insights
Our take on the implications for business owner-managers considering exit and succession following Budget 2021 – a case of pain deferred?
Rishi Sunak’s second budget was noteworthy for what it didn’t do.
There had been extensive speculation that CGT rates would be hiked or even equalised with Income Tax rates. This would have been bad news for business owners planning to sell their shares especially following the earlier reduction in Entrepreneurs’ Relief (now renamed Business Asset Disposal Relief). Inevitably this drove a wave in M&A activity since the autumn. As a result, at PEMCF we had a very active start to the year with 5 deals closing in just over a week – with 3 on one day.
This speculation followed the November 2020 review of Capital Gains Tax published by the Office of Tax Simplification (‘OTS’).
But Sunak didn’t mention CGT this time around other than to freeze personal allowances.
The worry about CGT rises has not gone away. It was Sunak who commissioned the review of CGT by the OTS saying that he was particularly interested in how CGT interacted with taxes on income, and it is clearly still on the agenda.
A Treasury decision to hold a “tax day” three weeks after the budget signals their intent to stimulate discussion on tax policy including capital gains. They’ve announced that they’ll publish a number of consultations on tax policy to gather feedback.
So there’s still some concern that CGT rates will rise – but for now business owners can get back to exit and succession planning without the distortion of a short term tax cliff edge.
Boosting the economy
The budget’s direct impact on company valuation will probably be less than the indirect effects of measures to boost the economy such as the Super-deduction. This allows businesses to offset 130% of investment spending on plant and machinery against profits for the next two years. Spend £1M on equipment and reduce your taxable income by £1.3M.
Good news if you decide to invest over the next couple of years but of course, this tax break will also reward those who were planning to invest already.
The Super-deduction is for investment in plant and machinery so sectors like manufacturing, industrial, and construction are likely to benefit most.
The Corporation Tax hike
The Corporation Tax increase to 25% for businesses making profits above £250,000 must have some impact on company valuations. For M&A purposes businesses are typically valued as a multiple of EBITDA (earnings before interest, tax depreciation and amortisation). EBITDA is before tax so the headline price or Enterprise Value won’t be affected directly.
But the Equity Value, or the price actually paid for the shares, is struck after an adjustment for surplus cash or net debt. More tax paid means less cash or more debt. At the same time the increased flexibility to carry back losses may help some of those worst hit by COVID to reduce their tax bill.
So there will be an impact. But this will be of second order significance compared to the impact of the multiple a buyer might pay in a competitive process. And quality businesses continue attract strong interest and good prices driven by liquidity in the market alongside appetite from trade and private equity buyers.
The short-term future looks choppy and so having a proper exit plan was never more important nor more challenging. If you’d like an informal chat about your future plans for your business and its ownership, we’d love to hear from you.