Thursday November 7, 2024

Unpacking Rachel Reeve’s first Budget as Chancellor

Lasting 77 minutes in total, Rachel Reeves first Autumn Budget as Chancellor was the longest since 2010 – and it certainly contained plenty for retailers to take notice of.

As we enter the key months of the Golden Quarter, it’s imperative that brands across the sector take note of the key changes announced and carefully consider what impact they might have on their operations in the months ahead.

Employer considerations

Perhaps the most controversial decision made by the Chancellor was to raise employer’s National Insurance Contributions (NIC) to 15%, alongside cutting the earning threshold at which businesses need to start paying the tax from £9,100 to £5,000. Plans were also announced to increase the National Living Wage by 6.7%.

Despite being widely trailed in the run up to Reeves’ speech, this one-two punch will still hurt retailers that are already contesting with inflated input costs and low consumer confidence. The British Retail Consortium estimates that the measures will add an estimated £367 million onto retail employers’ wage bill.

This will inevitably impact cash flow and increase the cost of developing and maintaining a workforce – although the impact of the NIC rise on the smallest retailers will be partially offset by steps to increase the Employment Allowance from £5,000 to £10,500.

With these changes set to come into force in April next year, it’s important that firms start to act now and consider how they are likely to impact operations – especially those in the mid-market that don’t qualify for Employment Allowance and remain most vulnerable to a spike in operating costs.

Areas that are most likely to be under review are capital investment and hiring plans, as well as the capability to continue to invest in their workforce – whether that’s pay rises or skills training. Here, businesses will need to walk a fine line between continuing to retain and attract the talent they need to thrive, and managing overall costs.

Business Rates – change in sight?

On a more positive note, retailers across the country will have breathed a sigh of relief at the news that the Business Rate relief scheme, which was introduced during the COVID pandemic to protect retail, leisure and hospitality businesses, will be extended for another year.

The relief will continue to apply up to a maximum £110,000 per business – although the current 75% discount will be reduced to 40% as of April 2025.

Alongside this, the Chancellor also announced plans to review the existing business rates system, with a view to permanently lower the multipliers for retail, hospitality and leisure properties from 2026/27.

Once again, this will be welcome news for the sector which has long called for reform to level the playing field between brick & mortar operators and ecommerce specialists.

However, the promise of change in two years’ time will do little to reassure those brands that face the prospects of higher operating costs in the immediate future.

Sector outlook

Consequently, the Golden Quarter will be more important than ever for retailers looking to build the resilience to weather the coming storm.

Promisingly, new research from media agency Havas indicates that over two thirds (67%) of Brits plan to spend the same or more this year than last, and, in a boost for those firms with a strong bricks-and-mortar presence, that 53% of respondents eager to return to in-store shopping[1].

However, the full impact of the Chancellor’s plans to boost Government borrowing on gilt yields is still playing out, and consumers will know all too well after Liz Truss’ mini-budget the impact that the bond market can have on mortgage prices and ultimately discretionary spend.

It’s going to remain essential for management teams to be vigilant for any cracks in their operations and take swift action if they see any issues.

Possible paths forward could mean merging with another business to create a more resilient organisation in terms of size, asset value and market share. Indeed, we expect to see a rise in consolidation over the coming months, as retailers review their options in this new landscape.

It’s important that the businesses that do pursue this route take into account changes to the Capital Gains Tax rate, also announced in the Autumn Budget. While the new rate of 24% is likely not material enough to deter deal activity in the long-run, dealmakers in the retail sector must make sure to take the increase into account when considering consolidation strategies.

Seeking advice from a restructuring professional can often be the best option for businesses unsure of how to proceed. It can understandably be difficult for owner managers to admit when their business is struggling – but engaging with an expert can help shed light on how business leaders can best navigate these difficult conditions and prepare for a return to growth in the future.

[1] https://www.marketing-beat.co.uk/2024/09/02/golden-quarter-havas-christmas/