COVID-19 and the UK Budget 2020

12th March 2020

The 2020-21 UK Budget has been announced by Chancellor Rishi Sunak.

The Budget is focused on providing support to entrepreneurs, stimulating the economy and safeguarding jobs amidst the economic impact faced by the Coronavirus pandemic (COVID-19). With this in mind Mr. Sunak pledged a £30bn package to help the British economy respond to the outbreak and warned of there being a ‘significant impact’ in the short term.

Having spoken to a number of our clients across the globe, it is clear the current COVID-19 pandemic will have a number of knock on effects on the fund management industry, including;

  • Fundraising – while global travel is becoming increasingly restricted, and more and more businesses begin to clamp down on external meetings, we expect to see a slowdown in fundraising. This is especially the case for funds currently on the road targeting capital from areas most affected by the outbreak.
  • Exits – as global markets stall, exits are beginning to look tougher. In the short term, confidence in public markets is down, and travel restrictions will make it harder to perform proper due diligence on both companies and assets. The longer term effects remain to be seen.
  • Cash Flows – as consumer spending decreases, cash flows for a number of businesses may start to reduce. This will have an effect both on private equity funds, but also for real estate owners relying on turnover based rents. Tenant risk may start to increase in the longer term.
  • Hiring – if the current environment continues, hiring of new staff may become increasingly difficult. This is particularly true as more and more people become reluctant to travel.
  • Cyber Security – businesses without proper ‘Business Continuity Planning’ in place may start to see gaps in their cyber-security as more and more people start working from home.

However, inevitably and despite the desperately difficult conditions surrounding the current distress, there will be opportunities for those managers sitting on significant levels of dry powder. We expect to see some businesses encountering cash flow issues, and subsequently a number of forced divestments in order to raise funds. A more prolonged downturn could present further opportunity.

With this backdrop in place, we have summarised the key points from the Spring Budget 2020 that will be of most relevance to our clients and the wider industry.

Financial Services Industry and Fund Management:

  • Review of the UK funds regime – The government will undertake a review of the UK’s funds regime during 2020. This will cover direct and indirect tax, as well as relevant areas of regulation, with a view to considering the case for policy changes. The review will begin with a consultation, on whether there are targeted and merited tax changes that could help to make the UK a more attractive location for companies used by funds to hold assets. The review will also consider the VAT treatment of fund management fees and other aspects of the UK’s funds regime.
  • VAT on fund management – As announced on 4th March 2020 the government is legislating to clarify when fund management services are exempt from VAT.
  • Financial Services Bill – The Bill will seek to support a vibrant asset management industry by simplifying the process for overseas investment funds seeking to market into the UK, and enable the implementation of a more proportionate prudential regime for investment firms. The government has published further details alongside the Budget ahead of legislating later in the session. As a result of the proposed changes to the prudential regime for investment firms, the government will be taking steps to ensure that bank tax legislation continues to operate in line with current policy.
  • Corporate Tax Rate - The government will legislate to retain the current 19% rate in April 2020, to provide support for vital public services.

Private Equity:

  • Venture Capital - The government will provide the British Business Bank with the resources to make up to £200 million of additional investment in UK venture capital and growth finance in 2020-21.

Real Estate:

  • Capital Allowances - Structures and buildings allowance (SBA) rate – The annual rate of capital allowances available for qualifying investments to construct new, or renovate old, non-residential structures and buildings will increase from 2% to 3%. The change will take effect from 1st April 2020 for corporation tax and 6th April 2020 for income tax. The introduction of SBA at Budget 2018 greatly enhanced the international competitiveness of the UK’s tax system and this increased rate of relief goes even further, providing businesses who invest with over £1 billion in additional relief by the end of 2024-25.
    Policy paper - Increase in Structures and Buildings allowance for capital allowances here
  • Non-UK resident Stamp Duty Land Tax (SDLT) surcharge – The government will introduce a 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021. This will help to control house price inflation and to support UK residents to get onto and move up the housing ladder.

View the full 2020 Budget here.

Langham Hall is an award winning provider of Fund Administration, Depositary and AIFMD services to global fund managers. To hear more about how we can help, whatever the requirements, please get in touch with a member of our team.