Summer Economic Update - Sector Commentary
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Following the Summer Economic Statement, we analyse how certain sectors will be affected.
Neil Stockham, Tax Partner
Given the backdrop of recent high profile announcements on redundancies, administrations and closures, retailers will be forgiven if they feel the sector has been ignored by the Chancellor in today’s Summer statement.
The Chancellor’s announcements of a VAT cut from 20% to 5% for the leisure and hospitality sector will hopefully provide a well needed kick-start for these sectors, and the c.2 million people who work there. However, it was disappointing that the Chancellor did not extend this measure to the retail industry and the three million people it employs. Sadly, with consumer demand still well below pre-crisis levels retailers will likely feel this was a missed opportunity to provide further support to the sector and we hope that the Government will reconsider this ahead of the Autumn Budget.
In terms of the other measures announced:
With confirmation that the Coronavirus Job Retention Scheme will end in October this year, the new Job Retention Bonus and measures announced to support businesses in hiring more young people will be broadly welcomed by all. The bonuses in particular, will provide welcome support for those retailers able to bring back the many thousands of staff who have been on furlough in recent months. Clearly however, with demand still stuttering there will be many retailers who will not be in a position to benefit from these payments.
The Chancellor’s announcement to incentivise apprenticeships will also be welcome news. However for retailers to benefit fully from these incentives and the Apprenticeship Levy arrangements that are already in play, greater flexibility is needed to ensure that they can be used by retailers to access, develop and enhance the key digital skills that those working in the sector desperately need to help them adapt and evolve for the future.
The measures to bolster the property market and for green home improvements will be warmly welcomed by both homeowners and businesses. Sustainability is high on the retail agenda and many retailers are making arrangements for both a greener and carbon neutral future. We also hope that the measures announced will stimulate sustained demand for those DIY/home retailers catering for all those who have and continue to work and study remotely from home.
So despite the further support measures announced, most retailers will be left disappointed and wanting more. Time will tell if today’s measures can provide the desired boost to kick start the economic recovery. If not, the Chancellor as he has promised several times already, must be ready to take the further actions necessary.
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Leisure and Hospitality
Robert Barnard, Partner, Leisure and Hospitality
Chancellor Rishi Sunak today unveiled a package to restart the economy’s recovery in his Summer Statement and vowed to protect, support and create jobs including getting pubs and restaurants busy again to help the UK economy recover from the worst effects of Coronavirus. Hospitality outlets, including hotels, reopened on 4 July with a huge sigh of relief, but recognising the necessary protocols to ensure the safety of their staff and customers.
The first eye-catching announcement was very positive for the hospitality sector as it was announced that in August anybody who eats out between Monday - Wednesday will receive 50% off their bill up to a maximum of £10. Guidance on this scheme has been now been released and can be viewed here. We also learnt of the decision to cut VAT for businesses in the hospitality and tourism sectors from 20% to 5% until March 2021. These are both very strong measures and one hopes that this will incentivise households to go out and spend rather than save over the coming months. These actions highlight the Chancellor’s recognition of the hospitality and tourism sectors which contributes billions to the UK economy every year.
However, what stands out the most (and is essential) are all the initiatives around employment. The announcement of the furlough bonus scheme (businesses will be paid £1,000 to retain furloughed staff), a job creation scheme for young people (the government will pay the wages of new young employees for six months) and the Apprenticeships’ initiative (firms will receive a payment of £2,000 for each apprentice they take on) will all be key for the sector. This is because young people make up a large percentage of the hospitality and tourism sector staff and key to its success.
As we start to move away from quarantine and enter into a world where travel restrictions have been relaxed for the specified countries and with the reduced VAT rate, I believe this should help to stimulate international travel in the short term. This will also mean with staycations still a hot topic, the country’s key geographic attractions should benefit and the hospitality industry should be able to look forward to a positive summer season, albeit with a significant catch-up period.
What is now key for business in the hospitality space is to scenario plan to help get a better understanding of what new reality could look like and to conduct ‘all employee’ communications on a regular basis – it is critical to take your people with you along any change journey.
The hope is that the economy will be through the worst by early 2021 and that the hospitality and leisure sectors, by that stage, will be able to reap the benefits from the Chancellor’s summer announcements.
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Real Estate and Construction
Andrew Crossman, Tax Partner, Real Estate and Construction
As a critical part of the UK’s economy, this is fundamentally a two pronged approach by the Government aimed at encouraging house building and protecting jobs in this sector. Firstly, the widely trailed ‘SDLT holiday’ starting immediately will see significant reductions in SDLT liabilities until 31 March 2021. This will eliminate SDLT on purchases of up to £500,000 for those buying their main residence and will also reduce the SDLT on those buying additional residential properties, although the 3% rate will still apply. While this is welcome news for many, it will likely be viewed as ‘negative’ for first time buyers who are already faced with juggling tighter lending terms and will now do so in a more competitive market.
Although perhaps less headline grabbing, there are also a number of measures also aimed at addressing employment, housing and green initiatives with most seeking to hit multiple targets. Focusing on the theme of residential properties, these include:
- The establishment of a £2bn “Green Homes Grant” to provide savings to households of up to £10,000 (for those on the lowest incomes) to improve the efficiency of their homes and is anticipated to give rise to 100,000 jobs in the sector. The “Social Housing Decarbonisation Fund” seeks to achieve a similar result for social rented homes.
