New Tax Year, More British Business Tax Fear

With the new tax year’s kicking off Tuesday, several new rules are now in effect. And based on our observations, companies across Britain have many gripes with them. Namely, industry groups warn higher costs threaten businesses big and small, potentially taking UK gross domestic product (GDP, a government-produced measure of economic output) down with them.^[i] Whilst we don’t dismiss the pain, we find it is important to separate local businesses’ concerns from stock market pressures—and in our view, UK stocks have long signalled tax tweaks aren’t a big threat.

By trade groups’ telling, UK taxes and general business policy have amounted to death by a thousand cuts in recent years. Last year, it was minimum wage and employer National Insurance Contributions (NIC) hikes. This year’s changes include mandated sick and paternity leave and changes to business rates. Businesses must pay a percentage of their assessed property value, regardless of revenue and profits, so the tax disproportionately hits brick-and-mortar businesses.^[ii] Think factories, shops, pubs and restaurants. And this tax comes on top of corporate taxes, which rose from 19% to 25% in 2023 for companies netting over £250,000.^[iii]

In October’s Budget, Chancellor of the Exchequer Rachel Reeves announced business rates relief aimed at easing this burden for physical retail, given its heavier real estate footprint than e-commerce.^[iv] But most positivity we saw lasted just a couple days before details of simultaneous business rates reform plans emerged, which would change how properties were valued and, in many cases, lead to higher tax bills.^[v] At the time, publications we follow focussed mainly on pubs, which had enjoyed a business rates holiday since COVID lockdowns.^[vi] That measure’s sunsetting, coupled with the broader changes, led to several pubs pulling their last pint.^[vii]

This week, manufacturing trade group MakeUK is leading the backlash, warning UK manufacturers face a £940 million business rates increase this year.^[viii] It also noted an odd discrepancy landing the sector with a disproportionate burden: “It said that factories accounted for a fifth of England and Wales’s property by rateable value, despite manufacturers only accounting for a 10^th of economic output.”^[ix] So a sector that contributes a sliver of GDP is contributing a much larger chunk of the business rates haul.

It might all sound like a headwind, and we get it. When costs go up, businesses have tough decisions to make. Do they raise prices and risk losing market share? Reduce their physical footprint, maybe by offshoring (relocating business processes to foreign soil)? Cut other costs? Or swallow the added expense and dilute profit margins to absorb it? It isn’t an enviable exercise, in our view. Yet we find it is also important not to extrapolate this as an automatic broad economic or stock market risk.

Here is the thing: UK companies are pretty profitable. Whilst headline corporate profits have flatlined in recent years using the Office for National Statistics’ flagship measure, annual net rate of return, that is skewed by the Energy windfall profits tax, which flipped offshore oil and gas producers into the red.^[x] The annual net rate of return in 2024, the latest figure available, for operations on the UK Continental Shelf was a dismal -2.9%.^[xi] Focus on onshore services and manufacturing, and the picture looks brighter. Services’ rate of return climbed from a recent low of 11.9% in 2018 to 15.2% in 2024.^[xii] Manufacturing had a tougher road, falling from a 21.3% return in 2014 to 10.4% in 2022, but it recovered to 11.7% in 2024.^[xiii]

Note, too, that the recent higher numbers coincided with a historically weak currency after the Brexit vote, which let exporters reap easy profits from currency conversion.^[xiv] Taxes are just one variable in all this, and based on our research, they are one businesses are used to managing. That just isn’t the story we would expect industry trade groups to tell, as they are in the business of encouraging politicians to change course. We aren’t casting aspersions at that, just giving some friendly exhortation to dig a little deeper when trade groups warn of big economic trouble and try to parse the market impact.

Speaking of markets, we don’t think any of this is sneaking up on UK stocks. These measures have been known for months, and markets are forward-looking. UK stocks trounced global markets last year, soaring 25.8% in a year commentators we follow warned nonstop that higher business costs would wreck the UK economy.^[xv] They were also up over 5% this year to date, whilst global stocks collectively were down And even before 8 April’s big ceasefire rally, they were up over 5% this year whilst global stocks were collectively down.^[xvi]

From this, we think investors can glean two things. One: Sizable, sustained outperformance isn’t what many would expect if higher business costs were a severe threat to earnings. Two: The UK stock market isn’t broader UK Plc. In our view, the market reflects Britain’s publicly traded companies, many of which do business globally, and is heavily weighted to Financials, Materials and Energy. Industrials, which would feel more of the business rates pinch, is only 12.6% of the MSCI UK Index.^[xvii] Consumer Discretionary and Consumers Staples Distribution & Retail, the main consumer sectors affected by business rates, combine for about 5.6% of local market capitalisation.^[xviii] And even with all these changes taking effect, most economists and analysts we follow project overall MSCI UK corporate earnings will grow this year, led by bigtime revenue growth.^[xix] Higher sales give businesses more wiggle room to absorb annoying fixed costs.

So whilst we don’t dismiss the pain some businesses will likely endure, our research suggests stocks deal with the aggregate, not the individual, and are cold-hearted. Focus on that and think the way we find markets do, remembering widely discussed news is old news and likely already in prices.