Food for thought

Analysing the recent Budget was challenging. After navigating the politics and point-scoring, it seemed there was not much to discuss. Except there are significant issues for the food, drink, and hospitality sectors.

The Budget’s aim is to ease the cost of living for lower-income individuals, stimulate long-term economic growth through public sector investment, and raise around £40 billion in taxes.

Key concerns for the hospitality sector

The main concern for the hospitality sector is business sustainability. How will businesses fare in the long term? Can they leverage this strategy to drive investment, innovation, and growth?

Some businesses may adapt to the new UK economy. It depends on their product range, customer base, target demographic, or geographic market. But these measures are unlikely to ease the current pressure on mid-range products and hospitality services. So, volumes may remain low for now.

Assessing the impact across the diverse food, drink, and hospitality sectors is complex. The Food and Drink Federation welcomed the focus on long-term growth and research and development (R&D) investment. UKHospitality and similar bodies were less enthusiastic.

Employment costs

The standout news for businesses is the increase in national insurance (NI) and the rise in the national minimum wage (NMW). These changes will increase labour costs, driving inflation.

Employers’ national insurance contributions (NIC) will rise from 13.8% to 15%. The threshold for NI payments will drop from £9,100 to £5,000 per employee. These changes, effective April 2025, will hopefully increase tax revenue by £25 billion.

Small businesses will receive some relief for employers’ NI, but they cannot escape the inflationary impact of the NMW. The NMW will increase by 6.7% to £12.21 per hour for those aged 21 and above, and by 16.3% to £10.00 per hour for those aged 18-20. The NI rate for under-21s and apprentices under 25 remains at 0%.

Despite changes to employers’ NI, there are no changes to the rules on discretionary gratuities paid via a tronc scheme. This quarter will see the first tronc distributions under the new regulations. It will be interesting to see how businesses adapt in this higher tax environment.

Business rates

The promise to reduce business rates for retail, hospitality, and leisure properties will not take effect until the 2026/27 tax year. The Chancellor extended business rates relief support, but at a lower rate. From April 2025, the discount will reduce from 75% to 40%, capped at £110,000. Small and medium-sized operators will see their rates bills increase.

Altus Group estimates that restaurant bills will rise from around £5,000 to £12,000, while pub bills will increase from around £4,000 to £9,500.

Duty on draught alcohol

A positive note in the Budget is the 1.7% cut in duty on draught beers, lagers, and ciders. This should benefit pub, club, and taproom customers, as well as independent breweries and cider producers. However, other alcohol taxes will rise in line with the retail price index (RPI).

Packaging sustainability

The Budget allows companies to use mass balance accounting to calculate recycled content for the plastic packaging tax. Jim Bligh, director of corporate affairs and packaging at the Food and Drink Federation, praised this decision. He said that it is an “important change”, which will “open up new markets for advanced recycling in the UK”. This will generate more green jobs and investment opportunities. As well as “increasing the amount of recycled content used in food-grade packaging”.

Business planning

With the Government’s new plans announced, businesses can now start planning and adapting. Cash flow forecasting remains crucial. Business plans and funding structures need revisiting, which may lead to tough decisions.

Staffing adjustments

Businesses of all sizes have worked hard since Covid and Brexit to stabilise staffing levels. This may need to rolling back, with potential workforce reductions or changes in shift patterns to manage costs. Automation, AI, and technology can assist with this.

Supplier choices

Businesses will need to make strategic choices around their suppliers, leading to uncertainty across the supply chain. Value for money is key, but with tighter budgets, the definition of value may change. This might not mean cheaper options but expect pricing discussions and tough negotiations. It will be interesting to see how supermarket groups react to this Budget.

Investment caution

Caution is the watchword for investment. Despite previous Government incentives like capital allowance super deductions. Additional costs on businesses will delay decisions or push them towards greater efficiency. We need to see what support will look like for R&D following HMRC’s recent approach to R&D tax credits.

Export markets

Many food production and manufacturing businesses explored export markets for diversification. Is this a focus if there are markets with flexible pricing that offer profit margins? Currently, the United States is a key market. It is important to note that, from the previous incarnation of the Trump administration, there were protectionist tendencies to import tariffs on certain foods. Direct investment in US business infrastructure and manufacturing could be a focus.

Product development

Should businesses invest in new products, offerings, or locations to spread risk and capitalise on market gaps? Or should they double down on robust products, divisions, and locations? Understanding true margins is vital.

Operational considerations

Consider salary sacrifice pensions and initiatives to reduce waste in production and hospitality settings. Energy costs are a significant topic, as are delivery and transport costs, noting fuel duty changes in the Budget.

Taxation impact

Taxation’s impact on business planning is crucial. Familiarise yourself with the new corporate tax roadmap. We are here to help.

Exiting business and employee incentives

We do not tend to combine these topics. The increase in capital gains tax was smaller than expected, with the lower rate rising from 10% to 18% and the higher rate from 20% to 24%. While a share sale business exit is more expensive from a tax perspective, it did not reach income tax levels as speculated.

The difference between income tax and capital gains tax rates means tax-advantaged share schemes remain attractive. But there are reforms to the taxation of employee ownership trusts and employee benefit trusts to prevent abuse. This will lead to more scrutiny at HMRC clearance stages.

The Budget’s impact on inheritance tax planning in agricultural businesses could affect the food and drink sector. It may affect UK food security if inter-generational business transfers become more challenging.

Conclusion

Challenging times lie ahead due to economic difficulties in the UK and uncertainty abroad. However, the long-term goal of sustainable growth, underpinned by innovation and efficiency, remains. Planning and understanding are key to avoiding major impacts on business viability, profitability, consumer choice, food security, and the well-being of business employees, owners, and their families.