UK businesses face a challenging tax and economic landscape driven by tax rule changes and expanded reporting requirements. Couple this with both a complex macroeconomic backdrop and new government investment priorities, and the operating environment only grows more complex.
The government’s autumn budget also featured an unexpected increase to National Insurance contributions, with business optimism falling to a two-year low, according to Deloitte’s Q4 2024 CFO survey.
“For many businesses, the tax rises announced are a large cost and they are now trying to work out how to manage them,” reflects Amanda Tickel, head of tax and trade policy at Deloitte.
Some will try to maintain margins by increasing their prices, but for others this is manifesting in a greater focus on improving the effectiveness of their existing workforce; working to find efficiency gains and cost savings by making better use of offshore service centres or automating more labour-intensive processes through technology like AI.
Even though businesses are used to responding to surprise tax changes, this rise is particularly challenging for businesses with larger workforces because it is not just the percentage increase - to 15% from 13.8% - the government is also reducing the threshold where employers start making National Insurance contributions (down to £5,000 from £9,100).
The national living wage is also rising which, coupled with the potential impact of enacting the employment rights bill, also means dedicating more time and resources to compliance.
“These three things together are a cost increase, and that’s why the cost reduction agenda is accelerating,” says Tickel.
Other tax changes are having an impact on specific sectors. For example, not only is the retail, hospitality and leisure sector particularly exposed to the National Insurance and living wage changes, the sector is also facing a cut to the business-rates relief regime, with the government announcing plans to cut the relief to 40% from 75% in April, before ending it entirely in 2026.
“That’s quite substantial,” says Eddy Tam, an economic lecturer at King’s Business School in London. “Our research found that there is quite a large effect from the relief in promoting occupancy and reducing vacancies on the high street. Scaling back from 75% to 40% is going to be a challenge for many retail shops.”
While the government plans to end the business rates relief for the sector, it is proposing to permanently cut business rates for such properties.
However, there are reasons for optimism. “With cost control to the fore in the wake of the budget, CFOs have trimmed expectations for corporate investment, discretionary spending and hiring in the next 12 months. But despite a fall in business confidence, we expect to see UK growth picking up over the summer on the back of easy fiscal policy and interest-rate reductions, with GDP growth likely to exceed the 2024 outturn and the performance of the euro area.” says Ian Stewart, chief economist at Deloitte.
In addition, the government has announced plans for its Invest 2035 industrial strategy to support high-growth sectors such as advanced manufacturing, clean energy, life sciences and financial services, among others.
“Ultimately, growth is driven by innovation,” says Simon Heath, a partner at UK investment firm Heligan Group. “If the government supports greater research and development through tax allowances, this will encourage firms to invest and find new solutions that can drive domestic and international growth.”
Unlocking innovation and growth
The treasury will continue its relief for research and development, offering tax incentives for innovation.
“In a positive move, businesses will still be able to claim significant R&D relief and patent box relief to support investment,” adds Tickel.
At the same time, the government wants to create a more certain tax environment for corporations, having released its corporate tax roadmap alongside the budget in October. This included capping corporation tax at 25% for the duration of the parliament and measures such as advanced assurances for R&D claims to give businesses confidence to invest in the future.
“It’s definitely not all doom and gloom, but it does depend what industry you are in,” says Tickel. “If you’re in an industry which is highly dependent on a lower-paid workforce, you are facing a significantly bigger proportion of cost, so your agenda is going to be about how to manage that increased cost base and still remain competitive and profitable. If you’re in the innovative research space, for instance, you will be feeling quite confident that the government is trying to create a more supportive environment for you.”
“We strongly welcome the corporate tax roadmap,” says Kurt Burrows, group head of tax at Anglo American. “Confirmation that there is expected to be stability in key aspects of the tax system such as the headline rate, patent box, R&D relief rates and investment/expensing allowances is very helpful. Similarly, we welcome the consultations announced in the roadmap, and particularly the opportunity to have an advanced certainty mechanism.”
While the Invest 2035 strategy is potentially encouraging, businesses want to see more detail about what this will actually look like in practice - details that are not due until the spring.
“We now have a bit more certainty on the bigger tax rises, but what we don’t have is more certainty on the overall environment for the UK in terms of the investments that are going to happen and how business can engage with those,” says Tickel. “It would be helpful for businesses to have early sight of what the ambition is with the industrial strategy, so that business can start building their plans.”
Some sectors are calling for more appropriate tax consideration. For instance, the absence of changes to the bank corporation tax surcharge continues to disproportionately impact small and mid-tier banks in the UK, says OakNorth Bank’s head of finance Ankur Singh.
“These institutions play a crucial role in attracting global investment, fostering competition, driving economic growth and creating jobs within the UK,” she says. “However, maintaining a bank surcharge that significantly exceeds equivalent rates in other international jurisdictions undermines the sector’s competitiveness.”
This threatens to hinder growth and diminish the financial services industry’s global appeal, says Singh. To address this, OakNorth suggests a significant increase in the threshold for applying the surcharge, aligning it with regulatory thresholds such as the £50bn retail-deposit threshold used for the leverage ratio.
“Such a change would alleviate the tax burden on mid-tier and specialist banks, enabling them to strengthen their capacity to support economic growth through increased lending and enhanced competitiveness,” says Singh.
