Press Release
Businesses’ profit expectations at three-year low as Autumn Budget approaches
17 Oct 2024
New research from leading business and financial adviser Grant Thornton UK LLP finds that mid-market business confidence is faltering ahead of the Autumn Budget on 30 October, as profit growth expectations sink to a three-year low and confidence in their funding position continues a downward trajectory since the beginning of the year.
The firm’s latest Business Outlook Tracker*, which surveyed 603 UK mid-sized businesses in October, finds that just over one third (39%) of respondents expect their businesses’ profits to increase over the next six months. This is the lowest level seen since December 2021 and a significant -30 percentage point (pp) drop compared to February this year (69%).
With interest rates remaining high at 5%, despite inflation falling, businesses’ confidence in their funding position also continued a steady decline in October. Confidence dropped -3pp compared to July, and -9pp compared to February.
Whilst overall confidence in the economy remains stable, there has been a slight increase in businesses’ pessimism about the outlook of the UK economy across this year. As we approach the new Government’s first Budget, 13% of businesses are pessimistic about its outlook, a +4pp increase compared to February 2024.
Commenting on the findings, Schellion Horn, Head of Economic Consulting, Grant Thornton UK LLP, said:
“The low levels of growth expectations are in line with what we’re seeing in the market. Whilst the economy has shown more resilience than many expected and we managed to avoid a recession, in recent months the Government narrative has been increasingly pessimistic about the state of public finances and the spending gap, warming up businesses and the financial markets to the expected tax changes in the Budget. However, the downbeat tone has undoubtedly impacted business’ confidence around the economy and their own profits, which in turn hinders investment and growth.
“The symbiotic relationship between the economy and the mid-market should not be underestimated. Earlier this year our analysis of UK businesses’ labour productivity, when measured as average annual revenue per employee, showed that UK mid-market business productivity has surpassed that of larger and smaller companies for the last six years, making them the engine room of the UK economy. At the International Investment Summit, we heard the good news about several large corporate businesses planning significant investments into the UK but given the mid-market's vital contribution to the UK’s productivity, it’s important that the Government also prioritises building mid-market confidence by incentivising their ability to invest in growth.
“As the Government narrative changes post-Budget, focusing more on Invest 35 and the Industrial Strategy, which are designed to encourage investment and productivity, we expect to see business confidence rebound.
“As for the Budget, business leaders will be looking to understand the impacts of any changes on their finances and running this through their business plans. This will allow them to mitigate the impacts in some cases or to adjust their businesses accordingly.”
While many businesses are already feeling unsure of their financial position, the research also finds that almost all of those surveyed expect to see some taxes/costs to businesses increase over the next 12 months. The taxes that businesses feel would pose the biggest challenge to them, if increased, are found to be:
* Environmental taxes (30%)
* Capital Gains Tax (30%)
* Corporation Tax (29%)
* Business Rates (29%)
All the businesses surveyed are now looking to the government for support. The three areas that businesses would most like to see the government focus on in the Budget are, tax incentives for businesses to invest in:
Capital (30%)
Skills (28%)
R&D (27%)
Abby Agopian, Head of Tax Policy at Grant Thornton UK LLP, said:
“That businesses are braced for tax rises is not unexpected as the Government has not shied away from the narrative that there are tough fiscal choices to be made in order to fill what’s been described as a substantial black hole to balance the books.
“The expectation is that there will be little fiscal room for enhancing the current suite of business tax incentives. The main business tax offer at this Budget is anticipated to be a tax roadmap for businesses which it is hoped will confirm previous statements from the Government that the current capital allowance incentives, including full expensing, and R&D tax incentive rates will be maintained. Sticking to the theme of maintaining stability, the centrepiece of the roadmap is expected to be the Government’s pledge to cap the headline rate of Corporation Tax at 25 percent.
“The list of taxes that would pose the biggest challenges to business if increased extends well beyond Corporation Tax alone, with Environmental taxes and Capital Gains Tax topping the list, and there remains little clarity on what this wider future business tax landscape could look like post 30 October. There is a risk that those looking for wider clarity on this at the Budget may be disappointed, as it’s understood that the focus of the business tax roadmap will be Corporation Tax, with Reeves referring to it at the International Investment Summit this week as a ‘corporate tax roadmap’.
“On environmental taxes, the Government committed in their manifesto to implementing a Carbon Border Adjustment Mechanism on imports into the UK of certain carbon-intensive goods and businesses await the outcome of the consultation which took place prior to the election. Beyond that, it is not known whether, and if so how, the current Government may use the business tax system for the UK’s transition to net zero. For Capital Gains Tax, business owners and investors are currently faced with uncertainty over what (if any) changes to the regime could be announced and when these potential changes would come into effect.”
*The Business Outlook Tracker is a bi-monthly survey of UK mid-sized businesses (defined as annual revenue between £50million - £500million). Censuswide, on behalf of Grant Thornton UK LLP, surveyed 603 senior decision makers in mid-market businesses between 27 September 2024 – 7 October 2024.
