Impact of spending review on small businesses

Prior to the announcement of the long-awaited spending review, there had been much talk over the possible impact the swinging cuts and additional funding would have on small businesses.

Media speculation meant that small business owners were running scared - a survey from the Forum of Private Business (FPB) revealed that almost a fifth of small firms were pessimistic about the future due to the feared impact of the spending cuts.

Meanwhile, industry experts were warning SMEs to brace themselves for impact - Andrew Burn, restructuring director and public sector specialist at KPMG, commented, “For the smaller businesses either directly or indirectly exposed to the public sector the overall impact is likely to be negative leading to difficult discussions with funders or the need to take swift and aggressive action to reduce overheads.”

Richard Fleming, UK Head of Restructuring at KPMG, echoed these sentiments, saying, “We expect to see corporate distress across a whole range of sectors.”

A wave of consolidations is expected to take place over the next 18 months across the business services sector, property sector and possibly other sectors, as thousands of smaller businesses that have lost government contracts directly or indirectly are swallowed by larger rivals or forced into administration.

The small business sector has, however, found that there were some plus points contained in the government announcement.

Just as FPB’s chief executive Phil Orford said, “Small businesses must be given the freedom and confidence to become the catalyst for private sector led recovery, and constraints on their growth should be removed,” the review did go some way to offering a helping hand to small businesses struggling to cope with the financial constraints of the period.

Jane Bennett, head of campaigns at the FPB, talked of developments announced in the review which would help small businesses create job opportunities, which would in turn help to tackle the level of unemployment.

“There were positive developments on export, inward investment from oversees and also education – including creating many more apprenticeships a new ‘work programme’ with private sector involvement. High tech industries – and the people that work in them – are extremely important for a strong economy in the future and it is good that funding for science is being ring fenced,” she said.

“However, Bennett did warn that 'these measures alone will not be enough to allow small businesses to substantially create employment in order to replace the 490,000 jobs that will be lost in the public sector.'”

John Walker, chairman of the Federation of Small Businesses, called for the government to put a small business programme for growth into action immediately. “The small business community continues to have a vital part to play in driving a credible recovery and taking on new members of staff to help tackle unemployment,” he said.

The programme for growth would help to boost SME's confidence to take on new members of staff, something that is vital at present. Walker added, “As our research shows, small firms are at tipping point and lack the confidence to take on the 500,000 people that will be made redundant as a result of these cuts.”

“So it is up to the Government to incentivise the small business community - through extending the National Insurance contribution holiday to existing firms and cutting VAT to five per cent in the construction sector - to promote growth and help small firms take on new staff,” said Walker.

Another aspect of the review, which could potentially benefit the small business sector, is the focus on tax. The FPB's Bennett added, “We feel that one crucial area the Government has addressed is tax. HM Revenue and Customs will be expected to find savings of 15 per cent via new technology and other efficiencies and these are likely to include reforms to the UK’s complex tax system. This should save money for both the government and small businesses, which we have found spend £1.8 billion every year on tax administration.

“It is pleasing the Government is investing £900 million in tackling tax evasion and fraud in order to claw back £7 billion in lost tax revenues,” she said.

The FPB also said that small businesses would benefit from the new code of practice on tax payment, which all banks must now sign up for, which requires financial institutions to provide key information upfront to Revenue and Customs about avoidance schemes that could cost the taxpayer millions of pounds. The Chancellor has set a deadline for banks to sign up by the beginning of next month.

As small businesses have long been unable to compete with big businesses on a level playing field due to the ease with which bigger companies can avoid their tax commitments, this new focus on stamping out such tactics should aid smaller companies.

Whilst SME leaders are unanimous that this will undoubtedly be a positive, there is still more that could be done to aid small business growth, including further tax relief and reductions of administrative burdens, wherever possible.

“It is important that these spending cuts and efficiency measures do not exist in isolation but are joined by further bold policies addressing issues such as red tape reform and late payment,” added Bennett.

Lord Alan Sugar took to Twitter to convey his feelings on the spending review, tweeting, 'Osborne fails to realise [the] deficit can’t be cut without growth,' - thoughts which were echoed by David Frost, director general of the British Chambers of Commerce, (BCC) who said, “Now that the Spending Review is complete, our message to Government is that it is now time for a clear strategy for growth – which in turn will give companies, and especially small and medium-sized enterprises, the confidence to invest.”

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