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VAT hike and end of furlough head big weekend of change

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The VAT rise will hit the hospitality sector

British business and more than 1.6 million workers are facing a nervous weekend as the discount on VAT and the furlough scheme are among a number of government support measures that will come to an end.

Businesses which benefited from the cut in VAT from 20% to 5% in July last year will see it hiked to 12.5% from Friday (1 Oct), while the furlough scheme will end after 19 months propping up jobs across the economy.   

The small employer Sick Pay Rebate and the Apprenticeship Incentive – will also end, meaning that small employers could find their operating environment becoming less hospitable from Friday. The £20-a-week addition to Universal Credit for struggling households will be withdrawn on 6 October.

The Federation of Small Businesses says the Government has not published statistics yet on the usage of the Coronavirus Statutory Sick Pay Rebate Scheme.

“However, we believe it is likely to be in the hundreds of thousands.,” says the FSB. Alongside testing and vaccinations, the SSP rebate gives confidence that employers can afford the bill when staff fall sick or are told to self-isolate.  


Meanwhile, the Apprenticeship Incentive, offering £3,000 to businesses in England which took on an apprentice, also runs out today.

The ending of these schemes come at a time of sharp rises in the price of wholesale gas and oil, and the panic over petrol shortages. Inflation is expected to hit 4%.

The restrictions on the issuing of winding-up petitions, a common trigger for corporate insolvencies, also expire today – although the threshold for the debt that a company must owe to its creditors before a WUP can be issued against it has been raised to £10,000, from its pre-pandemic level of £750, until 31 March 2022.

VAT rises to 12.5%

Economists and tax specialists say the increase in VAT will be felt particularly by the hospitality industry and could threaten the survival of some of those which are just recovering from the lockdown.

The rise to 12.5% will remain in place until 31 March next year and will then return to the full 20% rate. The lower rate applies to suppliers of restaurant services, hot takeaway food, holiday accommodation and admission charges for some attractions.

Scott Craig, partner and head of VAT at Azets, the UK’s largest regional accountancy firm and business adviser to SMEs is warning that the hospitality industry has not had sufficient time to benefit from the cut.

He said: “The UK has slowly reopened but there is considerable economic uncertainty and the hospitality industry is facing the brunt. Businesses have no doubt benefitted from the reduction in VAT but 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 longer many businesses would have improved their financial position and have a better chance of survival.

“Increasing VAT will reduce their income and unfortunately trigger unnecessary closures that could have been avoided if the rate had been held for another six months.”

Furlough scheme

The furlough programme, which at its peak paid a third of employees to stay at home, has cost more than £68 billion and is the the most expensive single UK economic support measure during the pandemic. 

By the end of July employers had to pay 10% of the salaries of their furloughed workers. 

One million employees could still be reliant on the bailout when it comes to an end.

Figures from HM Revenue & Customs showed 121,600 people aged between 18 and 34 were taken off the furlough scheme in June and July.   

There is now concern about the 540,000 people aged over 50 who were on furlough at the end of July, accounting for 35% of the total.

Reports suggest the Chancellor is preparing more “customised support” to help match newly-unemployed workers with more than one million job vacancies across the UK, with details expected to be announced in the Budget on 27 October.

Trade unions have called for furlough to be used as the basis for a permanent short-time working programme of the sort seen in countries such as Germany. 

This would aim to help firms retain staff during periods of temporary reduction in demand, or provide time for re-training in the event of lasting decline.

In an interview with Daily Business in June, dispute resolution specialist Euan McSherry at Aberdein Considine said the sudden ending of support schemes is likely to lead to disputes between companies and suppliers over contracts and orders.

“I think we will see a lot of director-led petitions to wind companies up as well as creditor action,” he said.

Insolvency practitioners are hiring in anticipation of a sharp rise in insolvency activity in the Scottish market.

What will be the effect on the labour market?

Forecasts over what will happen depend on how many employers decide to retain workers whose wages have been paid by the state. Some expect a sharp rise in unemployment, while many businesses across a range of sectors are short of staff.

According to a CBI survey of the private sector published today 59% of respondents said they are currently facing labour shortages and 42% are raising pay for key roles to deal with the issue.

Research by iwoca, Europe’s largest small business lender, reveals that two in five small business owners are concerned that employees will choose not to return from furlough.

With over 520,000 small businesses still accessing the scheme, this suggests that almost 50,000 owners believe that their furloughed employees won’t come back.

With vacancies on the rise the research finds that more than two-thirds (64%) of small businesses will be looking to hire in the next year.

A survey by Lloyds Banking Group / Bank of Scotland, also published today, shows rising business confidence likely to lift demand for workers.

Hann-Ju Ho,, senior economist Lloyds Bank Commercial Banking, said: “Employment expectations have risen significantly, with more than half of businesses expecting to recruit in the next 12 months.

“The hope is that the availability of labour will increase to alleviate current staff shortages for many firms, which will help to underpin UK economic growth over the medium term.”

Meanwhile, businesses are now facing the cold wind of scrutiny as HMRC gears up to claw back any cash that may have been handed over in error. 

Christine Rolland, forensic accounting director, Henderson Loggie said: “As the Coronavirus Job Retention Scheme grant payments come to an end this month, the message from the tax man is clear: volunteer information about any furlough claims that may have been wrongly submitted and repay the amount owed to the taxpayer, or face higher penalties, and possibly prison, if it’s found out later that claims have been overstated or made fraudulently.”

By the end of March this year, HMRC had opened almost 7,500 investigations and is now staffing up to cope with the flood of investigations it expects to come. By June, 28,000 reports of potential furlough fraud had been received.

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