A mere few weeks ago, a Conservative majority government seemed like a foregone conclusion. However, after falling eight seats short of a majority, a strong theme has emerged in reaction to the shock election results: uncertainty.
As John Walbaum, head of investment consultancy at Hymans Robertson, summed up: “The only thing we can be certain of is more uncertainty. Uncertainty over Brexit and uncertainty over the future policies of the next UK government.”
In the article below, we take a look at the business industry’s reaction to the hot topics.
As Brexit negotiations were due to start on 19 June, the Tories’ decreased mandate has undoubtedly thrown talks into a tailspin. Many view this blow to the Conservative party as a rejection of their “hard” Brexit position, illuminating a need to recalculate Brexit strategy.
Nigel Green, founder and CEO of deVere Group, echoed this sentiment and added that the Conservative party’s decision to form a government propped up by the Democratic Unionist Party (DUP) will likely confound Brexit plans as the DUP “have said they will not back a hard Brexit”.
Green adds that “the bloody nose delivered to the British government last night by the electorate means the UK’s power at the Brexit negotiations is now likely to be relatively weak”, further complicating impending talks.
George Bull, senior tax partner at RSM, outlined three pressing tax issues facing the new government.
Firstly, simplification of the UK tax system.
Secondly, he highlights the importance of “restoring faith in the UK tax system”, which is perceived by some of the public as unfair as “some companies and individuals blatantly evade tax, or use tax rules to avoid tax unfairly”.
Finally, Bull points to the need for the government to “design a post-Brexit tax system which meets our future needs as a nation”, of which he says one element is Making Tax Digital (MTD).
While the future of MTD remains unclear, a potential complicating factor noted by Brian Palmer, tax policy adviser of AAT, is that financial secretary to the Treasury Jane Ellison has lost her seat in Battersea. Palmer noted: “Jane was day-to-day lead for MTD, so it’s not clear if her demise might lead to another delay, while her replacement gets up to speed”.
The Conservatives’ lack of a majority will also undoubtedly jeopardise certain tax plans. James Hender, partner at Saffery Champness, commented that “a minority government will require consensus on policies on an ad-hoc basis and concessions will almost certainly be made to win over support more broadly”, particularly with regards to “politically charged” tax areas such as inheritance tax and national insurance.
Bull added that other issues on the new government’s agenda will include decisions on how much the country’s wealthiest should be taxed and clarity on the shape of UK VAT.
While the Conservative party is likely to persevere with plans to reduce corporation tax from 19% to 17%, the likelihood of achieving this has been thrown into doubt.
Law firm Pinsent Masons has also stressed the importance of clarifying corporate tax reforms that were removed from the Finance Bill, as “businesses have had to assume that new restrictions on tax deductions by companies for interest payments are already in effect”, due to the risk of inaction being too great. The new uncertainty is problematic and is likely to create an added compliance burden.
Due to the increased likelihood of a “soft” Brexit, James Ross, tax partner at McDermott Will & Emery, said that “groups worried about losing the benefit of EU Directives to minimise withholding tax on intra-group interest, dividend and royalty payments may want to hold fire before unwinding their UK holding company structures.”
Ross also noted that “large groups will have to grapple with new restrictions on the deductibility of interest and on the carry-forward of tax losses.”
As expected, the political uncertainty has impacted the pound, which is down 2% against the dollar and euro according to John Walbaum, head of investment consultancy at Hymans Robertson.
However, John Wyn-Evans, head of investment strategy at Investec Wealth & Investment, said that “relative to Brexit night this is a very limited fall, and to put the move into context, sterling is now almost exactly where it was before the election was announced. The pound is no longer deemed to be overvalued.” Although there will be a short-term inflation effect, Walbaum does not expect this to hugely affect the underlying position.
“Thanks to the pound’s fall, the FTSE 100 enjoyed a relatively strong opening, up just over 1%”, Wyn-Evans added.
There appears to be a general consensus that the election results have taken markets by surprise.
Michael Metcalfe, global head of macro strategy at State Street Global Markets, commented that “markets were poorly prepared for this surprise result in UK” as “an outright Conservative victory was still the base case scenario for most”. That being said, markets are largely remaining cautious in this period of turbulence while the new government finds its feet.
Bill Street, head of investment for EMEA at State Street Global Advisors, elaborated that “the initial risk-off market reaction will drive gilt yields sharply lower”, a trend that is expected to continue in the current climate of political uncertainty. However, he added that “as the market prices in campaign promises of fiscal stimulus and a softer Brexit, we believe that gilt yields could be on course for a sustained upward move over the medium term.”
According to Wyn-Evans, the election results suggest an “anti-austerity protest”, which “would suggest higher deficits and thus a greater supply of bonds, putting some upwards pressure on yields”.
He added that “there is quite a sharp divergence in performance between overseas earners (up) and domestic cyclicals (down). There is also a nice bounce for the Utility shares that were under threat of renationalisation. In contrast the more UK-centric small and mid-cap indices are lower this morning.”
Equity markets, meanwhile, are reacting “fairly calmly”, according to Walbaum.
The weeks ahead
There is little sign of uncertainty lifting in the coming weeks, as the Conservatives and Labour vie to form a government capable of both functioning in the House of Commons and negotiating a deal for the UK following its exit from the EU.
With the result taking the public, markets, business industry – and Theresa May – by surprise, we can all be certain that the election rollercoaster is not yet over, with many twists and turns to be expected in the weeks, and months, ahead.