What can businesses expect from the new Government?

Paul Stout, partner at the Southampton office of PKF Francis Clark, considers the outlook for business owners as new Chancellor Rachel Reeves prepares to deliver the Labour Government’s first Budget.

Business leaders are sure to be watching closely on Wednesday 30 October when the new Government’s first Budget is unveiled.

Nearly four months on from Labour’s landslide election victory, it will be a big moment in providing clarity as to what the coming years will look like for entrepreneurs, management teams and high-net-worth individuals.

Tax changes

There were some clues to the direction of travel in the Chancellor’s statement to Parliament on the new Government’s public spending inheritance at the end of July. Rachel Reeves said a Treasury spending audit had found £22 billion of unfunded pledges – widely seen as preparing the ground for tax rises while passing the blame to the previous regime.

In her speech, Reeves spoke of creating “the stable conditions which investors need to thrive” and returning “confidence to our economy so that entrepreneurs and businesses big and small know that this is a place to do business”.

We therefore expect the Government will be reluctant to introduce any measures that can be construed as damaging businesses or incentives to work.

So far, the Chancellor has stuck to tax changes set out in Labour’s manifesto (non-doms, VAT on school fees and more tax on carried interest). She has also confirmed the abolition of the furnished holiday lettings rules announced by her predecessor Jeremy Hunt, affecting owners of rental properties.

Beefing up HM Revenue & Customs to tackle non-compliance is already on the agenda. Given the stated hole in the public finances, what further measures could we see in the Budget?

In our view, restriction of tax reliefs is likely as a means of raising revenue. Tax changes are more likely to be focused on who is subject to a tax or entitled to a relief, rather than headline rates. A return to the long-frozen fuel duty escalator also seems likely.

If the Chancellor is prepared to raise tax rates, possible targets could be the dividend tax rate of 8.75% for basic rate taxpayers or an increase in the main rate of capital gains tax (CGT). Many economists have called for CGT to be brought into line with income tax rates. Business owners are eagerly awaiting clarity over the direction of travel on this.

Selling your business

More broadly, what is the outlook for business owners, particularly those who are considering selling or succession planning?

The good news is that deal activity is in a much better state than some commentators would suggest. The mid-market is active – indeed, at PKF Francis Clark we completed over 100 transactions last year.

A further positive is that there is plenty of finance out there: debt supply is high despite high-street lenders being more cautious and the higher cost of capital for borrowers. Alternative debt providers have picked up the slack and their products often have much more flexibility. The private equity sector has a lot of dry powder and corporates are generally well capitalised, meaning deal multiples are holding up.

The key message is the need to prepare properly for a transaction. Business owners should consider vendor due diligence, use data analytics and create a strong equity narrative that is supportable by your data. The objective is to get a deal done in as short a timeframe as possible, to avoid deal fatigue and third-party events affecting the transaction.

Investing in data analytics well in advance of a planned sale can pay dividends. Every pound of profit is worth multiple times that in company value, so business intelligence that enables you to increase profitability can directly boost the valuation when you come to sell.

It’s not too late to accelerate your transaction. Currently we are seeing a lot of interest in employee ownership trusts and management buy-outs.

When it comes to personal wealth, there are relatively easy steps individuals can take to guard against potential changes in the Budget. It’s often surprising how little planning has been done in relation to things like pensions and inheritance tax.

It’s also important for family businesses to get the basics right when thinking about succession planning, including making sure you have a tax efficient shareholding and, where appropriate, family in posts in the business.

Please don’t hesitate to contact us if you would like to discuss any of the issues raised in this article.

For more information, visit pkf-francisclark.co.uk.

Paul Stout
Partner and Head of Mergers & Acquisitions
[email protected]
07791 306938