challenging economic backdrop, businesses remain cautious. Members of the Association of International Certified Professional Accountants’ UK Regional Advisory Panel highlighted their main concerns in a recent videoconference. These concerns include:
COVID-19 has pushed negotiations around a trade deal with the EU off the radar for many businesses. Nevertheless, it is now less than five months until the transition period ends, and the UK has yet to sign a trade deal with the EU. If a deal is not signed by 31 December, UK businesses face the prospect of higher costs and a heavier regulatory burden going forward, as well as a further economic shock on top of the pandemic.
Many businesses anticipate resourcing issues once the transition period expires — especially those that rely on skilled workers from within the EU. A finance leader for an infrastructure company said his business depended on European expertise for support on critical projects. At present, the company is struggling to find good lead engineers, especially as many are nearing retirement age.
Manufacturers are concerned about possible restrictions when it comes to sourcing key components from within the EU and exporting their finished goods to EU markets. At present, the UK government’s procurement process does not reward companies that have operations in the UK and employ staff in the country. It should review its industrial strategy if it wants to attract and retain inward investment into the country and also ramp up the UK’s exporting capability.
COVID-19 has had severe financial consequences for many businesses, particularly those in sectors such as hospitality, retail, and travel. Other businesses have continued to prosper throughout the pandemic or seen their revenues substantially recover following the easing of lockdown restrictions that started in May.
Nevertheless, businesses in all sectors face ongoing uncertainty around the medium-term economic outlook. Understandably, business leaders are wary of a painful and prolonged economic downturn, which could take hold after the government’s furlough scheme is phased out at the end of October. If the UK does not strike a trade deal with the EU, Brexit has the potential to further exacerbate any downturn — especially if companies cancel UK-based projects and transfer them to Europe instead.
The UK government should try to align its long-term debt with long-term projects for the benefit of the country’s economy. These could be infrastructure projects and skills development to drive long-term growth.
Second wave of COVID-19
Recent COVID-19 flare-ups, both in the UK and internationally, have served to highlight that the pandemic is far from over. In fact, the worst may be yet to come. Businesses are concerned about the possible economic impact of a second wave of COVID-19 in the autumn, especially if it is accompanied by widespread lockdowns. As a result, they would like the government to outline what safety nets it plans to use in the event of a second wave — would it launch another furlough scheme, for example?
The finance leader for a software testing company said the proposed changes to the IR35 off-payroll working rules were challenging for her business. The changes, which are set to take effect in April 2021, will make medium and large private-sector companies responsible for setting the tax status of their contract workers. Although there is justification for the changes, the timing is challenging since companies will need to implement them while they are still wrestling with the fallout from the pandemic and potentially from Brexit as well.
Another employment tax policy that causes complexity is the Nursing Agencies VAT Concession, which exempts recruitment agencies from charging VAT where nursing staff are supplied. The same policy does not apply to doctors and other hospital staff, which leads to complicated workarounds intended to minimise VAT costs. There should be a consistent approach towards the VAT treatment of all healthcare workers.
Short-term and sector-specific tax changes
In his summer statement, UK Chancellor of the Exchequer Rishi Sunak announced that VAT on restaurant food, accommodation, and attractions would be reduced from 20% to 5% between 15 July and 12 January. While this will help to bolster the profit margins of some businesses, short-term tax changes of this nature can be time-consuming and costly to implement, offsetting their intended financial benefits. The government should ensure that it understands the full impact of tax changes on businesses before launching these kinds of policy initiatives.
The government should be ambitious in its thinking when it comes to developing policy responses that will boost the confidence of both businesses and consumers. There is no one single answer to the challenges we face. As we move forward, we need a pragmatic — rather than a dogmatic — approach. We also need solutions that minimise — rather than increase — the uncertainty and complexity that already exist today.
— Andrew Harding, FCMA, CGMA, is chief executive–Management Accounting at the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.