Business leaders have been left reeling after George Osborne announced a £11.6bn “payroll tax” and removed hundreds of millions of pounds of support.
Companies will be charged 0.5% of their payroll from April 2017 towards the apprenticeship levy, which will raise roughly £3bn a year for the following four years
Business groups reacted with fury to the move, with the Institute of Directors labelling it a “payroll tax” and the CBI claiming it represents a “tipping point” for the UK’s competitiveness and a “sting in the tail”.
In a further blow, the government delayed revealing the findings of its review into business rates until next year’s budget. It also ended a £1,500 tax discount for 278,000 small and medium-sized retailers, worth an estimated £417m. These firms will face a 20% increase in their business rates bill next year.
Companies employing large numbers of people and with significant amounts of property will be particularly affected by the chancellor’s autumn statement.
The British Retail Consortium has estimated that business rates, the apprenticeship levy and the “national living wage” will cost retailers an extra £14bn over the next five years.
Tesco, for example, which employs 310,000 people in the UK and has more than 3,500 stores, has to introduce the national living wage for over-25s, hand over tens of millions of pounds in business rates, and pay out 0.5% of its staff costs in the apprenticeship levy.
Dave Lewis, chief executive of the retailer, has warned this is a “potentially lethal cocktail” of costs. Tesco’s business rates bill had already increased by 35% in the past five years and the apprenticeship levy will dwarf its existing training bill, although Britain’s biggest private employer did not disclose the exact cost.
The apprenticeship levy is designed to fund 3m places for apprentices. Businesses that spend less than £3m on wages a year will not pay any tax because each employer will receive a £15,000 allowance that offsets the cost. The chancellor said this would mean 98% of businesses are exempt, but those employing as few as 100 workers could be caught up by the levy.
The Institute of Directors criticised the tax, claiming a quarter of it will be spent on government bureaucracy and administration. Simon Walker, director general of the IoD, said: “The major business tax announcement of this autumn statement was the apprenticeship levy, which can only be described as a new payroll tax. At 0.5% of payroll it will be a big new cost for many companies, including medium-sized ones.
“We are very concerned by the government’s assumption that a quarter of the money collected will be spent on just administering the levy. Firms have been promised they will get back more than they put in, but it’s not clear how this will happen if so much is being lost in bureaucracy.”
Carolyn Fairbairn, director general of the CBI business lobby group, said Britain’s competitiveness had been damaged by the introduction of the national living wage, business rates and the apprenticeship levy. She said: “This was a good spending review for longer-term investment in the economy but there’s a sting in the tail in the size and scope of the apprenticeship levy.
“Business recognises there are tough choices to be made in balancing the books, but many are reaching a tipping point, where the cumulative burden of the living wage, apprenticeship levy and business rates risk hurting competitiveness. Many firms will be disappointed to have been kept hanging on for a much-needed review of business rates until next year’s budget.”
Even manufacturers, which could benefit most from new apprenticeship, questioned the levy. Terry Scuoler, chief executive of the EEF, the manufacturing industry trade body, said: “The apprenticeship levy is a blunt instrument, and the Government must work hard to ensure employers are not disadvantaged and that many smaller and medium sized businesses are exempted.
“What really matters is creating high-quality, well-trained apprentices who can look forward to successful careers in industry. This cannot be a simple numbers game where businesses are clobbered to pay for apprenticeships. The government’s approach to this requires a lot more sophistication than we’ve seen so far.”
Small businesses had more to cheer in the autumn statement, with many given exemption from the apprenticeship levy, and the chancellor pressing on with small business rate relief for 600,000 firms. However, discounts on rates for high street businesses was not extended, meaning small shops, pubs, cafes and restaurants face a sharp increase in their bill next year.
Paul Turner-Mitchell, a business rates expert, said the autumn statement had been “terrible” for retailers, with increasing signs that a review of the commercial property tax would prove a damp squib.
Forecasts by the Office for Budget Responsibility show that total business rates payments are expected to rise a further 16.5% between this financial year and 2020-21 to £32.4bn.
The chancellor announced the review into business rates last year amid growing complaints that the tax did not move in line with economic growth and placed a disproportionate burden on some sectors, such as retail. However, Osborne handed local authorities more power to set the tax and said the review would be “fiscally neutral”.
“The autumn statement was terrible for both the retail sector and those who have campaigned long and hard for the meaningful structural reform of the system,” Turner-Mitchell said.
“First there was the manifesto U-turn to report on reform by the end of the year. Then came the scrapping of retail relief followed by yet another increase in a tax already the highest in the world and highly uncompetitive. It’s a real kick in the teeth and the government has just simply not listened.”
‘There’s a real skills shortage. It’s getting worse’
Matthew Kimpton-Smith is giving the chancellor’s new apprenticeship levy a cautious welcome. He has taken his 40-year-old family business through the recession, weathered this year’s downturn in China and brushed off a slump in demand from a battered oil and gas industry. But there is one area the manufacturer sees as a growing challenge: finding skilled engineers.
“We are constantly hiring because it is taking a long time to fill the vacancies with the right people,” says Kimpton-Smith), group managing director at Cheshire manufacturer Cygnet. His company makes machines for manufacturers of lightweight fibres that go into things like aeroplanes and cars. It is an area in which he feels the UK is leading.
“But we have a real skills shortage and it’s going to get worse,” says Kimpton-Smith, whose parents founded Cygnet in 1974.
With a workforce of 140 and a wage bill of around £5m, Cygnet will have to pay around £10,000 extra a year in tax under the levy. Lobby groups for big business have lambasted the levy, but Kimpton-Smith supported the principle, while waiting to see how the scheme is used in practice. George Osborne pledged that those paying it will “get out more than they put in”.
“For us in engineering and manufacturing, to promote apprenticeships, I will take the hit,” said Kimpton-Smith, whose company has three apprentices. “The total effect in the end I think will be good for us and I think it’s important for the country to be investing in skills.”
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