Impact of Autumn Budget 2024 on the commercial transactions market

In the lead-up to the Autumn Budget 2024, there was a flurry of sellers desperately trying to complete business disposals ahead of Rachel Reeves’ expected announcements regarding changes to capital gains tax (CGT). For individuals hedging their bets and managing to complete deals before 30 October 2024, it resulted in a welcome tax saving, given the Chancellor’s unusual step of raising CGT rates immediately, from 10% and 20%, to 18% and 24% respectively.

Significant changes impacting transaction volumes, timing and business valuations

Since then, it is fair to say there has been a slowdown in the number of commercial transactions. Whether we see another flurry of activity with smaller owner-managers trying to complete ahead of further CGT changes that apply from 6 April 2025 is yet to be seen. With the change in the CGT rate for gains that qualify for business asset disposal relief increasing from 10% to 14%, the maximum tax at stake is £40,000, which may not be significant enough to encourage sellers to complete before the new rate takes effect. In many cases, the annual interest earned on sale proceeds may exceed the additional tax payable.

What will almost certainly have a more significant impact on commercial transactions is the effect increases in employment costs scheduled from 6 April 2025 will have on deal values. With most deals priced on a multiple of annual earnings before interest, taxes, depreciation, and amortisation (EBITDA), the rise in employer National Insurance contributions (NICs) to 15% and the reduction in the threshold at which they are payable to £5,000, gives an annual cost hike of almost £1,000 per employee earning the UK average wage. The rise in the national minimum wage (NMW) at the same time will also impact EBITDA, with potential additional annual costs of over £1,500 per full-time employee. Upcoming changes to employment rights may also add to increases in employer costs.

The impact of these changes will be most significant for businesses in industries that employ large numbers of lower-paid workers, such as childcare, retail, leisure and hospitality, but all businesses should consider how they can offset these increases in operating costs to reduce the impact on profit margins and maintain business value.

It is not unusual for the findings of tax due diligence work to identify risks regarding the employment status of off-payroll workers and whether there is an obligation for engaging businesses to account for income tax and NICs under PAYE. The NICs increases compound this risk and this should be built in when calculating maintainable EBITDA and considering future cashflows. 

All of these factors may delay transactions if sellers find they are not getting as much as they expected from the sale of their business, due to lower transaction values and increased CGT costs.

Dramatic effect on business confidence

The recent Budget has also had a notable impact on market confidence. According to the British Chambers of Commerce, business confidence has declined significantly, with 63% of businesses citing tax, including employer NICs, as a major concern. The Institute of Chartered Accountants in England and Wales also reported a dramatic drop in business confidence, which fell to its lowest level since quarter 4 of 2022. This decline in confidence is attributed to the increased tax burden and anticipated rise in operating costs due to the upcoming NICs and NMW changes.

A cautious market, for now

The Autumn Budget 2024 clearly introduced changes that will impact businesses significantly. Anticipation of an immediate change in CGT rates led to a flurry of pre-Budget transactions, but the subsequent slowdown indicates a cautious market for now. The increase in employer NICs and the rise in the NMW are expected to affect EBITDA and deal values, potentially delaying transactions.

Additionally, the heightened concern about tax and the overall decline in business confidence suggest that businesses are bracing for a challenging economic environment. It remains to be seen how these changes will play out in the long term. However, given the recent reduction in the Bank of England base rate and expectations that it will fall further, many commentators are expecting an uptick in transactions in 2025. Now is the time to ensure that you and your business are in the best shape to seize future opportunities.

For more information, please get in touch with Michelle Harris or your usual 91̽»¨contact.