Thriving sectors find themselves put on the menu to reassure markets

Ahead of the Chancellor’s Autumn statement on 17 November, a Corporation Tax rise won’t do much for UK business or Treasury receipts, however along with other measures it might reassure the markets.

Following the previous Chancellor’s ill-considered mini-budget in September, domestic markets are seeking reassurance of cohesion between the Treasury and the Bank of England. Any measures that signal a more co-ordinated approach will restore some stability. Overall, markets will overlook a hit to profitability of UK businesses in exchange for a guarantee of fiscal stability.

Any suggestions that the new Chancellor’s policies are not firm enough to ‘balance the books’ could send sterling on a volatile path lower and gilt yields to heights not seen since the 2008 financial crisis (or September this year). Currency moves of this nature will see M&A activity pick up across the small and mid-cap sector as multinational corporates look to snap up UK businesses at fire-sale prices. A spike in gilt yields could once again cause a sharp revaluation of income generating assets, such as commercial property and infrastructure.

Given this, sectors that are thriving in the current environment are on the menu. Booming banking profits thanks to rising interest rates could see the bank surcharge remain at 8%, rather than falling to 3% in April (which was intended to align the sector with the increased main corporation tax rate of 25%).

Businesses from across all sectors will feel the pinch if corporation tax increases from 19% to 25%. However, this could perversely prove a positive for domestic markets if overseas investors, who have shunned UK assets in recent years, consider this an indication of fiscal responsibility and a foundation for long-term economic stability, leading to reappraisals of their UK Plc investment thesis.

The Energy Profits Levy, currently an additional 25% tax on oil and gas profits and due to expire in December 2025, is rumoured to potentially increase to 30% and be extended to 2028. If this occurs, although profitability within these sectors would be negatively impacted, their recent strength and the stubbornness of their supportive economic conditions (rising rates and higher energy prices), will mean market reaction is muted.

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