Given everything else that is going on this week, it might have been easy to miss the first UK budget since last year’s general election – and the first for Rishi Sunak, appointed as the UK’s finance minister just a few weeks ago. Indeed, many of the headlines have focused on the short-term measures that the government is taking to shore up the health service and limit the damage to the economy that COVID-19 will inflict. However, important though these are, the longer-term commitments – and a likely re-definition of the rules that the government imposes on itself to govern public spending – may prove even more significant. Certainly, what is reportedly the largest increase in government spending for a generation (mostly financed by borrowing) will affect many sectors of the UK economy in the years ahead.
As expected, having cut its growth forecasts, the government confirmed significant increases to infrastructure spending and long-term investments. Here, the ambitions of the government should not be understated: if these commitments are honoured, over the next five years the UK will be spending double the average amount spent on investment for the last 40 years. Among the announcements were a commitment to spend £27bn on roads, £5bn on broadband and £800m on carbon capture, as well as £12bn earmarked for affordable housing.
Having confirmed election pledges to spend £6bn more on the health service in the coming years, significant measures were also announced to help small- and medium-sized businesses to respond to the “temporary” disruption that will be caused by the coronavirus. These included the suspension of business rates for small businesses in certain sectors, help with funding for sick pay, and a temporary loan scheme for SMEs. An apparently uncapped commitment to the National Health Service (“whatever it needs, whatever it costs”) was backed with a £5bn emergency response fund.
The tax policies set out in the budget may be considered a mixed bag by private equity investors. On the one hand, the government has delivered its election manifesto promises (previously discussed here) to cancel the proposed cut to corporation tax rates, so the main rate will remain at 19%, and to “review and reform” entrepreneurs’ relief – a generous regime for owner-managers that can cut capital gains tax rates in half for qualifying shareholders, but which has been pruned in recent budgets. It was widely expected that this relief might be abolished altogether, following criticism by the respected think tank, the Institute for Fiscal Studies – but the government did not go that far. Instead, it adopted a suggestion made by the Federation of Small Business and reduced the lifetime limit on gains eligible for the relief from £10 million to £1 million for qualifying disposals made on or after 11 March 2020, a move with little overriding logic other than to further limit the cost to the government of this regime. Additionally, from April, the government is proceeding to implement the controversial digital services tax – a tax on revenues from search engines, online marketplaces and social media that arise from UK users – the French implementation of which resulted in the U.S. threatening to impose tariffs on imports from France.
More positively for the UK’s private equity industry, buried in the detail of the budget was the announcement of a new consultation aimed at making the UK’s funds regime more attractive to investors. Areas to be covered by the consultation will include the “tax treatment of asset holding companies in alternative fund structures”, VAT on management fees, regulation and other (unspecified) aspects of the existing rules. The government also confirmed that it will consult on the way the UK should implement new prudential rules for investment firms, which will affect many UK-based private equity advisers, and launched a Reforming Regulation Initiative, asking for ideas to help ensure that regulation is “sensible and proportionate”. These announcements seem promising and offer a good opportunity for the industry to engage. There are undoubtedly many changes that the government could make that would help the sector to weather the inevitable Brexit storm.
This week’s budget does mark a step change in the UK government’s attitude to public spending and many of the announcements will be welcomed by businesses and private equity investors. The policy announcements regarding UK taxation (particularly entrepreneurs’ relief) may not inspire the same reaction, but that unwelcome pill at least came with an acknowledgement of the desirability of maintaining a healthy, competitive UK funds industry.