With businesses facing significant uncertainty following the latest tax changes and the adverse market response, this month I consider how businesses can and should respond to this situation.
Before I look at my tips for navigating these times, it’s worth reminding ourselves of the basic principle that for any tax system to operate effectively it must be:
In other words, tax should be paid in proportion to the amount of income earned.
Taxpayers must have certainty as to the amount of tax to be paid and when it must be paid.
Convenient (i.e. easy) to pay tax; and
Not too costly for a government to administer.
(The Wealth of Nations, Adam Smith)
Generally these principles, in one form or another, have always underpinned the UK tax system. The mini budget on 23 September 2022 has been widely judged to have failed to adhere to these principles. The announcements overlooked the fact that citizens need to plan for the taxes they are required to pay. It ignored the fact that investors make their investing decisions based on certainty and a stable investing environment, where a degree of predictability is a good thing. And it certainly discounted completely the reaction of the markets to unfunded announcements.
However, overall, business came out of the mini-budget well. Planned increases to national insurance and corporation tax were scrapped; the health and social levy was also scrapped; IR35 was reversed to the pre-2017 position; incentive zones were announced; investment incentives and option plans were expanded. A raft of pro-business measures designed, say the government, to stimulate growth. A growth agenda is a welcome strategy and, certainly, our business bodies have been calling for this for some time. But some of the changes announced must bring frustration to business too, if only for the sheer amount of time and effort spent complying with the soon-to-be-repealed measures. For example, IR35 for the private sector was delayed by a year to give medium and large businesses more time to prepare for the changes and significant work was undertaken to ensure compliance.
The cost of these new pro-business measures is yet to be disclosed, as is the detail of how they will be funded. This brings substantial uncertainty to the business environment as the cost of borrowing goes up and interest rates start to tick upwards.
There is no doubt that the current business landscape feels unsettled. So, how can business leaders navigate this time? The below are not necessarily answers but are some considerations to bear in mind as you navigate the period ahead:
Be prudent. If you can, consider whether you should keep more cash on hand than you would normally.
If you trade overseas, is now the time to be thinking about currency hedging if you don’t already do it?
Talk to your trade and industry bodies to get their advice and insight. Many will be lobbying Government to ensure a stable, sustainable trading environment, and arguing that the competitiveness of the British business environment depends on this message getting across.
Do pay attention to what the opposition political parties are saying they would do if the win the next general election. Usually, new governments make tax changes and hopefully the opposition will be learning the lessons from this week and headlining any tax changes well in advance of making them.
Look out for the OBR forecasts. We know that it will be made available to the Government on the 7th October, but only publicised on 23 November 2022.
It looks like we are in for a bumpy ride over coming months, and while we wait for a clearer picture to emerge, the best advice I can share with business leaders is to maintain some semblance of equilibrium. And hang on in there!