- The “Short-Term Home Building Fund extension” available to house-builders that cannot access funds privately will support the construction of, it is estimated, 7,200 houses in England. It is noted that a proportion of the fund will be ring-fenced for those that demonstrate “innovate approaches” to building houses and will be open to only small or medium sized housebuilders.
- There a two schemes aimed at unlocking land for housing development. Firstly the allocation of £400m to seven Mayoral Combined Authorities that is anticipated to allow for the construction of 24,000 homes in England. Secondly, and perhaps more significantly, the announcement of a planning reform commencing with the introduction of legislation over the summer aimed at simplifying the process for property conversion and releasing land for property development.
It is this last point that will be particularly of interest and it will remain to be seen whether the measures will be both sufficient and implemented appropriately to achieve their goal. Against the backdrop of long-term chronic housing shortages, while unlocking this part of the puzzle would undoubtedly be welcomed, if successful, the question will be asked – why was it not done sooner?
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Neil Williams, Tax Partner, Professional Services
With property and people costs accounting for the majority of fixed overheads for legal , accountancy, recruitment, property advisory and consultancy firms, today’s announcement on a support package for workers was welcome but did it go far enough?
The key measures for professional services businesses can be summarised as follows:
- Jobs retention bonus for businesses retaining their furloughed staff at £1,000 per employee.
- A kick start apprentice scheme for additional jobs for 16-24 year olds working a minimum of 25 hours a week for six months.
- A £1,000 bonus for businesses to hire new trainees
For further detail on these measures, please visit our Budget hub.
For many professional services firms who employ highly skilled and highly paid workers the measures announced are unlikely to directly influence business decisions to retain people who now find themselves in partly underutilised teams.
It is likely that the decisions made by firms’ leadership will continue to be based on business confidence and expectation of their businesses financial projections, and for some the decision to hold onto people will be seen as too costly.
Property consultants and estate agents however will benefit from the short term reduction in stamp duty rates if it stimulates the market sufficiently to boost property sales.
The main thrust of the measures is for the creation of new jobs and certainly this will help many leaders’ confidence in their ability to invest in junior employees. With the potential for a reduced overall workforce we might however still expect fewer new jobs created in spite of these measures.
If it is true to predict that many firms will be undertaking a restructuring of their workforce then what are their options?
In addition to a reduction in headcount, other considerations might be a change of working terms with people expanding their skill sets and taking on different roles in the business, a continuation of part time working introduced by many firms during lockdown and a reworking of staffing models into a more variable cost model.
While a variable cost model can reduce margins, the flexibility offered could help reduce the stress in the business created by high monthly payments. In these cases we may see an increase in the use of external consultants, lower salaries and higher performance targets, together with greater focus on equity awards and stock options. Perhaps all sensible considerations whether or not you are restructuring although, in the longer term, this may increase the impact of the off-payroll labour reforms on the business from 1 April 2021.
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Sue Bill, Tax Partner, Shipping
There is not much, if anything, that is directly relevant to the shipping sector in the Summer Statement, although the following announcements may be of interest:
- The furlough scheme will not be extended beyond 31 October. Instead, employers who continue to employ staff previously furloughed will receive a one-off payment of £1,000 for every furloughed employee who is continuously employed up to the end of January 2021, provided they earn more than £520 per month on average.
- Additional funding will be available for traineeships for 16 to 24 year olds. Employers will receive £1,000 per trainee from the Government. The Government will improve provision and expand eligibility for traineeships to those with Level 3 qualifications and below.
- New payments are being introduced for employees who hire apprentices, of £2,000 for each new apprentice under 25 and £1,000 for each new apprentice over 25 that is hired from 1 August 2020 to 31 January 2021.
- A new Kickstart Scheme has been introduced, being a £2 billion fund to create 6 month work placements aimed at individuals aged 16 to 24 on universal credit and at risk of long term unemployment. The funding will cover the cost of the minimum wage for 25 hours a week.
The aims of the Statement were to stimulate the economy and provide help for some of the hardest hit sectors. We will have to wait and see whether the Autumn Statement includes measures that may be more relevant for shipping.
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Glyn Woodhouse, Indirect Tax Partner
The Summer Statement did not cover any specific Charity issues – that said, although many of the general statements will be of great interest to the sector. In particular, the “eat out to help” out grants and the introduction of a temporary lower rate of VAT for hospitality and leisure services; specifically:
- Sales of food and non-alcoholic drinks to eat in or take away
- Hotel or holiday accommodation
- Admission to certain attractions like shows, exhibitions and amusement parks.
The lower rate of 5% will apply from 15 July 2020 to 12 January 2021.
Many charities will be involved in all of these things although it is worth noting that if an exemption or zero rating applies (for example the cultural exemption, which applies to many shows) then this will take precedence over the reduced rate.
In common with many businesses others in the sector, the biggest challenge will be operationally; organisationally to ensuring that point of sales systems and invoicing arrangements are updated so that the lower rate of VAT is applied. Charities will also need to decide whether to pass on the VAT savings in order to stimulate demand, or whether to keep prices the same in order to boost funds.
There are special rules that allow a taxpayer to apply a new lower rate of VAT to supplies that take place after the rate change, even though an invoice has been raised or payment received earlier. It is important though, that the policy decisions are made and that customer-facing staff are updated, so that they can deal with the inevitable questions from the public.
Another announcement which may also be of interest are the new ‘Eat out to help out’ vouchers. Details of this scheme are now available and most commentators are suggesting that VAT will be due on value of the meal as a whole, including the subsidised element paid by Government.
If you’d like to discuss this in more detail in relation to your charity, get in touch with Glyn Woodhouse who will happily take your questions.
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