Although there were limited major tax changes affecting the transaction environment, the principal driver of new transactions may well prove to be the improving sentiment towards the UK’s economic outlook.
Whilst this Budget may have lacked any significant changes compared to more recent statements, it did provide some encouraging signs for those involved with transactions. The indications are that the UK will narrowly avoid a technical recession in 2023. The Chancellor further announced that the Office for Budget Responsibility has forecast that inflation is expected to reduce significantly from current rates of 10.1% down to 2.9% by the end of 2023.
Given this backdrop, it will be interesting to see how these expectations of lower than anticipated inflation filter through to monetary policy in the UK, and the corresponding impact on financing costs in a leveraged buy-out context.
Tax changes directly impacting the transaction environment were limited. There were no significant proposed changes to the capital gains tax regime for shareholders, although a new elective accruals basis for carried interest may provide welcome additional flexibility to access overseas tax relief for some investment managers. There were no changes to the previously announced increase in the main corporation tax rate to 25%. However, within the Chancellor’s pro-enterprise agenda, there were some proposals included that may impact the timing of cash tax payments, which should be taken into account when undertaking tax modelling on future deals.
Where a business invests in fixed assets, full expensing, which replaces the super-deduction, will allow companies to fully expense new main rate assets for a period of three years starting from 1 April 2023. Given that the increase in the main rate of corporation tax to 25% takes effect from 1 April 2023, under this new regime businesses will obtain up front relief worth 25p on every £1 invested, accelerating cash tax benefit that would otherwise unwind on an 18% reducing balance basis over many years. Importantly, the proposed full expensing rules will be in place until 1 April 2026 only, notwithstanding that the Chancellor expressed a desire to make the measure permanent in the future. This establishes a set period of time to benefit from full expensing and consequently consideration should be given towards the timing and funding of significant capital expenditure projects by those already holding investments and those considering potential further acquisitions. For further commentary on the proposed introduction of full expensing, see `below.
There was also a further change to the Research and Development (R&D) regime for R&D intensive small and medium enterprises (SMEs) with an enhanced R&D credit. This is welcome news given the previously announced changes to the R&D scheme that negatively impacted SMEs. Again, the need to consider this as part of any due diligence exercise and cash flow modelling will be important and require specialist advice to confirm eligibility to receive the enhanced benefit. For further commentary on the proposed changes to the SME R&D regime, see below.
Finally, the Budget contained some limited updates to the qualifying asset holding company (QAHC) regime, intended to align access to the regime with the intended potential beneficiaries. Amongst other minor changes, the rules will clarify that a securitisation company cannot also be a QAHC; will provide for an election to treat listed investments as unlisted so that access to the regime is not prevented in relevant situations; and will ensure that the capital gains exemption operates as intended in the situation where a QAHC invests in a derivative with an underlying subject matter of shares. The fact that the Government continues to refine the scheme demonstrates its commitment to the regime, and the broader desire to ensure that the UK is a first choice holding location.
Given the Chancellor’s restricted scope for major tax changes, those provided affecting the transaction environment were always going to be limited. Whilst there are some technical changes, the principal driver of new transactions may well prove to be the improving sentiment towards the UK’s economic outlook.