European Funds Comment: The UK Election Result

13 December 2019

The UK election results are in: Boris Johnson will remain as British Prime Minister and lead a Conservative government with a healthy majority. That should enable him to deliver on his pledge to “Get Brexit Done” – the slogan that dominated the Conservatives’ election campaign, despite being widely regarded as somewhat misleading. It will also clear the path for the new government to honour the other promises the Conservatives have made over the last six weeks or so, so it is a good time to remind ourselves what those were.

Uncertainty over Brexit is far from over, of course. It is now almost certain that the UK will leave the European Union in January, on the basis of the Withdrawal Agreement negotiated in October. However, that will only fire the starting gun on the second stage of the Brexit negotiations, and the time available to do a deal appears to be short: Mr Johnson pledged during the campaign not to extend the transitional period that is due to end on 31 December 2020. So, there is much more of Brexit still to come, including from those who will continue to argue that the UK’s direction of travel is misguided and should be altered. (For more detail on what the Brexit Withdrawal Agreement will mean for European private equity firms, you can read our recent European Funds Comment here.)

But, Brexit aside, what will a Johnson-led government mean for the UK private equity industry, and the business community at large?

The Conservative party manifesto – like Labour’s, but at a much lower level – promised increases to public spending: “approximately £80 billion in additional capital spending over the next four years” (a consequence of a change to fiscal rules announced early in the election campaign), and fairly hefty increases in day-to-day spending (much of which was already planned before the election). However, despite these spending commitments, tax policy does not look set for dramatic change: the manifesto pledged no increases to VAT, income tax or national insurance (and, in fact, increases to the NI threshold are planned, delivering an effective tax cut). Corporation tax rate cuts will be cancelled, but an imminent rise (from the current headline level of 19%) is not likely. And the Conservative manifesto did not indicate that capital gains tax rates would rise – although “entrepreneurs relief” will be “reviewed”, an announcement that has sparked some concern among venture capitalists and owners of high growth businesses.

All of this led the respected Institute for Fiscal Studies (IFS) to conclude that “it is highly likely that the Conservatives would end up spending more than their manifesto implies and thus taxing or borrowing more.”

Some specific Conservative policies may yet affect strategy at portfolio companies. For example, a plastic packaging tax of £200 per ton – to apply to plastic packaging where the recycled content is less than 30% – should give added impetus to an important shift that is already well underway. A small increase to research and development (R&D) tax relief, and a commitment to “the fastest ever increase in domestic public R&D spending” might also have an impact. A new points-based immigration system is likely to apply to EU and non-EU nationals, and that may well make it harder to recruit unskilled workers from abroad, as well as adding to the bureaucracy in recruiting those with specialist skills. Existing proposals to reinforce the UK government’s powers to scrutinise and intervene in takeovers for national security reasons will probably also go ahead.

Furthermore, in common with all political parties, the Conservatives pledged to crack down on tax avoidance and evasion. Quite what that means remains to be seen, although the government has committed to a new anti-tax avoidance and evasion law and seems determined to press ahead with its Digital Services Tax – due to be implemented in April next year – despite likely opposition from the United States.

Proposals to change corporate governance rules are mostly in line with those already in train, in contrast to the more radical suggestions made in the Labour and Liberal Democrat manifestos. Important changes to those rules for private companies are already coming into force in 2020 as a result of legislation passed in 2018, and the UK industry association – the BVCA – has been in active discussion with the government over several others.

The Conservative party’s manifesto may prove to be an unreliable guide to the next five years. On the one hand, it suggests minimal change: the IFS concluded, in its pre-election analysis, that the Conservatives appear to believe that “most aspects of public policy are just fine as they are.” But, of course, if the UK does leave the EU next year, a lot will change, and UK-based businesses will have more than enough disruption to contend with. There may also be substantial rule changes that were omitted from the manifesto: it is noteworthy, for example, that the Conservatives did not spend much time during the campaign talking about changes to regulation and tax that could improve competitiveness for a post-Brexit Britain. Policies along these lines may yet emerge in the coming months, as well as strains on the public finances that may need to be plugged. And the debate over Scottish independence will now begin again in earnest.

So much will change over the next few years. For the time being, though, significant tax and (further) corporate governance changes do not seem to be high on Mr Johnson's agenda.