Self-employed clients are struggling

Government support schemes missed sole traders, contractors and the self-employed during Covid, and continue to do so.

Sole traders, contractors and self-employed individuals have faced unprecedented challenges in recent years. While larger businesses and SMEs have been somewhat supported by Government support packages during Covid-19 and recent energy bill highs, many sole traders have fallen between the cracks.

Inflationary pressures have pushed up costs of raw materials, leading to supply chain issues, while the cost-of-living crisis has led to less work for those providing domestic services such as painting and decorating or household construction projects.

Some of the common issues experienced by sole traders, contractors and tradespeople include:

• cash flow issues – having enough money to pay suppliers and sub-contractors.
• shrinking customer base due to cost of living
• tight profit margins
• rising energy bills
• cost of materials
• ongoing supply chain issues
• labour shortages due to Brexit.

In addition, IR35, which was extended to apply to the private sector in April 2021, has also caused issues. It has reduced net income for those deemed to be ‘inside’ IR35 who are therefore required to pay NICs and income tax but lack the benefits of a regular employee such as holiday pay or sick leave.

How are these micro businesses and sole traders managing in this climate? We spoke to accountants whose clients include hairdressers, actors and window cleaners to find out about the issues they’re experiencing.

Micro businesses, contractors and sole traders are experiencing people issues

Emma Chesson, Associate Director, Business Services and Outsourcing, BDO LLP

With the types of businesses we work with, we are seeing a lot of focus on people. There are difficulties in attracting and retaining talent and dealing with the impact of Brexit on the workforce. There are also challenges from newer ways of working, such as creating a team dynamic in a hybrid world and supporting staff wellbeing in the workplace.

Being a business owner can be a very lonely experience and getting the right support can be a challenge. We are focusing on supporting our clients to help them build a resilient growth strategy.

Verdict: Smaller businesses are experiencing people issues from talent retention and labour shortages to employee engagement.

Clients are being cost-squeezed from all sides  

Steven Leonard, Partner, JL Winder & Co

Government support schemes missed small businesses during Covid, and continue to do so.

Cash flow is the major issue facing most smaller businesses and sole traders. Due to increasing business and personal costs, they’re being squeezed from both sides. They’re struggling particularly with inflationary effects on supplies, overheads and wages.

Minimum wage increase is also having an impact: it’s not just the 10% increase in minimum wages but wages need to be increased for other employees to ensure the wages differentials are maintained for more skilled or experienced staff.

In certain sectors such as hospitality, there’s also a labour shortage and rates have already increased due to demand.

It’s therefore the dilemma whether these businesses can pass on costs to customers who are quite often individuals and therefore more price sensitive. Trying to absorb the costs will see a drop in profits and create a struggle to meet personal costs (mortgages, fuel, general inflationary price rises etc).

Although there is some support available across many sectors, it does seem that small businesses and sole traders are generally overlooked by the Government and policy-makers. It seems that if you don’t have a property or employ several staff, you’re off the radar.

Our job as accountants is to support and guide clients and help them adapt to the current situation. Clients need accurate and up-to-date information to help make informed business decisions. Communication with clients on an individual basis is particularly important.

Small businesses are a major part of the economy and, while they are undoubtedly facing difficulties, experience tells us that good businesses will always survive and then thrive when the pressure eases.

Verdict: Micro businesses are being squeezed from all sides, facing cash flow issues around wages as well as general inflationary costs in business and personal lives.

Virtually no support and various big concerns

Alan Broome, Director, Acumenica Group

There is virtually no support or relief for sole traders, contractors or self-employed businesses. Key concerns for these businesses are around spiralling costs, recruitment difficulties and tepid demand. Increases in business tax rates for 2023/34 are also very concerning.

We are advising our clients to work hard AND smart. Keep an eye on costs from a cash flow perspective, but don’t neglect sales.

Verdict: Micro-businesses have ongoing concerns around spiralling costs, recruitment difficulties and tepid demand.

Self-employed clients have been hardest hit

Neil Parsons, Managing Director, Wolters Kluwer Tax & Accounting UK

Prior to the onset of the pandemic, self-employment in the UK had been steadily increasing. It peaked at five million between October and November 2019 (15.3% of total employment), according to the Office of National Statistics. Since then, numbers have fallen and account for 13% of total employment.

Self-employed individuals and freelancers were among the hardest hit by the pandemic, not receiving the same level of governmental support. In many cases, their businesses have still not recovered and continue to struggle due to high energy costs and costs of materials. Research from Centre for Economic Performance (CEP) at the London School of Economics and Political Science found that a third of self-employed people cite the cost of energy as their most challenging issue.

We are seeing our clients experience increased demand from their own self-employed clients, with forecasting services in higher demand, among other new services and more frequent advice.

What we saw throughout the pandemic was just how much people relied on their accountants. Accountants were helping their clients proactively navigate government grants, local authority grants and bank loans. They were also helping business owners understand the nuances of individual businesses and giving the best advice to enable their survival.

Verdict: Self-employed clients have been among the hardest hit and have often fallen between the cracks due to lack of governmental support.

Annie Makoff is a freelance journalist and editor.