Around three weeks ago, chancellor Jeremy Hunt unveiled a tapestry of fiscal measures and updates to the nation’s economic policy in the Spring Budget of 2024. This budget is a reflection of the government’s balancing act between economic recovery, social support, and long-term fiscal sustainability. From tax adjustments to healthcare investments, each facet of the budget bears implications for business owners, buyers and the broader economy. 

It is worth noting that at this point, amidst one of the most serious cost of living crises the country has seen in decades, the UK is already in a state of technical recession. Moreover, high interest rates from the Bank of England, post Brexit supply chain issues and geopolitical ramifications have added to significant challenges within the UK’s business environments. Let’s take a closer look at some key findings from the budget, and understand how it can impact the acquisition strategy of those looking to turnaround struggling businesses. 

National Insurance Cut

At the forefront of the budget’s tax reforms is a notable 2 percentage point reduction in National Insurance contributions for both employees and the self-employed. This move, while providing relief for workers, is strategically juxtaposed with the freeze on income tax personal allowance and higher rate bands until 2028. Despite the cut, the freeze in income tax thresholds presents a double-edged sword, leading to what economists term “fiscal drag” — effectively resulting in higher tax revenues for the government as incomes rise with inflation.

What this means for Distressed Business Buyers

The impact of this strategy for current businesses will depend on their specific circumstances. On one hand, a lower National Insurance contribution could improve the profitability of labour intensive businesses. On the other hand, the freeze on income tax thresholds could lead to higher tax bills for the business owner if their income increases due to the business turnaround. This could reduce the disposable income available for reinvestment in the business. 

The National Insurance cut will likely have a bigger impact on industries that are more reliant on labour compared to others, including the following: 

Hospitality, Leisure and Retail: These sectors often have lower wages and a high number of employees. A reduction in National Insurance contributions could be significant for profitability.

Manufacturing: While automation is increasing, many manufacturing processes still rely on manual labour. The cut could improve margins in labour-intensive manufacturing.

Construction: Construction sites typically have a high number of on-site workers, making them potentially more impacted by the National Insurance change.

Debt Relief Order Modifications

Proposed alterations in the Spring Budget Report for England and Wales outline significant modifications to Debt Relief Orders (DROs), aimed at streamlining access to debt relief for struggling individuals. The proposed changes are:

• Elimination of the £90 application fee effective from April 6, 2024.
• Expansion of the maximum debt threshold from £30,000 to £50,000.
• Doubling of the allowable value for motor vehicles from £2,000 to £4,000 starting June 28, 2024.

The main aim behind these is to help debtors while seeking necessary assistance. Getting rid of the application fee means that more people can seek help with for their finances without having to pay anything. Also, the expansion of the maximum amount of debt for individuals means more people will be able to apply for a DRO, even if they have a lot of debt. In simple terms, these changes are making DROs more accessible for people with low incomes.

What this means for Distressed Business Buyers

Since DROs are for personal debt, these changes won’t directly affect acquisition strategies for distressed businesses. Businesses facing insolvency typically go through administration or liquidation, which are different from DROs, however, distressed business buyers should consider this when evaluating potential acquisitions. 

Businesses in sectors more sensitive to consumer spending might be riskier. If the business you’re considering relies heavily on employees who might be struggling financially, the changes to DROs could be relevant. Easier access to debt relief could potentially improve employee morale and retention.

Business Measures

The budget includes specific measures that focus on certain industries. For instance, it extends tax relief for the performing arts sector, which has been struggling due to the pandemic. Additionally, there are changes to the VAT thresholds that affect small businesses. One significant change is the removal of tax relief on mortgage payments for furnished holiday lets. This indicates a change in the government’s approach to housing dynamics. It could have an impact on the rental market, possibly leading to more long-term rentals becoming available as the incentives for holiday lettings change.

What this means for Distressed Business Buyers

Performing Arts: The tax relief extension could make these businesses more attractive by improving their profitability. Distressed businesses in this sector might become more viable acquisitions.

Small Businesses: Changes to VAT thresholds could impact some small businesses. It’s important to factor this in when evaluating businesses in this category, especially those nearing the VAT threshold.

Furnished Holiday Lets: The removal of tax relief might disincentivize ownership, potentially leading to more properties entering the long-term rental market. This could benefit distressed businesses looking to acquire properties for buy-to-let purposes.

For businesses in affected industries (especially small hospitality businesses), conducting a more thorough financial analysis to understand the impact of the budget measures will go a long way in bullet proofing distressed acquisition strategies. 

Housing and NHS Funding

The adjustments to capital gains tax on the sale of residential properties are intended to encourage an increase in the supply of housing. However, these changes may have implications for rental markets and strategies related to property investment. On the other hand, while the extra funding allocated to the NHS is appreciated, it does not fully tackle the underlying issues that the healthcare system is grappling with. Specifically, there are ongoing challenges related to infrastructure and the need for updated equipment within the NHS that remain unaddressed despite the funding injections.

What this means for Distressed Business Buyers

The impact of these changes only adds to more uncertainty in the housing and healthcare industries. While it might increase supply, it could also affect rental prices depending on market dynamics. The additional funding for the NHS, while relevant to the overall economy, likely has a limited direct impact on most distressed business acquisitions. The property investment and management industry could see the most significant impact due to potential changes in the buy-to-let market.

This uncertainty requires a cautious approach when it comes to distressed business acquisitions in the housing sector. Overall, distressed business buyers should:

Monitor Housing Market Trends: Stay informed about the impact of capital gains tax changes on property availability and rental prices.

Focus on Targeted Acquisitions: Distressed business buyers might consider focusing on distressed property management companies or businesses with significant buy-to-let portfolios if the market becomes more favourable for acquisitions.

Refine Acquisition Criteria: Consider incorporating potential changes in the buy-to-let market when evaluating distressed businesses in the property sector and conduct thorough due diligence during these evaluations

Looking Ahead

Utilising market research and data analysis to make informed decisions about potential acquisitions is the way forward to set the pace for the rest of the year. By carefully navigating this evolving landscape and adopting a strategic approach, distressed business buyers can still find opportunities for successful acquisitions in Q2 2024.