Despite a return to some stability, ICAEW’s latest Business Confidence Monitor (BCM) suggests that the current economic challenges are set to continue at least in the short term. 

ICAEW members work in a vast array of organisations, spanning multiple sectors and sizes. The insights gathered through our quarterly survey and ongoing anecdotal evidence from members explain the impact on members at the coalface of business, help to signpost ICAEW content and inform our consultations with government departments. Looking back over the first two months of this year the challenges evidenced in 2022 remain, with specific emphasis on energy, climate and international trade.

Energy costs – future remains uncertain

Although the cost of energy has fallen from the levels first seen following the Russian invasion of Ukraine, it is still far above historic highs as we reach the 12-month anniversary of the invasion. As that 24 February milestone passes, there is no way of knowing how long the war will continue. This uncertainty and the possibility of an escalation or the onset of other geopolitical events weighs heavily on business. 

The Energy Bill Relief Scheme (EBRS) which runs to the end of March 2023 was generally well received by business, but the Energy Bills Discount Scheme due to replace EBRS from 1 April 2023 is likely to receive less favourable reviews. In particular, the switch from a price cap to a discount on wholesale gas and electricity prices leaves business open to the whim of the market. 

A further energy shock, a particularly cold winter or a multitude of other possible scenarios may have a detrimental impact on already struggling businesses in some of the hardest hit sectors. This is particularly the case for high energy-use businesses – from 1 April 2023, only energy-intensive businesses identified by Standard Industry Classification (SIC) codes will be able to access support

For businesses not making the list and facing significantly higher energy costs the future is uncertain, with those coming to the end of fixed-term contracts set to be in for a bigger shock. While the government has announced further support to help compete with European rivals in the form of the British Industry Supercharger, some businesses will undoubtedly slip through the cracks. 

Rising input costs and falling demand

We are hearing more reports of businesses facing the squeeze of rising input costs and falling demand, some exploring insolvency options with resulting job losses. The sectors most impacted include construction, where inputs including cement are extremely energy-intensive to produce and where sales of outputs have been hit by rising mortgage rates and the cost-of-living crisis. This sector, highlighted in the BCM, is one of the Financial Reporting Council’s priority sectors for supervisory focus for 2023/24.

In response to the energy crisis. ICAEW created the Energy crisis hub, signposting content and events to provide practical support and advice. The ICAEW Insights podcast on The energy crisis – what can businesses do? explored the opportunity for organisations to secure their own energy supply and strategies to reduce energy demand.

What lies in store depends to a great extent on government policy, with businesses holding their breath in anticipation of the chancellor’s Spring Statement on 15 March.

Climate and ESG a growing focus for businesses

More than ever, business is focused on addressing actions which have a negative impact on climate change. Interest in renewable energy options has been fast-tracked by the surging cost of energy but held back by lack of access to finance and the non-availability of kit, often with lead times of six to 12 months. This opportunity is further thwarted by a lack of skilled workers to install and maintain heat pumps, solar installations and other new technology. 

The US Inflation Reduction Act (IRA) and the EU’s response in the form of the Green Deal Industrial Plan present opportunities for growth. To ensure the UK economy remains competitive on the international stage, it’s important we cultivate an environment where businesses can and are motivated to invest. This necessitates a long-term strategy with clarity and simplicity centre stage. 

The UK is at the cutting edge when it comes to technology and specifically that relating to green energy. Environmental, social and governance (ESG) remains a growing focus for businesses of all sizes, motivated by customer demand and the regulatory environment along with energy security and demand reduction considerations. The role of tax in incentives and behaviour in the pursuit of UK carbon reduction has also recently been considered by ICAEW’s Tax Faculty. 

Trade

Discussions about Brexit and the Northern Ireland Protocol have increased in prevalence, with a deal announced on 27 February. On the ground, businesses struggling in domestic markets would traditionally look to international markets, but the landscape has become increasingly complex. 

Post-Brexit, exporting to the EU has become onerous for some businesses without in-house expertise or time to navigate complex rules, made all the more challenging because of economic sanctions and the move to HMRC’s Customs Declaration Service. ICAEW’s Global Trade Community focuses on helping members take advantage of international opportunities.

In a recent discussion with ICAEW members the point was made that exporting must be promoted as ‘essential’ as opposed to an ‘optional extra’. As one member declared: “Something needs to change in the language.” The newly formed Department for Business and Trade is well placed to link business with the opportunities international trade presents.

An ICAEW webinar in partnership with Avalara, suppliers of cloud-based tax compliance solutions, discussed what you need to know about exporting to the EU and beyond. Trading Internationally: An Export 101 is open to both ICAEW members and non-members and is available on demand.