A quiet Budget but detailed changes to follow next week

Frances Edwards, Tax Director, Professional Services

It has been a turbulent few months for Professional Service firms with the uncertainty of firms’ future cashflows following the proposed changes to basis period reform, subsequent cost increases of the health and social care levy, and the increase in corporation tax to 25% in April 2023. The lack of changes being served up by the Budget will come as a welcome relief.

Having said that, no doubt the extension of the £1m annual investment allowance until March 2023 will benefit firms – many Professional Service firms have been investing in their IT or office set up following the pandemic and relief for longer term investment plans is encouraging.  

The Budget did bring some additional details relating to basis period reform, including the expected impact to the exchequer and confirming the already announced implementation date in the 2023/24 tax year: a welcome deferral of a year. It is expected that a number of changes to the draft proposals including more flexibility on how overlap can be utilised be included in further details due to be published in early November.

It’s still important for firms to consider the cash flow impact of basis period reform as it has only been delayed by a year. While this reform will look at the amounts taxable in the year, it is also likely that we will see the timely tax payments consultation bring tax payments forward giving a double hit to cash flows so planning and understanding the impact on the capital in the business will be key.

At a macro level, there were some positive messages around the economy as a whole including investment and growth. However, the expected inflation and wage rises will also be of note to Professional Service firms who no doubt will already be managing a hardening employment market with a war for talent and what’s been described as the ‘great resignation’ of those experienced professionals looking at alternative careers. Managing the people costs for people businesses will remain at the top of all professional services firms’ agenda’s.

The debate around optimal operating structures, partnerships v corporate v hybrid structures continues and changes. Basis period reform may be seen as diminishing the value of an LLP while, conversely, the combination of increased corporate tax rates to 25% and the higher dividend tax rates keeps extraction of profits from a corporate looking costly – and then there is the impact of the increase National Insurance costs to consider. This creates a complicated model that is ever changing.

Finally, whilst it’s our role in life to constantly evaluate the financial impact of changes, it remains clear that the culture of a firm is still arguably the most important factor when considering business growth and success. The much touted phrase, ‘culture eats strategy for breakfast’ applies here, so when considering the impact of these changes, we need to listen to our people and ensure changes best drive our businesses forward.

Ensuring you focus on people to drive engagement and also have an operational structure that is fit for the future will enable strong Professional Service firms to succeed.

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