The UK Spring Budget 2023: a boost or blockade to the UK M&A market?
Jamie Guy
by Jamie Guy
On 15 March 2023, Jeremy Hunt announced the UK's Spring Budget for 2023 ("Budget"), his first as Chancellor of the Exchequer. Whilst the key strategic focus was, undeniably, to curb inflation and avoid recession, a number of the measures announced will influence the outlook of the UK's M&A market following their implementation in April 2023.
This article shall examine the potential impact on M&A activity within the UK brought about by the measures within the Budget as well as certain macroeconomic reactions following the Budget which will further effect UK M&A in the initial quarters of this financial year. Two elements of the Budget which will influence the buoyancy of the UK M&A market are:
the increase of corporation tax from 19% to 25% for companies with annual profits over GBP 50,000;
changes to the capital allowances rules; and
the abolition of the lifetime allowance on pension savings.
Historically, the UK was an attractive investment opportunity for overseas investors as corporation tax levels in the UK were well below other European nations, including Germany and France. Whilst the increase does not go so far as to bring the UK's corporation tax levels in line with those in Germany, the UK and French levels are now much closer, risking that UK companies are no longer as attractive to foreign investors as they once were, not to mention operational difficulties caused by Brexit. Conversely, the increase in corporation tax to a level in line with, but not above, European competitor nations, means that UK target companies may remain a lucrative investment to overseas investors on the basis of the weak value of the British Pound. Moreover, the Budget made the rules relating to capital allowances more generous. The effect of capital allowances is to reduce the effective rate at which a company pays corporation tax. The Government has claimed that for some companies that invest heavily in plant and machinery the enhancement in capital allowances will counter-act the rise in the headline rate in corporation tax. This may encourage investment into plant and machinery and attract further foreign investment to capitalise on such benefits. Consequently, the UK M&A market may maintain strong throughout 2023 via overseas investment.
The Budget providing the opportunity for owner managers to capitalise on greater tax free savings allowances within their personal pensions may result in fewer individual sellers going to the market to realise value for the individual's retirement. In the past, pension savings, excluding the state pension, were subject to tax once they exceeded a limit of GBP 1,073,100; however, the Budget abolishes this limit with effect from 6 April 2023. Whilst the rationale for such changes is clearly to entice those subject to higher tax rates to continue working for longer and, in turn, boost economic activity and growth in the UK, this move does present an unintended consequence which could hamper M&A activity and delay the sales of owner managed businesses. However, although the overall limit has been abolished, an annual limit is still in place (though increased) so the effect is likely to be more at the smaller end of the market.
The changes implemented by the Budget to corporation tax and pension savings aside, inflation in the UK did not slow at the rate anticipated by many financial experts. In response, the Bank of England announced on 23 March 2023 that it would raise its base interest rate from 4% to 4.25%. Again, the rationale is clear and in line with the wider outlook that reducing inflation and avoiding recession in the UK are of paramount concern. The increase in base rate, however, also increases the cost of debt financing which risks slowing the appetite of debt funded transactions, for example, smaller scale management buy-outs/ins are more reliant on such funding methods. This will not, however, prevent continued activity from private equity funds whose already raised funds are in need of deployment and consequently, it is likely such transactions will continue to flourish albeit with amendments to deal structures, placing more value focus on earn-out mechanisms and future performance based metrics.
Overall, the Budget was clearly focused on addressing greater economic concerns at play within the UK economy over the strength of the M&A market, which in recent years has been particularly strong. It is, therefore, likely that the impact of the Budget on M&A activity, especially in the first half of this financial year, will be somewhat detrimental. However, we must be mindful that the past few years have been particularly buoyant and a further boost for the market was not, in fact, necessary. It is likely that, should the aims of the Budget bear fruit, a slower first half of 2023, coupled with improved economic growth and lower inflation levels towards the end of Q2, may result in a flurry of M&A activity in the second half of the year.
A further impetus to M&A activity in the second half may be politics. The leader of the opposition Labour Party, which currently has a substantial lead in opinion polls, has refused to rule out a substantial rise in capital gains tax if the Labour Party will the next general election, due in 2024. This may lead to a rush to sell before are feared changes are implemented.
Ward Hadaway is one of the largest full-service law firms in the North of England, with a reputation for quality, innovation and a practical approach to meeting their clients’ needs. With 90+ partners and over 450 staff, the firm’s approach of partner-led relationships with all clients is supported by a resource that has real strength in depth.
Jamie Guy is a Solicitor in Ward Hadaway's Corporate team. He provides assistance to the Corporate team on a range of transactions including mergers and acquisitions, private equity investments, business reorganisations and fundraising. He also advises on mainstream company matters and has experience in drafting a variety of corporate documents including shareholder agreements, company articles of association and a range of ancillary documentation. Contact Jamie.
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