We may still be in the final throes of summer, but a long shadow is being cast by reports of the £50 billion black hole in the public finances, and thoughts are already turning to what measures the Chancellor might implement in the autumn Budget to fill it.
This article is by Claire Madden, who is Managing Partner at Connection Capital
Tax rises look inevitable, but with Rachel Reeves’ room for manoeuvre limited by Labour’s manifesto promise not to raise taxes on “working people”, small and medium sized business (SME) owners and managers will be concerned about what this means for them.
After all, in the past year, the cost of doing business has already been driven up by employer’s national insurance (NI) hikes, and other employment costs will likely rise as a result of the forthcoming Employee Rights Bill. Succession planning has also been potentially knocked off course by the decision to include business property assets worth over £1million in the inheritance tax (IHT) net. At a time when economic conditions are challenging, all this piles more financial pressure on SMEs and raises a question mark over what the future holds.
The spectre of further CGT hikes
For many business owners, a major preoccupation is whether the headline rate of CGT which was raised in last year’s Autumn Budget (while the benefits of Business Asset Disposal Relief have been reduced) will be hiked further to bring it into line with income tax rates.
If this happens (as has been suggested), business owners who have been lining up an exit may delay their plans in the hope that a more favourable tax environment will eventually return. That might not be an ideal outcome for entrepreneurs ready to step aside, or for the next generation of senior management ready to take over and drive SMEs forward – or indeed for the Treasury.
By postponing exits, the prospective CGT this step could have generated will not end up in the public coffers just when it is so desperately needed. Indeed, figures show that tax receipts have actually fallen since CGT rates were increased, to £13.1bn last year, down from £14.5bn in the previous 12 months and £17bn in 2022-23.
Increasing CGT could have a chilling effect on business investment – both by owners themselves and by external investors. Entrepreneurs may feel there is less incentive to put in the long hours and stake their own capital to start a new business, or to take on more risk by expanding their operations, if they’re not going to be adequately recompensed for their efforts in the long run.
Likewise, private capital investors who might otherwise have backed small companies with ambitious growth plans and significant value creation potential may have second thoughts about doing so. According to recent research among our high net worth clients, while most (57%) would not be deterred from investing in public or private equities by a hike in CGT, a substantial minority (43%) said it would affect their level of investment. This matters because private capital is an important source of SME funding, especially as bank lending is not always readily available on suitable terms.
Confidence is key
Many commentators argue that fuelling economic growth is the best way to fill the black hole, but measures that make it harder to run a successful business and uncertainty over the future outlook on tax and investment can have a chilling effect.
Currently, there’s no cast-iron guarantee that other taxes such as income tax or VAT are safe from an increase. The knock-on impact – raised prices and dampened demand – could be the final straw for some business owners. Meanwhile mixed signals in other areas are creating confusion about what the government’s goals are, and how they will be achieved.
A prime example of this dichotomy is the push to attract domestic and overseas institutional investment into UK listed small cap companies on the one hand, while increasing taxes on private wealth investing in AIM stocks on the other.
Confidence is key: only when they can see a benign landscape ahead and a clear direction of travel will business leaders want to take critical business development and investment decisions. Otherwise, they are likely to hunker down or even retrench. So the news that business confidence is at a low ebb, falling further into negative territory in Q2 according to the ICAEW , will hardly be music to the Chancellor’s ears.
Business investment is vital for a thriving economy – creating jobs and increasing revenues that lead to higher tax corporation tax, income tax and NI receipts. But clarity and consistency around tax policy are essential to ensure that companies and investors can make well-informed choices and take positive actions. The Chancellor may not have many appealing options to plug the black hole, but bolstering flagging sentiment should be top of the list of priorities.
