Goodbye PFI - The Autumn Budget 2018 - commentary from the Corporate Finance Faculty

An unexpected increase in tax receipts of £13bn afforded a Chancellor with a reputation for prudence the opportunity to move towards an end to austerity in the Autumn, pre-Brexit (and probably, mid-term) Budget. Headlines have focused on increased personal allowances, additional spending commitments for the NHS, on roads and the introduction of Universal Credit and new taxes on technology companies and plastic. Business organisations zeroed-in on support for small business via business rate relief, changes to the apprenticeship levy, a freeze on fuel duty and an increase in annual investment allowance on plant and machinery. But employment costs look set to rise, with an increase in the minimum wage and by 2020 an increase in employment costs for off-payroll workers in larger companies.

The Budget address also saw Philip Hammond make perhaps rather too many jokes at the expense of the opposition parties opposite. One of these episodes was followed by the formal announcement of the end of PFI (“Private Finance Initiative”) and its successor PF2. This had been a long time coming. No new PFI arrangements have been signed off by Phillip Hammond as Chancellor. At this point in the Budget address, cameras turned to Messrs Corbyn and MacDonnell on the Labour front bench. Both looked somewhat bemused, given their consistent opposition to PFI throughout their political careers. Whilst the vast majority of PFI project were indeed put in place under New Labour, current party policy seeks to take PFI assets onto the public balance sheet. The failure of Carillion has brought further political attention to a few high profile PFI projects, such as the £335m Royal Liverpool Hospital.

However, supporters of PFI, point out there are now over 700 operational PFI and PF2 projects, with a capital value of around £60 billion. The NAO reports that annual charges for these deals amounted to £10.3 billion in 2016-17, but these also include capital repayment and the provision of service and maintenance. Over the last 20 years capital investment using PFI and PF2 has averaged around £3 billion a year. To put this in context, that’s relatively small in comparison to publicly financed government capital investment, which currently amounts to around £50 billion a year. Advocates of PFI also point out that the majority of projects in the 90’s and 2000’s led to construction and development of schools, hospitals, GP surgeries and so on, which would otherwise simply not have been built at all. As the model developed, advisors generally became adept at ensuring commercial and yet fair returns for all parties. We look forward to contributing to the consultation on the successor to PFI and the continuing debate on public investment in national infrastructure and other essential services.

Elsewhere in the Budget, measures aimed at property and the housing sector included the introduction of a new Structures and Buildings Allowance (SBA) on construction of new commercial property, as well as Stamp Duty Land Tax reliefs for first time buyers and an extension of support for smaller house-builders via the British Business Bank. Also announced was significant additional funding for Scotland, Wales and Northern Ireland.

Principal investors should note that measures will be introduced to ensure that HMRC receives payment of taxation due in circumstances where companies become insolvent. Changes are also promised for reliefs for acquired goodwill in the acquisition of businesses with eligible intellectual property. Entrepreneurs’ relief remains at £10m but the holding period for shares is increased from one to two years. Whilst some business lobby groups welcomed the announcement of a temporary increase in the Annual Investment Allowance from £200,000 to £1m; others felt it was insufficient to persuade owners to invest in plant and machinery at the present time.

Brexit related uncertainty also hangs over the UK’s relationship with the European Investment Bank and its European Investment Bank funds. The British Business Bank can now draw down up to £200m to fill gaps left by lack of EIF funding for UK venture capital and growth finance.

Business Angels and advisors to small firms will find some adjustments to the Enterprise Investment Scheme (EIS) relating to Knowledge-Intensive funds, including giving a longer time to make the investment.

And finally, the Chancellor announced that another Budget will be required in the event of a “no deal Brexit”. Unthinkable, surely? But then again, also included was the announcement that the Royal Mint would be producing a new 50p coin to commemorate Britain leaving the EU. Heads they win and tails….well, we’ll just have to wait and see.

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