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What You Should Know About the 2018 Budget’s Effect on M&A

Posted on October 31, 2018 By in Entrepreneur + SME + UK M&A + 2018 Budget + Chancellor

Chancellor Philip Hammond this week announced the 2018 Budget, the last one before the UK leaves the EU. As negotiations continue over a Brexit deal, uncertainty surrounds the UK economy but Hammond appeared confident that a good deal will be secured and that austerity is coming to an end.

In the context of business, the Budget was largely positive – for example, rates for small businesses are to be cut, there will be a temporary increase in the annual investment allowance from £200,000 to £1m, and start-up loan funding is to be extended to 2021. As well, new enterprise allowance is to be extended for benefits claimants to help get their businesses off the ground.

Negatively affected by the budget are tech giants such as Google and Facebook with the announced introduction of a Digital Service Tax but, overall, the Budget is promising for SMEs and start-ups

But is the Budget equally pleasing for M&A?

Entrepreneurs’ Relief

Entrepreneurs benefit from a reduced tax rate of 10 per cent, compared to the normal rate of 20 per cent, when selling shares in a personal company, which helps the business owner to make substantial savings. There was speculation whether this relief would be abolished with the Budget and the good news for entrepreneurs is that they can still benefit from the reduced tax rate but, from 2019, entrepreneurs must own a business for two years before selling in order to qualify for the relief, which is up from one year previously.

This is to prevent an abuse of the rules and is unlikely to affect genuine entrepreneurs, with the chancellor stating they are the “heart of our dynamic economy”.

Targeted Relief for the Cost of Acquiring IP-Rich Businesses

From April 2019, the government is looking to introduce targeted relief for the cost of goodwill in the acquisition of businesses. From November 2018, the government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code.

As can be seen, the Budget is largely positive in terms of tax relief concerning the buying and selling of businesses – while the rules have become stricter in terms of entrepreneurs’ relief, this is much more preferable to the alternative of abolishing it.

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M&A and U.K. start-ups: where next for the beginners?

The U.K has a vibrant start-up culture, with an estimated 600,000 new companies set up in 2015. A whole host of factors have powered this part of the economy. Many U.K. industries are world leaders, for example the recruitment sector, while the E.U. freedom of movement drew on human capital from across the continent. The development of new challengers in different industries and sectors plays a key role in stimulating M&A activity, with buyers attracted for reasons from exciting IP to up-and-coming talent. Established companies may find it difficult to truly innovate in-house, so M&A may also give the opportunity to roll-out acquired new products or services in support of their existing operations.

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