James Pinchbeck, partner at Streets Chartered Accountants, considers the effect of energy price hikes on businesses and what can be done to manage the situation.
Whilst the Spring invariably brings warmer weather and lighter days, this year it is unlikely to help businesses weather the storm of unprecedented price hikes in the cost of energy. According to a recent Policy Voice Survey by the Institute of Directors, over 53% of its members surveyed indicated that the cost of energy was and continues to exert a negative impact on their organisation.
The energy price hikes have come at a time when there seems to have been a perfect storm with Brexit and the pandemic leading to unprecedented disruption to businesses, with rising costs particularly as a result of labour shortages and supply chain issues and in many cases a lockdown loss of revenue. Whilst some may have been able to pass on such cost increases, for many this has not been the case having to absorb them with a loss of margin.
Businesses are no doubt feeling a bit weather beaten with what seems the exponential increases in energy yet another disruption or problem that is adding to the domino effect of challenges faced.
The average household is likely to face an increase in their annual energy bill of around £700 in light of the 54% increase in prices. When it comes to businesses, the annual bills for the average small business will increase from £1,150 to £1,725 and for the average medium sized business from £1,860 to £2,864. Many businesses though, depending on what they do, for example those engaged in manufacturing or processing, are set to see in real terms much larger bills.
Whilst the first approach to dealing with the situation may be to see if you can seek a cheaper supplier, this is unlikely, given the state of the market, to yield results. For those on contract with their energy supplier, whilst their current deal may be favourable, they should prepare for hikes on renewal.
Managing the situation really needs a more strategic approach, starting with an in depth understanding, even audit of your energy consumption. Such information can then be used to determine steps and approaches to reducing consumption and becoming more energy efficient. This may include greater use of more energy efficient equipment, changes in staff attitudes and approaches and working practices through to installing new energy generation technology.
Quick and simple short-term measures, though, may not achieve the results required, not least in terms of achieving security or certainty around the supply and cost of your energy. You may then look to capitalise on the tax reliefs included in the Spring Statement and prior Budgets to support those looking at investing in green technologies and alternative energy sources.
Those looking to install heat pumps, solar panels or wind turbines can benefit from a removal of the 5% VAT levy on the cost of such installations.
The government is introducing targeted business rates exemptions for eligible plant and machinery used in onsite renewable energy generation and storage and a 100% relief for eligible low-carbon heat networks with their own rates bill. It was announced in the Spring Statement that these measures will now take effect from April 2022, a year earlier than previously planned.
Businesses investing or incurring expenditure in energy saving or environmentally beneficial technologies can look to benefit from the enhanced capital allowances. The extension to the temporary increase in the Annual Investment Allowance (AIA) to 31 March 2023 allows 100% tax relief to businesses investing up to £1 million in qualifying expenditure.
Help may also be available from your energy company with many offering schemes or grants to help improve business energy efficiency, which can reduce costs; for example, subsidies on the upfront costs for more energy-efficient equipment.
The cost of investing in new technologies could also be financed, with some funders and banks like Natwest offering ‘Green Loans’ and ‘Green Asset Finance’.
Finally, food for thought, perhaps the increase in energy prices may see more and more of those who have either opted for hybrid or home working return to their employer’s place of work as they seek to manage their domestic bills.
See this column in the May edition of East Midlands Business Link Magazine.