Small business confidence stalls following interest rate hikes - latest FSB research

"SMALL business confidence stalled in the 2nd quarter of 2023 after a strong recovery at the start of the year, with FSB's Small Business Index (SBI) headline confidence measure falling to -14.2 points in Q2 2023, down from -2.8 points in Q1," according to Phil McCabe, from the FSB in Merseyside and Cheshire.

Following ion from the survey of 882 small business owners and sole traders, between:- 22 June to 7 July 2023, that was conducted by The Federation of Small Businesses (FSB)

The decline reflects the downbeat economic conditions small businesses had to navigate over the quarter, with inflation remaining stubbornly high and 2 Bank of England base rate hikes, which have added pressure to index linked debt repayments.

Q2's result is however more positive than the same quarter in 2022, when confidence plummeted to -24.7 points as energy prices surged in the immediate aftermath of Russia's invasion of Ukraine and inflation climbed steeply, sparking the 1st wave of the cost of doing business crisis.

There were strong sectoral differences in confidence, with accommodation and food services falling by 18.1 points to reach -35.8 points, while wholesale and retail tumbled by 12.6 points to reach -37.8 points.

Manufacturing businesses were more or less in line with the all sector confidence reading, at -14.5, almost exactly the same reading registered in Q1 (-14.4), while information and communication fell by 4.9 points to hit -19.6. Professional, scientific and technical activities, meanwhile, was the only major sector to reach positive territory, at 7.8 points, down 7.1 points from the 1st quarter.

Revenues over the 2nd quarter among small firms were in line with the previous quarter, with small businesses reporting that they increased 33% compared with 34% in Q1, and 41%, unchanged from Q1 reporting that they decreased.

However, looking ahead, small firms' revenue expectations have dampened, with 32% in Q2 expecting to see sales rise in the next 3 months compared to 39% in Q1, while 36% expect to see a drop in sales, compared to 26% in Q1.

The medium term outlook was slightly rosier, with 50% of small firms anticipating growth over the next 12 months (51%), up from 46% in the 1st quarter. The proportion bracing for contraction remained steady, at around 14% in Q2; 13% in Q1.

Employment numbers shrank as more small firms saw labour costs increase in Q2. 14%, up from 12% in Q1 small firms said their employee numbers declined over Q2, while 12% said their employee numbers rose, unchanged from Q1.

Exports improved compared with the previous quarter, with the number of small firms who export reporting an increase in volumes (33%) notably higher than in Q1 (22%), while the proportion reporting a 36% decline in exports, 40% lower than in the 1st quarter.

Looking at barriers to growth for all small businesses, the domestic economy remained the most cited concern, noted by 3 in 5 small firms (61%, unchanged from Q1). Consumer demand ticked upwards as a concern, from 30% in Q1 to 36% in Q2, while; thankfully; utility and fuel costs declined notably as concerns, falling respectively from:- 33% to 25% and 13% to 8%, between the 1st and 2nd quarters.

Rising costs were an issue for the overwhelming majority of small firms, with 85% saying they had risen compared with the same period in 2022. This is a slight fall from the previous quarter, which registered a record high of 92%. 49% of small businesses reported an increase in labour costs and 20% reported an increase in financing costs, up from 45% and 15% in Q1 respectively.

30% of small firms who applied for finance were offered a rate of 11% or more; in the same quarter in 2022, this was true for only 12% firms. Likewise, the proportion of small firm finance applicants who were offered a rate of up to 4% fell from 37% to just 5%, between:- Q2 2022 and Q2 in 2023.

FSB Merseyside and Cheshire's Phil McCabe, said:- "Although the upturn in small firms' confidence from the 1st quarter didn't carry over into the second quarter of the year, the message from our research is that small firms' confidence in the future is looking rosier. Over 50% of all small firms expect to grow over the next year, for example. There are undoubtedly challenges ahead. Small firms are already feeling the impact of rate rises on their margins, and through lower consumer demand, and further increases will undermine the prospects of a recovery in confidence. Small businesses are very alive to the danger that interest rate rises will overshoot the level needed to curb inflation, and will instead act as a drag on economic expansion. Amid the rate rises and sticky inflation of the second quarter, and with economic growth underwhelming at best, it's disappointing but perhaps not surprising that the momentum from the 1st 3 months of the year petered out somewhat, but small firms are survivors, and there are positive signs in our findings. The proportion of small firms saying that their cost of doing business was higher than in the same period last year has eased back slightly from last quarter's record high, which resonates with the most recent inflation figures, and offers a small sign of hope that inflation may finally be on its way to being tamed. It is also very welcome to see energy and fuel costs falling in the rankings of small firms' most cited barriers to growth. Small businesses have shouldered huge cost burdens, with many seeing their energy bills soar, and we would once again urge all energy companies to allow small business customers to:- 'blend and extend' their energy contracts, to take advantage of lower wholesale prices compared with this time last year. Given the right conditions for growth, small firms have the potential to power a groundswell of economic activity. With the domestic economy the biggest perceived barrier to growth, however, they are in something of a catch 22 situation. The Government should get ahead of the curve, and take the summer to plan a programme for enabling small firms to grow and invest; tackling late payment in the official response to the recent late payment consultation would forge a path to an environment where late payments are all but eliminated. Taking concrete action on late payment would help to unlock confidence in the 3rd quarter, especially with the end of the rises in the base rate perhaps finally in view."

Did you know that the FSB is a non profit, non party political organisation, that was founded in 1974? It offers its members a wide range of vital business services, including:- advice, financial expertise, support and a powerful voice heard in Governments.

Self Assessment customers can help themselves by filing their tax return early

SELF Assessment customers could take advantage of 4 key benefits when filing their tax return early, HM Revenue and Customs (HMRC) has revealed. The Self Assessment deadline for the 2022 to 2023 tax year is 31 January 2024. Customers who file early will have more control over their financial affairs and beat the January rush.

The 4 benefits to filing early are:-

• Planning... find out what you owe for the 2022 to 2023 tax year as soon as you have filed, which allows for more accurate financial planning.
   

• Budgeting... spread the cost of your tax bill with weekly or monthly payments using HMRC's Budget Payment Plan.
   

• Refund... Check if you're due a refund in the HMRC app once you've filed.
   

• Help... you can access a range of online guidance and information to help you file your return and get help if you are unable to pay your bill in full by the 31 January deadline. You may be able to set up a Time to Pay plan.

Myrtle Lloyd, HMRC's Director General for Customer Services, said:- "Customers who file their tax return early get to see exactly what they owe and have more time to budget, reducing the stress around Self Assessment. Given that January is the busiest month for HMRC's phone lines, I urge customers to check out the tips on filing your tax return early on GOV.UK and to consider doing so themselves."

There is lots of help and support available online:-

• Customers can access the new online tool to check whether they need to do a Self Assessment tax return.
   

• HMRC's top tips for filing tax returns early can be found on GOV.UK.
   

• Ask HMRC's digital assistant to find information about Self Assessment. If they cannot help, chat live with an HMRC webchat adviser.
   

• Access webinars and videos about Self Assessment.

Customers need to be aware of the risk of falling victim to phishing scams and should never share their HMRC login details with anyone, including:- a tax agent, if they have one. HMRC scams advice is available on:- Gov.UK.