Overall, the QES Q3 results for the Thames Valley are positive, with the uptick in performance that we saw in Q2 continuing throughout this quarter. However, despite strong results for sales, orders, cash flow and recruitment, there are a lot of challenges which are still evident, which is very much in-line with the national picture.
Sales activity, cashflow and recruitment signify optimism in the region
Looking at overall performance, UK sales and orders for local businesses have increased for more than half of the survey respondents. This is greater than the national average and perhaps a reflection of the high presence of technology and life sciences businesses within the region, as these sectors have been particularly resilient over the last 12–18-month period.
Overseas sales and orders have also increased for around a third of businesses. This is lower than the figure for domestic sales but is an increase of 10% on the Q2 results and perhaps an encouraging sign in terms of how businesses are emerging from COVID, and how they are coping in the post-Brexit world. However, this still could be an indication of possible challenges in relation to overseas trade. For example, trading within the EU post-Brexit comes with increased paperwork, which can act as a barrier, especially when demand is increasing domestically. It will be interesting to see how overseas trading performs over the next quarter.
As it has done nationally, cashflow has increased for local businesses, with approximately 50% reporting an improvement this quarter. This figure is an increase on Q2 (39%) and is greater than the national average, highlighting the region’s relatively strong position. This is further emphasised when looking at the figures for cashflow decline, with only 11% reporting this locally, compared to 22% nationally. However, with only just over a quarter stating they have increased investment in their business over the last three months, there appears to be some caution around how cash is utilised.
Turning to recruitment, 60% of businesses have been looking to recruit throughout the quarter, an increase of just under 20% when compared to Q2, and 41% have seen their workforce grow. Despite this, 58% reported that they are operating below capacity, so there is still plenty of scope for further growth over the upcoming months, potentially resulting in a further increase in positive figures in Q4.
These are all positive signs but, as also highlighted in Q2, challenges remain. Recruitment issues and skills shortages are well publicised and there are also inflationary pressures, as well as concerns over taxation.
Strong recruitment levels stuttered by skills shortages
Starting with recruitment, skills shortages are very high profile at a national level with roles such as HGV drivers and care sector workers being particularly highlighted in the press. Within the region, just over half of those recruiting are struggling to find staff, which is a big increase from Q2 (41%) but is better than the national position. Difficulties are evident across the spectrum of roles, and it extends not only from those that we are familiar with, but also to other areas such as professional services and clerical staff, amongst others.
The reasons for this have been well documented, including people returning to the EU, either due to Brexit or COVID-19, and some pay levels and working conditions. In fact, the region’s businesses reported concerns about the impact of the cost of pay in the context of whether they will need to raise prices in the short term.
This is very reflective of the competitive market and also other recent changes that are impacting the cost of employment. For example, the changes to the rules regarding off-payroll labour came into force in April 2021, with certain individuals who were previously paid as contractors now needing to go onto the payroll, resulting in an increase in tax costs.
In addition to this, the recently announced national insurance rise from April 2022, and the subsequent health and social care levy, are also going to be leading to concerns around the cost of pay. There will also be businesses that have claimed from the Coronavirus Job Retention Scheme which has now ceased, leading to further pressure on costs.
To counter this, it’s interesting to see that a little over a quarter of businesses in the region reported plans to increase investment in training. This is likely to be a positive factor in terms of retention of existing staff, and we are seeing that employers are focusing on staff development and well-being, with the retention agenda in mind.
Inflationary pressures may lead to price rises
Moving onto inflationary pressures, around a third of the region’s respondents cited these as more of a concern compared to three months ago. Although this figure is lower than the national average, it is still a high proportion of local businesses. The survey results suggest that the cost pressures businesses are facing may have to be passed onto the customer in due course, with 42% expecting to have to raise their prices over the next three months. This was further enforced by over 40% citing raw material costs as being a particular concern, which is perhaps not surprising given supply chain shortages.
It is worth highlighting that the survey was completed in mid-September, and developments in recent weeks could mean that the figures citing concerns may be higher if the survey was to be conducted today. It will be very interesting to see what the position will be in terms of Q4 and beyond, given recent inflationary pressures and concerns.
Taxation to be used to fund the deficit?
With regards to taxation, approximately 20% of businesses in the region are more concerned about tax compared to three months ago, which is a reasonable proportion of businesses, and there has been a lot in the press about how tax will be used to fund some of the COVID-19 debt, with some changes already being announced. We know that corporate tax rates are going up to 25% from April 2023, for businesses with profits above £250,000 in a year, and personal allowances will be frozen from April 2022, which will effectively raise more tax as wages increase.
We will be watching the Budget with interest and there is speculation about whether the chancellor will announce further tax rises. If nothing is announced this time around, then future tax rises must be a possibility down the line, given the deficit which needs to be funded.
There is particular speculation about Capital Gains Tax (CGT) and whether changes will be made, given that is at a rate of 20% at the moment and much lower than income tax rates. There has recently been a review of the CGT regime so it might be that changes are announced in the Budget, either to remove some of the reliefs that take the rate below 20%, or potentially to increase the rate. If the rate is increased, it will be interesting to see whether the change takes immediate effect, or whether it is announced for a date in the future, as that may stimulate a lot of M&A activity in the short term and therefore generate tax receipts for the Treasury. There is a buoyant M&A market in the Thames Valley so that could provide a positive short-term boost to the position here.
There are also a lot of valuable tax reliefs available. For example, there is currently a 130% deduction for certain capital expenditure that qualifies for capital allowances, providing an increased amount of relief until 31 March 2023. There are also a lot of businesses in the region that qualify for R&D tax credits. These provide enhanced tax deductions and the ability to receive cash back from HMRC, particularly in the early stage of a business’ life cycle. It’s possible, given there was an R&D review conducted recently, that we may see some changes in the Budget related to this area as well.
Growth expected but profitability likely to take a hit
Looking ahead, just over 80% of local businesses expect turnover to improve over the next 12 months, which is better than the national average and an encouraging sign that the region will continue to grow. However, only 53% believe profitability will improve, which is quite striking and is a more dramatic gap than the position seen in the Q2 figures. This is reflective of the upward cost pressures businesses are facing and the choices that have to be made in relation to passing these onto the customer.
Challenges are to be faced
In summary, the region is in a strong place compared with the national position. Growth is expected to continue, at least over the short term, but there are a number of challenges, particularly around recruitment and inflationary pressures, which are also being faced nationally. It appears that these pressures will continue, and maybe even increase, over the coming months.
The national and regional briefing that took place on October 13th is now available on demand here