If they are absolutely candid, the first response of many private equity executives in the UK to the budget that Rishi Sunak delivered Wednesday was one of considerable relief.
His speech was preceded by months of speculation, driven by an Office of Tax Simplification report, that the capital gains tax rate was about to be increased by a spectacular margin (potentially all the way up to 45 percent), and even if the change was less severe, that the scope of the activities which are defined as capital rather than income might be revisited instead.
The impact of such changes, had they been made, on the international competitiveness of the UK PE industry, especially for the largest funds, would have been considerable. There is some evidence that the mere possibility of a switch in policy has had an impact on market activity this year.
That no overhaul of CGT was announced does not mean that it is off the agenda for the foreseeable future. There is due to be a series of consultations launched on various aspects of taxation by Her Majesty’s Treasury later this month and it is conceivable that CGT might be looked at again. It is, though, a reasonable assumption now that an imminent and drastic alteration looks less plausible.
In the policy pronouncements themselves, there was much in the budget for the sector to welcome.
Private equity has long had a very significant footprint in the hospitality, leisure and entertainment spaces. This is particularly, but not exclusively, true for UK-rooted mid-market investors. All of these industries have been hit by a tidal-wave due to the covid-19 crisis. That has been true for those who have backed businesses in what is described, somewhat harshly, as “non-essential retail” too. It is valid for those who offer services to these companies as well, such as travel insurance providers.
These aspects of the economy are not due to start to return to life until mid-April; others will not be operating at close to full capacity until May and a few will have to wait all the way until 21 June.
They desperately needed, therefore, measures such as the furlough scheme and the suspension of business rates to be extended. Not only has that happened but for longer than many had thought. There will, alas, be some businesses, including those backed by private equity, which will not emerge again once the pandemic has abated. The number of such casualties has, however, been reduced by the action that the chancellor has taken. At a minimum, more companies will have a second chance.
This has come at the price of utterly staggering borrowing levels in the short term and the crystal-clear signal of an increase in personal taxation (through freezing allowances) and corporation tax. Yet the phased nature of what has been set out means that a consumer-led recovery remains viable. If, as must be possible, the growth projections issued by the Office for Budget Responsibility turn out to be too cautious and the economy rebounds with more vigour, there would be scope to soften the rise in corporation tax to something less than the stated 25 percent rate when April 2023 finally arrives.
In the meantime, there are a host of new measures, some macro, some micro, to attract interest.
The most eye-catching of these is the “super deduction” on investment, allowing those who make such expenditure to claim up to 130 percent of that sum against their tax liabilities. This is a genuinely bold innovation by the Treasury, and while it is supposed to last for only two years from 2021-2023, the argument for retaining it beyond that point if it is clearly inspiring investment will be a strong one.
There are other changes in Rishi Sunak’s speech that will be of value to the sector. The creation of a UK Infrastructure Bank is an intriguing move, as are the eight new freeports and the collection of incentives towards green finance. The commitment to ease the rules surrounding visas for highly-skilled individuals could be transformative for technology companies. In a similar spirit, the two new consultations flagged yesterday offer the opportunity for positive developments.
The first relates to the Enterprise Management Incentives scheme, designed to support high-growth companies in recruiting and retaining the best talent so that they can scale-up effectively, which asks whether and how it might be extended. The second relates to research and development tax reliefs and whether they remain “up-to-date, competitive and well-targeted”, with the implication that they could be enhanced.
Private equity is increasing its presence in the UK. It employs almost a million people in just under 4,300 companies with 90 percent of investments being made in SMEs. The decisions that the chancellor has taken in his budget make it more likely, as the covid-19 crisis eases, that this will not only remain true, but that private equity will be an even more significant player in the decade ahead.
Tim Hames is a senior advisor at FTI Consulting and was the director general of the British Private Equity and Venture Capital Association (BVCA) from 2013 to 2019.