Budget changes will increase costs of MVLs and trigger more SME insolvencies - forecasts
16 December 2024
Tax changes introduced in the recent budget will lead to more insolvencies in 2025 and increase the cost of solvent business exits, say insolvency professionals.
The Budget was the first for the new Labour Government and put in place total tax rises worth £40bn.
Among those were an increase to the basic capital gains tax rate from 10% to 18%, with the higher rate to increase to 24% from 20%. This took effect from the date of the Budget on 30 October 2024.
Business asset disposal relief (BADR), formerly known as entrepreneur’s relief, will also rise. BADR allows business owners to pay less tax in some circumstances when they dispose of a business. Currently business owners pay 10% on all qualifying assets, but this rate will rise to 14% in April 2025 and 18% in April 2026.
The changes to BADR and capital gains were widely expected and may have led to some businesses taking preventative action, with some insolvency professionals saying that in the lead up to the budget they saw a significant increase in members’ voluntary liquidations (where a solvent business is wound down).
Chris Dyer, senior commercial banker specialising in insolvency at commercial bank Arbuthnot Latham, said that the changes to capital gains and BADR will impact both insolvency practitioners and solvent business exits.
“For insolvency practitioners, these changes mean that planning members' voluntary liquidations will require more strategic tax considerations and ensuring estate accounts are set up in plenty of time to receive and distribute funds. The increased capital gains tax rates will affect the tax liabilities of shareholders receiving those distributions from solvent liquidations so acting swiftly and diligently will be key.”
He added: “Solvent business exits will become more costly, potentially accelerating the decision-making process for business owners considering liquidation before the new rates take effect. Despite the higher tax rates, MVLs remain a tax-efficient method for closing solvent companies, especially for those with substantial retained profits.”
Further reforms include changes to national insurance and the minimum wage, which will take effect from April 2025. The rate of NI that companies pay is to increase from 13.7% on salaries above £9,100 to 15% on salaries above £5,000.
The legal minimum wage for over 21s will rise from £11.44 to £12.21. For 18–21 year-olds the rate will increase from £8.60 to £10 as part of a long-term plan to move towards a ‘single adult rate’.
The increases will detrimentally impact a swathe of SMEs already operating on thin margins as a hangover of from inflationary pressures and the higher cost of servicing debt, said Stephen Jacobs, director for bank support and business recovery at asset valuer and seller Christie and Co.
“Further Budget impositions, [including] a reduction from 75% to 40% for business rates relief, will effectively double the liability for retail and leisure businesses, and the introduction of business rates for private schools and VAT on school fees will be an additional burden for the education sector.
“We foresee that these factors will lead to a rise in business distress and failure resulting in a steady increase in demand for restructuring and insolvency services.”
John Cullen, insolvency partner at Menzies, said: “The impact of the recent budget won’t be felt for some time yet and, unless there is a real focus in helping certain sectors, it would be unrealistic to think that corporate insolvencies will go anywhere but up during the course of 2025. With growth not being as strong as anyone would’ve hoped, only the most optimistic of forecasters would suggest anything different.”
After the Budget, the Institute of Directors said that its economic confidence index had fallen to a level lower than in the early days of the Covid-19 pandemic.
