What implications are there for design consultancy businesses as a result of the measures announced in the Chancellor’s Pre-Budget Report and Comprehensive Spending Review last Tuesday?
All-round bad news: while the main rate of corporation tax will be cut from 30 per cent to 28 per cent, this is slyly being funded by increasing it for small companies – which means most design consultancies – from 19 per cent to 22 per cent. The increase from ten per cent to 18 per cent for capital gains tax will hit anyone planning to sell their consultancy, as well as anyone holding EMI share options. More costs will be incurred via a supplementary business rate, and income-splitting between spouses will be legislated against next year.
Jim Surguy, Senior partner, Harvest Consulting
The abolition of taper relief has grabbed the headlines. Paying 18 per cent tax instead of ten per cent is disappointing for consultancies that have sold and are doing earn-outs, and for those thinking of selling. But 18 per cent is still a lot less than 40 per cent. Don’t be panicked into selling your group before April 2008 – that’s the tail wagging the dog. All your share schemes must be revisited. Frankly, the budget is a big red herring – far more important is the credit crunch that is damaging businesses.
Ian Cochrane, Chairman, Ticegroup
All cats are affected – fat or thin. The Pre-Budget Report brought unwelcome news to most parts of the design world. The effect of the change in capital gains tax will be felt by groups that are not yet ready for sale – don’t sell too soon; those that are looking for a sale – watch out for the stampede; those that have sold and are holding shares in the buyer company – sales before April 2008 may depress the share price; those in the course of earn-outs – take advice; and holders of buy-to-let portfolios, that will see a reduction in their tax bills.
Roger M Alexander, Chairman, Lewis Silkin
The aspect of the Budget which will affect design consultancies the most is the change to capital gains tax. The merger and acquisition market is very active currently and this change is likely to create a rush to complete sales before April 2008. Additionally, design groups have incentivised key senior employees in the past by allowing them to become shareholders. The new effective rate of tax makes this a less attractive option, which may well affect their ability to keep key people.
Mandy Merron, Partner, Willott Kingston Smith