On the 29th July 2024, new Chancellor Rachel Reeves unveiled the results of a public spending audit carried out by the government. The audit examined levels of public spending from the previous Conservative government and set out the new government’s plans to reduce the budgetary pressures identified.
While this government spending audit focused on public spending, its findings and repercussions have the potential to hugely impact private sector businesses. To help you stay informed and plan for the coming months accordingly, we have outlined the key takeaways from the audit and how we expect UK businesses to be impacted in this article.
The Results Of The Public Spending Audit
In the government public spending audit, the Treasury identified a ‘forecast overspend’ of £21.9bn which exceeded limits originally set out in the Spring Budget 2024. A number of unfunded policy announcements were highlighted as having contributed to this overspend, including extensions to the Household Support Fund and the Advanced British Standard. The audit also identified that high inflation and other recent events such as the war in Ukraine have added to pressures on public spending.
Implications For UK Businesses
The Chancellor has stressed that the new government will need to implement cost-saving measures to reduce the pressures on public spending. Crucially, this is where UK businesses are likely to be affected. With the Autumn Budget on the horizon in October, it is widely anticipated that the Chancellor will implement changes and reforms to existing fiscal policies in order to combat the £21.9bn shortfall and raise additional funds for promises made in the Labour Party’s election manifesto. We expect the following changes, if implemented, to impact UK businesses most significantly.
Investment Opportunity Fund Withdrawn
While most actions to ease pressures on public spending resources will be outlined in the Autumn Budget, the government has already taken steps to take immediate action on spending pressures. £5.5bn worth of savings are expected to be announced in 2024-25, including the scrapping of the Investment Opportunity Fund – a project launched by the previous government to invest in priority sectors.
The Investment Opportunity Fund was targeted particularly at the projects of small and medium businesses in areas that need ‘levelling up’. The removal of this initiative may therefore have a direct impact on those who were planning on being able to access this funding as part of their business initiatives. Given the circumstances in which the Investment Opportunity Fund has been scrapped, it is also unlikely that it will be replaced by an alternative in the Autumn Budget and therefore those affected will need to look in other places to access the money they need.
Possible Tax Rises
It is widely speculated that the main way the government will recover funds for public spending is through tax rises. While the Labour manifesto promised no rises to income tax, National Insurance, corporation tax or VAT, a number of other taxes including business rates and Inheritance Tax were not mentioned. This could mean that the Chancellor looks towards these areas in order to raise funds for public spending.
In addition, we anticipate that the Chancellor may announce increases to Capital Gains Tax, bringing these rates in line with current income tax levels. Such a change would have a huge impact on UK businesses looking at disposing of assets or extracting profits as part of the Members Voluntary Liquidation (MVL) process. Currently, this process is incredibly tax-efficient as said profits are taxed as capital gains and subject to lower tax rates. Should Capital Gains Tax rates be increased to match income tax rates, those looking to close their solvent business via an MVL would therefore pay significantly more tax when doing so.
Changes To Business Asset Disposal Relief
In addition to possible business tax hikes, existing tax reliefs may also be altered to combat the high levels of overspending identified in the public spending audit. Such measures may again apply to UK businesses considering an MVL as it is anticipated that Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) will be one of the tax reliefs scrutinised in the upcoming budget. Business Asset Disposal Relief brings Capital Gains Tax down to 10% for qualifying businesses. Cutting this would subsequently help to restore some degree of public spending control, but the decision to do so would come at the expense of businesses that may be planning to benefit from the tax advantages of the MVL process.
Your Next Steps
With the government already implementing fiscal policy changes that affect UK businesses, and with more remedial measures to come in the Autumn Budget, now is the right time for company directors and business owners to prepare for life under the new government. Particularly if you are a retiring business owner or planning an MVL as a means of extracting your hard-earned wealth from a venture that has now reached the end of its life, it is worth thinking ahead and considering bringing your plans forward to ensure you benefit from the current rules regarding tax and solvent liquidations.
At Ballard Business Recovery, our expert team can help you consider how the implications of the public spending audit and upcoming Autumn Budget may affect your business and plans for the future. If you would like to be proactive and extract profits now via an MVL, we are on hand to help. Simply get in touch today to find out more.
