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UK finance chiefs finally know what’s coming: higher taxes.
Faced with a weak currency, rising borrowing costs and rising inflation, finance executives’ already fraught budget planning was put on hold earlier this fall as the country’s government announced sharp, debt-funded tax cuts, knocking the pound down to just 37- Then to withdraw it. Year low and financial markets gyrated. Now, under a new prime minister, the government is promising fiscal austerity with a rise in corporate tax rates to 25%.
Kwasi Kwarteng, then Chancellor of the Exchequer, answering questions in the House of Commons in October.
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Agence France-Presse/Getty Images
With the latest change, the corporate tax rate has flip-flopped four times in less than a year. The tax increase, from the current rate of 19%, will apply to companies with annual profits of more than £250,000, the equivalent of more than $307,000. The higher rate would raise around £18 billion in extra tax revenue each year, the government said in October.
A few months before the levy takes effect in April, finance executives say they welcome certainty — if not higher taxes — as they prepare their budgets for 2023. For a labor market tight from rising credit costs, with a host of other obstacles on the horizon, it’s less of a wild card.
“What I really disliked was that it would go down, then it would go back up, then it would go down and now it’s going up again,” said John Besson, finance director at Associated British Foods plc. British Foods plc finance director John Besson said. Corporate tax rate. “We can now plan ahead. We know it’s going up to 25%.
UK government changes bring corporate tax rates in line with other major economies. According to professional services firm PricewaterhouseCoopers, China and France both have similar rates, with the US federal level at 21% while Germany’s corporate levy is effectively 30%.
Associated British Foods, owner of fast-fashion chain Primark and other businesses, will see its full-year tax bill rise by around £20 million from around £300 million due to the tax changes, Mr Besson said. ABF, which reported a 22% rise in annual revenue to £17bn and a 46% rise in operating profit to around £1.2bn, said it would review its investment plans in the UK “We will certainly look at our investments,” Mr. Besson said. “But at this point, it doesn’t lead to a reevaluation of any investments we’re making.”
Primemark parent Associated British Foods will see its full-year tax bill rise by around £20 million due to the tax change.
Photo:
Yui Mok/Zuma Press
For London-based financial technology company Wise Plc, the clarity around corporate tax is helpful as the company looks to expand its business, said chief financial officer Matt Briers. “All we ask in the UK is that it be predictable and stable,” Mr Briers said.
Wise, which reported a 55% rise in revenue to £397 million and saw total revenue rise 63% to £416 million in the six months ended September 30, is working to maintain its profit margins and run its business more efficiently. Yes, Mr. Briers said. “The tax rate we certainly can’t control. … It’s controllable,” Mr. Briers said, referring to Vice’s plans to preserve profits and capital.
UK companies planning for 2023 are weighing factors such as access to labor – which is more limited after the UK’s exit from the European Union – inflation, borrowing costs and future tax liabilities, said Sharon Bell, European equity strategist at Goldman Sachs Group. Inc.
“Of course, clarity is a very useful thing,” Ms. Bell said of the increase in the corporate tax rate.
UK inflation rose to a 41-year high in October.
Photo:
Jason Alden/Bloomberg News
Costs to UK companies are rising on multiple fronts. Interest rates have risen to 3% and are expected to rise further, driving up borrowing costs. That follows a decade during which many companies were able to renew credit terms at cheaper rates than they previously had as the Bank of England eased monetary policy, Ms Bell said. Borrowing costs have risen for all businesses, she said, with European companies looking to refinance now facing rates of around 4% to 5%, up from 1% to 2% a year or two ago.
Inflation rose to a 41-year high in October, running at 11.1% as energy and other commodity prices rose. The pound remains at around $1.23, down more than 7% from a year ago.
The outlook for companies is getting darker. UK companies issued 86 profit warnings in the third quarter, up from 51 a year earlier and 64 in the previous quarter, according to EY-Parthenon, the strategy arm of professional services firm Ernst & Young. More companies issued their third or more warning in a 12-month period in the third quarter, according to Joe Robinson, turnaround and restructuring strategy leader at EY-Parthenon.
“Businesses are facing an unprecedented combination of shocks, including rising costs, sluggish demand and excess supply, making it increasingly difficult to balance competing priorities,” Ms. Robinson said, according to a release. “Increasing uncertainty means events can move quickly for companies that are showing signs of stress.”
But compared to a few months ago, the economic outlook is more stable, said ABF’s Mr Besson. Interest rates are high, but not rising as fast as they once were, and the US dollar has lost some of its strength, he said.
“Some of those moves, particularly the interest rate moves and the exchange rate moves, were pretty extreme,” Mr Besson said. “We’re in a better place.”
Write to Jennifer Williams-Alvarez at jennifer.williams-alvarez@wsj.com and Nina Trentmann at nina.trentmann@wsj.com
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