Diversify markets and innovate systems to thrive in 2022

Business confidence in the first quarter of 2022 has returned to pre-pandemic levels, suggesting that companies are looking to the future after an unprecedented two years, ICAEW says.

ICAEW’s Business Confidence Monitor (BCM), which surveys 1,000 chartered accountants across the UK, found confidence at 27.6 (out of 100) in the first quarterly index of 2022. Although this is significantly below the highest-ever reading of 47 two quarters ago, the peak was explained as a blip following the introduction of the vaccine.

Companies participating in the latest BCM report that domestic sales grew by 5.3% in the past year, with such growth not seen since 2007. Domestic sales are forecast to remain strong, and further growth is expected in the year ahead, although predicted growth rates have slowed compared with the previous quarter.

Rachel Eade MBE, a Supply Chain Specialist at BCRRE at the University of Birmingham, says many companies are looking forward to an improved year in terms of growth, albeit underpinned by lots of concerns. “Those challenges are around cash flow, dramatically increased input costs, access to new markets, export and regulation, both internally in the UK and externally,” she warns. Access to finance for growth – including both grants and lending – has become harder, she adds.

The quarterly BCM report shows that labour shortages and supply constraints are also being felt more acutely in some sectors compared with others. In particular, transport problems are more widespread for companies in the manufacturing & engineering and retail & wholesale sectors than elsewhere.

Diversify and innovate

The uncertainty caused by changing demand is also an issue plaguing companies, says Eade, highlighting the boom in demand for PPE during the pandemic, which has dropped off dramatically. To overcome demand fluctuations, she says businesses are looking to diversify into industries where demand is booming.

This is particularly true of sectors such as automotive, Eade says, where deflated markets have continued into 2022, with a slow increase predicted because of new export rules and COVID-19-related access to components in the supply chain.

Rail looks to be an attractive sector to pivot into, she adds, with the government’s long-term investment in High Speed 2 driving high levels of interest in the sector.

Tax burden or tax innovation driver?

Increasing numbers of companies are also concerned about the tax burden, and the availability of government support for business. The changes in national insurance contributions and the apprenticeship levy are seen as contributing to the corporate tax burden. Meanwhile, the Plastic Packaging Tax will add further complexity when it comes into force in April 2022.

Eade does not believe that there is a reluctance among organisations to pay tax, “but they need help in understanding how to spend it and how to get the return on that tax in a meaningful and efficient way”. She also does not oppose the idea of using taxation to drive behavioural change, “but there’s a difference between legislation and encouragement, and policy and strategy”.

However, the administrative and reporting requirements that sit alongside the tax regime represent the biggest burden for business, she warns. “As a manufacturer, you’re often required to report on your costs and your suppliers as well,” she says.

Loans damage the future borrowing power of a business

The tailing off of government support was a particular concern for retail and wholesale businesses, particularly those who were heavily reliant on business rates relief, which is due to end in April.

ICAEW member Johnathan Dudley, Head of Manufacturing at Crowe, says: “As a business, you should secure financial war chests, strategise what the business of the future needs to be and plan accordingly.”

The idea of government support in the form of loans just creates more gearing, reducing the future borrowing power of businesses and increasing their risk profile. “Meaningful grants are needed,” he urges.

Dudley was chair of ICAEW’s Manufacturing Community when it submitted aproposal for a Coronavirus Business Recovery Offset Scheme (CBROS), published in May 2021 and designed to encourage UK manufacturers to boost their post-pandemic competitiveness on the global market by investing in plant machinery, innovative process and skills.

To incentivise businesses to spend and banks to lend, the CBROS would provide 130% enhanced credit against COVID-19 debt (CBILS, BBILS, CLBILS, Time to Pay) as an immediate deduction against amounts owing on COVID-19 debt.

Looking further into 2022, ICAEW Chief Executive Michael Izza says the government’s plans for levelling up the country could help boost post-pandemic economic recovery.

“We hope that engagement with the private sector can play a key role in achieving growth,” says Izza. “We’d like to see the government use opportunities to make the UK the best-regulated advanced economy, and further position Britain as a global hub for innovation, science and technology.”

Further reading:

• Recent ICAEW coverage of BCM Q2, which unpicks how business confidence declines to pre-pandemic levels. Readers can access the full report here: ICAEW’s UK Business Confidence Monitor Q1 2022
• Click here for everything you need to know about the Plastic Packaging Tax before April
• ICAEW coverage of the government’s recent Levelling Up White Paper