Navigating reporting and uncertainty
Businesses are also calling for more pragmatism when it comes to tax-reporting requirements given that the level of transparency and data needed is becoming more onerous and time-consuming to manage, particularly given the introduction of the OECD’s new pillar two minimum tax rules, which will impact businesses with consolidated annual revenue of over €750m.
“Businesses are happy generally to be transparent, they just want it to be efficient,” says Tickel. “The more you have to report and file, the more data you have to find and collate. As long as the tax authority does something with it, that’s fine. But if it’s reporting for reporting’s sake, then that just needs to be balanced to make sure it’s not impacting productivity.”
International developments are also creating wrinkles for the business operating environment, especially around trade as businesses consider the potential impact of US tariffs, ongoing access to markets and challenges around supply chain organisation.
One challenge that businesses often struggle with is that trade strategy is not usually a specific role within the organisation but instead spread across different business functions, which can lead to an incoherent approach to trade and missed opportunities.
“There needs to be more focus from business around understanding trade corridors, trade and market access and export opportunities,” says Tickel. “It’s rare that organisations have a trade strategy or trade policy lead - it may be managed within the logistics team or with legal counsel or with the CFO or with the tax director, so it can be a little bit disjointed.”
Businesses also need to contend with a constantly evolving tax landscape that often extends beyond the headline announcements.
“There is a lot of change and consultations going on, so there’s a need for business to understand what the priority areas are so they can engage with them,” says Tickel. “There’s always a reaction to an announcement like the National Insurance rise but you’ve got to also have an eye on what’s coming next.”
Given this dynamic operating environment, businesses need to ensure tax and compliance changes remain high on the boardroom agenda, while also paying close attention to the government’s trade and investment policies for any opportunities that could unlock fresh growth for UK businesses in the months ahead.
Five actions for businesses to take today
Deloitte’s head of tax and trade policy, Amanda Tickel, highlights five actions that businesses should take today to mitigate potential tax challenges.
Focus on cost reduction
Businesses are facing a triple squeeze from higher National Insurance contributions, a rising minimum wage, increased compliance obligations and beefed-up workers’ rights.
That combination is pushing cost-reduction strategies higher up the C-suite agenda. Many businesses are responding to this by trying to find ways to use their workforce mix more effectively (optimising their outsourcing strategy, for example) while also exploring where AI can help increase automation and boost efficiency.
“There are a number of things businesses are doing that are focused around the effectiveness of the workforce they’ve got - this isn’t ‘we’re going to make people redundant’, it’s more ‘how can I make best use of the workforce I’ve got?’”
Engage in tax consultations
The UK tax environment is expected to remain in flux for the foreseeable future, with the government outlining new tax consultations and sign-posting more further down the line.
For example, current open consultations include the tax administration framework review, which is examining HMRC’s approach to non-compliance and how it allows for correcting taxpayer mistakes. It is also consulting on simplifying the taxation of offshore interest and seeking views on draft regulations around international tax compliance.
“Businesses have got to understand what the agenda is and how to engage with that so they can have an influence on policy.”
Horizon-scan for change
Given the fluid tax environment and ongoing consultations, businesses need to keep an eye on potential changes to the tax system that go beyond the newspaper headlines. For instance, the government is also introducing a number of levies in areas such as gambling and new building safety.
In addition, the CBAM (Carbon Border Adjustment Mechanism) scheme is introducing a carbon levy on imported goods that are emissions intensive.
“All of these things are also coming down the pipe, so while the Chancellor says she will not announce further big tax increases, the tax system is still changing by the week, so it’s important to stay focused on what is coming next.”
Formalise your trade strategy
Not only are elevated geopolitical tensions reshaping international trade relationships, the UK government is also negotiating new trade agreements, such as access to the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), a free-trade deal mainly among Pacific Rim countries. This backdrop means it is vital for trade strategy to move higher up the C-suite agenda.
“Organisations need to make a conscious decision as to who is accountable for trade strategy and build that into organisational design, and make sure that the board is thinking about all of this.”
This means understanding how the geopolitical landscape and UK trade policy is impacting the business today but also how it will impact in the future to better identify potential risks and opportunities.
Invest in the right tech
Businesses need to ensure they have the right tech and systems in place - not just as part of the broader cost-reduction agenda but also to keep pace with growing compliance and reporting requirements, as well as HMRC’s tax-modernisation programme.
Those reforms will likely have an impact on businesses if HMRC starts requiring more electronic invoicing or electronic filings as businesses will need to invest in software or build new tech in response.
“Tax isn’t just about legislation, it’s also about technology these days, so this is something to actively plan for.”
UK businesses face a challenging tax and economic landscape driven by tax rule changes and expanded reporting requirements. Couple this with both a complex macroeconomic backdrop and new government investment priorities, and the operating environment only grows more complex.
The government’s autumn budget also featured an unexpected increase to National Insurance contributions, with business optimism falling to a two-year low, according to Deloitte’s Q4 2024 CFO survey.
“For many businesses, the tax rises announced are a large cost and they are now trying to work out how to manage them,” reflects Amanda Tickel, head of tax and trade policy at Deloitte.
Some will try to maintain margins by increasing their prices, but for others this is manifesting in a greater focus on improving the effectiveness of their existing workforce; working to find efficiency gains and cost savings by making better use of offshore service centres or automating more labour-intensive processes through technology like AI.
