Energy costs and Covid pose ‘existential threat’ to UK’s small businesses

The viability of thousands of small businesses is at risk as spiralling energy coststake their toll on companies just as they try to recover from Covid restrictions, according to a stark warning from their federation.

Small businesses, which employ almost 13 million people in the UK, are expected to feel the brunt of crippling energy costs in the coming weeks as firms begin to strike new fixed-term deals amid record high energy market prices across Europe.

The UK’s micro businesses, which employ fewer than 10 people and a total of 4.2 million employees across the country, are “in trouble” due to the national energy crisis ignited by record energy market prices, according to a warning from the Federation of Small Businesses (FSB).

A survey by the group found that energy costs are the biggest concern facing its members and warned that they could pose an “existential threat” to firms that have already been dealt a blow by Covid restrictions.

“This is a cruel pincer,” said Craig Beaumont, at the FSB. “It will lead to some businesses realising they cannot continue as is, either [by] trying to slash costs or, the last thing they want to do, lose people. Or they could have to give up altogether, shutting the business down and letting everyone go.”

The looming risk to millions working in the small business sector threatens to compound a “cost of living catastrophe” in the spring, driven by stalling wages and rising tax and energy bills, which could make 2022 the “year of the squeeze”, according to the Resolution Foundation.

The FSB is expected to reveal next week that almost half of of its members consider energy bills to be biggest potential “disruptor” to their businesses, ahead of supply chain concerns and worries over the cost of fuel, which have reached record highs following a rebound in the global market price for oil.

“It is micro businesses which are the ones in trouble. Many small businesses tend to buy their energy via fixed rate deals but when these end they face much higher charges,” Beaumont said.

“For some, energy costs could prove to be an existential threat, particularly for the fragile end of the small business sector which is emerging from Covid-19 restrictions,” he said. “Anecdotally, we’ve found that energy bills are the main reason why some small businesses have remained closed and kept staff working from home. It is one of the only ways they can protect their finances against these costs.”

Senior officials from the business department, the Treasury, No 10 and the energy regulator have met energy companies in a series of emergency talks over recent weeks in an attempt to avert a national energy crisis which could drive the average home energy bill to £2,000 a year by next April.

The regulator, Ofgem, put forward a proposal on Thursday to help smooth the cost of recent energy supplier collapses which might otherwise add about £100 a year to the average energy bill. A spokesperson said the cost of its safety net had protected the credit balances of more than 4m households following the collapse of their supplier. However, the same protection is not offered to small businesses.

“Small companies don’t have the commercial clout of larger firms which are able to negotiate competitive longer-term energy tariffs with a supplier, but they don’t qualify for the same regulated protections which are offered to households either,” Beaumont said.

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Senior industry sources said energy companies have argued in favour of a £20bn Treasury-backed fund, which could provide loans, repayable over a number of years, to help suppliers meet their costs without sudden hikes to home energy bills next year. There have also been calls to remove the 5% VAT charge from energy bills and move some policy costs into general taxation.

The FSB is understood to have asked the government to extend many of the protections offered to households to help safeguard small businesses too.

Ofgem and the business department were not immediately available to comment.


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