How business owners can cope with rising costs – from inflation to VAT

Business owners across the UK are facing an ‘autumn storm’ of soaring business costs just as they come out of the pandemic, making it even harder for them to get back on their feet.

The rising cost of energy is pushing up monthly bills, while raw material costs are rising, too.

On top of this, the end of the furlough scheme this week means that there is little support for those whose businesses are still not back to full strength after the pandemic.

Mike Cherry, national chair at the Federation of Small Businesses, says that the end of September marked a ‘dangerous turning point’ for small businesses as furlough is removed.

‘As the weather turns colder, so too will the operating environment for many firms,’ he points out.

‘With challenges on many fronts, from rising energy and input costs to staff shortages and supply issues, the removal of some of the support measures brought in to hold off the worst effects of the pandemic on businesses will be tough for many to navigate.’

There are a string of reasons as to why business costs are rising.

Here, we look at some of the most significant:

Rising energy prices

As we have all seen in the news, the spike in energy prices is pushing suppliers out of business and meaning that we will all pay more for our fuel. This will affect business customers as well as those on domestic tariffs.

Business energy contracts work slightly differently from domestic contracts — they are usually negotiated separately for each fuel and may last far longer.

There are some rules especially for ‘micro businesses’, which give them more flexibility when it comes to switching tariffs and protects them against backdated billing that stretches back more than a year.

Micro businesses are those which typically employ fewer than ten people, and fuel regulator Ofgem said recently that there was evidence that most use an energy broker to get a good deal.

However, Anna Rossington, at Ofgem, suggests that a ‘significant number’ were still on the default deal from their supplier, with some paying twice as much for gas as is necessary.

How to cope: While it is obviously a volatile time in the energy sector at the moment, you can still talk to energy suppliers about whether you are on the right tariff as a business.

You’ll find more information about switching business suppliers at ofgem.gov.uk, while online comparison sites have specific services for business. Taking regular meter readings or having a smart meter installed could help you to keep on top of your costs.

Inflation

Inflation — the rising cost of living — affects businesses as well as individuals. Many businesses are finding that core materials, delivery and gas prices are affecting the bottom line.

‘All of my business costs have increased, in particular the cost of stock and packaging and ordering it from abroad, along with the postage costs and import tax on top’, says jewellery maker Emma Thomson, from Gemz By Emz in Essex.

The rise in Royal Mail fees twice a year is becoming ridiculous, too. I’m now having to increase my own product prices to make up for the money that I’m losing.’

How to cope: Aside from trimming expenses down to the bone and increasing prices, there is little business people can do about rising inflation. Searching for rivals to Royal Mail may result in cheaper delivery costs. Check out parcel2go.com, which allows you to search for the cheapest delivery service for different items.

VAT increase

Some areas of small business, particularly in the hospitality sector, have benefited from a VAT cut to help them to recover from the pandemic. The original cut, from 20% to 5%, came into effect on July 1, 2020.

The rate increased to 12.5% last Friday and this will apply until March 31, 2022.

The rate applies to suppliers of restaurant services, hot takeaway food, holiday accommodation and admission to some attractions.

Scott Craig, partner and head of VAT at regional accountancy firm Azets, suggests the increase will slow down the Covid recovery and firms could go bust. ‘The UK has slowly reopened but remains in a state of uncertainty and this has severely affected the hospitality industry,’ he explains.

‘As restrictions have lifted, businesses have no doubt benefited from the reduction in VAT but for some the increase to 12.5% comes too soon.

Events are now being planned well into 2022 and beyond, and if the reduced rate of 5% had applied for a longer period of time businesses would have improved their financial position and have a better chance of survival.’

How to cope: Ensure that prices on menus and tickets are updated with the new costs and consider whether prices charged to consumer have to rise.

This rise in VAT may be painful, but remember that this is only a halfway house — businesses must focus on trimming their costs ahead of the April 1 increase in VAT to 20%, Craig warns.

‘The hospitality sector should ensure it makes the most of the scaled-back VAT cut before reverting to the full 20 per cent in April — seek professional advice if needed.’

End of furlough

The furlough scheme, which helped companies keep employees on their books when restrictions were in force for coronavirus, has finally ended after a period of scaling back.

Alan Thomas, UK CEO at business insurance group Simply Business, reckons the end of the scheme will have a huge impact on small businesses.

‘The furlough scheme has been a crucial lifeline for countless small business owners, and their many more employees,’ he says.