New Tax Year, More British Business Tax Fear

As Americans hit the one-week-till-Tax-Day marker, Brits are nodding to a different milestone: the start of a new tax year Tuesday. And we reckon few are singing “Auld Lang Tax Syne,” because a new tax year is when new rules take effect, and companies have many gripes with the latest. Industry groups warn higher costs threaten businesses big and small, potentially taking UK GDP down with them. While we don’t dismiss the pain, it is important to separate local businesses’ concerns from stock market pressures—and UK stocks have long signaled 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 brought minimum wage hikes and higher employer National Insurance Contributions (NIC), the UK’s version of a payroll tax. This year’s changes include mandated sick and paternity leave and changes to business rates, which effectively amount to a commercial property tax. Businesses must pay a percentage of their assessed property value, regardless of revenue and profits, so the tax disproportionately hits brick-and-mortar businesses. 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.

In October’s Budget, Chancellor of the Exchequer Rachel Reeves announced business rates relief that aimed to ease this burden for physical retail, given its heavier real estate footprint than e-commerce. But the cheer 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. The big story at the time was pubs, which had enjoyed a business rates holiday since COVID lockdowns. That measure’s sunsetting, coupled with the broader changes, led to several pubs pulling their last pint.

This week, manufacturing trade group MakeUK is leading the backlash, warning UK manufacturers face a £940 million business rates increase this year. 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.”^[i] So a sector that contributes a sliver of GDP is contributing a much larger chunk of the business rates haul.

It all sounds like a headwind, and we get it. When costs go up, businesses have tough decisions to make. Do you raise prices and risk losing market share? Reduce your physical footprint, maybe by offshoring? Or swallow the cost and dilute profit margins to absorb it? It isn’t an enviable exercise. Yet it is also important not to extrapolate this as a broad economic or stock market risk.

Here is the thing: UK companies are pretty profitable. While 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. The annual net rate of return in 2024, the latest figure available, for operations on the UK Continental Shelf was a dismal -2.9%.^[ii] Focus on onshore services and manufacturing, and the picture is brighter. Services’ rate of return climbed from a recent low of 11.9% in 2018 to 15.2% in 2024.^[iii] 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.^[iv]

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. Taxes are just one variable in all this, and they are one businesses are used to managing. That just isn’t the story industry trade groups will 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 you see trade groups warning of big economic trouble and are trying to parse the market impact.

Speaking of markets, none 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 35.1% in a year headlines warned nonstop that higher business costs would wreck the UK economy.^[v] They are also leading this year to date, one of a handful of MSCI World Index constituent countries with a positive return even before April 8’s big ceasefire rally.^[vi]

From this, we think you can glean two things. One: Big, sustained outperformance isn’t what you would expect if higher business costs were a severe threat to earnings. Two: The UK stock market isn’t broader UK Plc. 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.^[vii] Consumer Discretionary and Consumers Staples Distribution & Retail, the main consumer sectors affected by business rates, combine for about 5.6% of local market cap.^[viii] And even with all these changes taking effect, consensus expectations are for overall MSCI UK corporate earnings to grow this year, led by bigtime revenue growth. Higher sales give businesses more wiggle room to absorb annoying fixed costs.

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