The economical challenge of business rates and VAT

Nikki Flanders, COO, Opus Energy

Many businesses start from the kitchen table, home office or garden. However, as they start to grow, so too does the administrative burden of keeping them afloat. From calculating business rates to the bureaucracy of VAT, it’s easy for small business owners to sometimes become distracted from doing what they love, purely because of regulatory compliance.

A recent survey documented this rise in the red tape faced by SMEs, revealing that many spend up to 120 days each year carrying out routine administrative tasks. We are a nation of entrepreneurs, but we are also experiencing a productivity crisis. We need small business owners to be inspired and creative in order to thrive and be successful, but figures like this show the challenging reality of running a SME.

This time burden, coupled with the financial repercussions of making a mistake or growing too large, could encourage small firms to stop growing, or to even consider abandoning their dreams of entrepreneurship altogether.

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Business rates are one such example of how financial administration can be a burden on a SME. While they are a vital part of our economy, providing the government with essential revenue, increasing rates are an obstacle for many smaller businesses.

We can appreciate that the government has a tough job trying to find the right balance, but smaller retailers in particular are calling out the effects being felt by SMEs. The Federation of Small Business delivered a stark warning earlier this year; that its members are likely to struggle with planned increases in the cost of both business rates and the national living wage.

There has also been talk of lowering the current VAT threshold of £85,000. This could be a big blow to small businesses, many of which sit just below the threshold in order to avoid the added costs that are incurred. If the threshold was lowered to encompass a new band of SMEs, they would need to either raise their prices – potentially costing them customers – or absorb the cost themselves.

The Association of Independent Professionals and the Self-Employed (IPSE) has recently gone so far as to caution the government against such action, arguing that it would actively discourage many SMEs from growing and would provide EU businesses with an economic advantage.

Ultimately, the age-old dilemma of cost versus growth is becoming exacerbated for SMEs today. The ambition of all business owners is for their enterprise to grow, thrive and become successful. However, with the risk of larger financial hoops to jump through as their business increases in size, many are questioning whether expansion is in their best interests.

For those of us who have growth within their sights, here are some thoughts on how to navigate the economic obstacles.

From a business rates perspective, there is relief available to some businesses under certain circumstances. Any SMEs who are finding that rates in particular are hindering their growth can investigate whether they are eligible by visiting the government website.

Likewise, the amount of VAT that a business must pay is subject to different rates. For example, education, finance, insurance and the services of doctors and dentists are exempt from VAT, while fuel and power used in homes and by charities are subject to a rate of just 5%.

Connecting with other business owners who have successfully grown their own enterprises is a good way to simply ask how they achieved what they did. Collaboration is an idea that many entrepreneurs are open to – at Opus Energy, we spoke to 500 SMEs last year about the challenges that they faced when setting up their business* and found that well over half (56 per cent) of SMEs would like to work more closely with likeminded businesses.

Finally, it’s also possible to use the location of your business to keep your finances under control. Business rates, for example, are partially determined by the value of the property from which the company is operating.

This is a strategy that many more entrepreneurs could be taking advantage of. In our research, we found that less than one-in-ten (8 per cent) SMEs set up their business in a specific location to benefit from favourable business taxes. Likewise, only 14 per cent said that they felt geography was important for the business’ success, because it affected the rates and rent.

Growing a small business takes time. It takes patience, effort and in today’s challenging business landscape, it can take a lot of financial diligence. If the UK wants to be a thriving hub for SMEs, the government must address their financial burden, and how best it can support, not hinder, small firms’ economic contribution. Our economy needs a strong SME network, consisting of businesses of all sizes. To help build this further, we need to encourage knowledge sharing and collaboration to help navigate legislative minefields.

All of us, business leaders and entrepreneurs alike, need to work with and support each other. Seek out partners and allies who can share advice and best practice, or if you are one of the well-deserved businesses that has grown successfully, be open to sharing your knowledge and experience. We are all stronger if we work together.

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