The UK’s technology sector has been flagged by the government as pivotal to sustainable economic recovery, post-Brexit and post-Pandemic. Following an additional crisis in external perception of the world’s fifth largest economy, now overtaken by Germany, it is understandable that ministers want to highlight areas of undisputed credibility. In tech terms, the UK still leads the charge in Europe. As home to eight of the world’s top 50 universities, companies can access a healthy pool of skilled talent, and research and development programmes. There is no shortage of software engineers on these shores.
Success in starting, scaling and selling UK businesses has been proven. London’s Silicon Roundabout, Canary Wharf’s Level 39 and other major cities, notably Bristol, Cambridge, Manchester and Cardiff, have produced several impressive digital start-ups, many of which have already been snapped up by large US or Asian corporates. The UK is among the top five markets for global venture capital funding activity, with more than 1,000 venture capital funding deals totalling $18 billion announced in the first half of 2022.
This a rare open door for businesses to push when it comes to available support, grants, tax breaks and advice – but they have to be nimble and ready for action on a number of fronts:
- Preparation for fundraising – financial content for Information Memoranda
- Efficient structures for founders and directors
- Support for tech grant applications
- Assisting in communications and negotiations with lenders
- Advice on R&D allowances
- Recognition of complex revenues
- Treatment of Intellectual Property and intangible assets
- Advice on structuring strategic alliances and major contracts
- Scaling strategies
- Due diligence on potential transactions
These don’t just apply to first timers. Successful tech businesses are resilient and able to ‘pivot’ or reinvent themselves in a global industry with seemingly endless possibility and diversity – internet security, Software as a Service, (SaaS), Platform as a Service (PaaS), carbon-ion batteries, trading platforms, e-commerce and telecoms solutions, to name just a few that we have worked with at Buchler Phillips.
It is impossible to overstate the importance of the technology sectors as a driver of global economic growth, opening new channels for commerce, supporting product innovation and helping the smooth running of our everyday lives. Supporting tech is a win-win for business owners and the country.
The only certainty is uncertainty
The weeks following the Autumn Statement, or quasi-Budget, have brought lower visibility to economic prospects. The fog has little to do with the chancellor and more to do with the scale of uncharted territory the UK economy is presently navigating. As recently as a week before the Autumn Statement, the Bank of England’s governor was dismissing any chances of interest rate cuts in the foreseeable future. At the end of November, the deputy governor, possibly the Monetary Policy Committee’s (MPC) greatest fan of lifting rates, won’t rule out cuts sooner rather than later if inflation continues to show signs of peaking.
Let’s not get too excited. The Bank still expects the present base rate of 3% to hit 4.5% by next summer, inflicting yet more pain on business and personal borrowers. Yet inflation is thought to have peaked at its 40-year high of 11%. In addition, strong demand for UK government bonds has pushed the pound as high against the US dollar and Euro as most economic stakeholders would like to see it, before it puts more pressure on the balance of trade. Furthermore, the UK is not technically in recession yet until a second quarter of downturn is officially measured and recorded in early 2023.
One area of relative certainty is that inflation won’t be tumbling anytime soon. The Ukraine War effect on energy prices and continuing, unrelated supply chain issues with Europe post-Brexit will keep prices high. Pay is also set to contribute to upward pressure, not least because of public sector demands and a 500,000-person labour shortage left by post-Covid non-returners (sick, early retirees and the like). The Bank of England has been more pessimistic about UK economic prospects than most business and academic forecasters. It’s now assuring observers that it recognises the potential effects of being too hawkish. Another small certainty is that the December MPC meeting will see vigorous debate.
Landlords and the housing market
Cheap mortgages following the 2008 financial crisis helped to fuel a boom in buy-to-let house purchases by those in a position to take on more debt. Despite lower rates, tighter borrowing rules ruled out other would-be landlords, as well as potential homeowners, and some sizeable portfolios were built, with several becoming incorporated businesses. Harder times are on the horizon for both residential landlords, tenants and those counting on equity in their homes to raise money.
September’s Stamp Duty cuts will be time-limited, ending in March 2025. The threshold at the threshold at which Stamp Duty is charged on residential purchases had been raised from £125,000 to £250,000, with the level for first-time buyers also up from £300,000 to £425,000 and to be used on purchases worth up to £625,000. More significant for landlords and second homeowners is halving the Capital Gains Tax annual exemption from £12,300 to £6,000 in 2023-24 and again to £3,000 in 2024. While some landlords may hold off selling, many are expected to leave the market after a series of slices off their margins from government and banks and will seek to off load their buy-to-let portfolios. This addition to the housing stock will contribute further to a softening of house prices, as supply and demand rebalance.
Those landlords who stay in the game will undoubtedly consider lifting rents to restore margins. However, they will see dividend allowances cut from £2,000 to £1,000 in 2023 and then to £500 from April 2024. By 2025, anyone receiving dividends above this amount, including many landlords who have incorporated, will pay tax on them at a rate depending on how much other income they receive.
It is no surprise that both corporate and personal insolvencies are gathering momentum, the deferred but inevitable consequence of bruising economic factors in the past three years. Nearly 2,000 businesses went insolvent in October, a 16% jump from September and a 38% increase on the same month last year, some no doubt tipped over the edge as post-pandemic support finally came to an end. The figures continue to be driven by Creditors’ Voluntary liquidations (CVLs), with 1,594 recorded in October 2022, up more than 50% on the pre-pandemic October 2019. Winding-up petitions presented by HMRC were behind 242 companies entering compulsory liquidation in the last month – four times as many as in October last year.
Of course, these statistics were already heading in this direction before interest rate hikes presented a new and unforeseen credit crunch for businesses. Many owner-managers of SMEs are being forced to increase levels of personal funding in their businesses, through selling their own assets, investing their own savings or even re-mortgaging their homes. This activity not only highlights funding difficulties for businesses, but also the personal risk borne by owners and directors. Some of those may also be personal debtors. While personal bankruptcies are still down on pre-pandemic levels, Individual Voluntary Arrangements are increasing: October 2022 figures are 13% higher than the same period in 2019.
All debtors, business and personal, must be proactive in seeking advice and engaging with creditors:
- Explore and exhaust all possible restructuring options before reaching for a CVL – your business may be capable of gaining a second wind, with the right breathing space
- Stay on the front foot with HMRC. Engage and explore a time to pay arrangement. Being unresponsive only aggravates tax authorities and hastens legal action
- Revisit repayment profiles for loans and propose realistic, achievable amendments. A loan that remains serviced, albeit differently, is still profitable for a lender.
- Consider the moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission.
- For personal debtors, explore the Debt Respite Scheme to allow time to address your situation. Information is available here.
Dealing with significant creditors, such as HMRC, banks and landlords, is a complex process to be navigated carefully. Businesses negotiating with these parties might consider professional advice and representation.
As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.
Our helplines below are open for free initial consultations.
Jo Milner 07990 816904
David Buchler 07836 777748
Let’s get to work!
About Buchler Phillips
Buchler Phillips is the UK’s oldest independent corporate recovery and restructuring firm, with a professional heritage dating back to the 1930s.
Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.
The firm is sector-agnostic but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; airline and aviation; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms.
Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals.
This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk