Reeves stings builders with rising costs
Chancellor of the exchequer Rachel Reeves prepares to deliver her first budget statement to the House of Commons
The chancellor of the exchequer has explained how she hopes to plug the £22bn black hole in the nation’s finances that she said the government inherited when it came to power in July.
The answer is a £40bn increase in the tax take.
Reeves is increasing the rate of employer national insurance contributions (NICs) from 13.8% to 15%. The per‑employee threshold at which employers start to pay National Insurance will be reduced from £9,100 per year to £5,000 per year. These changes will apply from 6th April 2025 and are expected to bring in an extra £20bn to the exchequer.
The lower rate of capital gains tax (CGT) is being increased from 10% to 18% and the higher rate from 20% to 24%.
The national minimum wage is rising 77 pence to £12.21 an hour, an increase of 6.7%.
The construction industry’s aspirations that equipment hire companies would get the same tax breaks for machinery purchases that are afforded to end-users were also dashed.
It was Rishi Sunak, when he was chancellor of the exchequer, that introduced full expensing for plant and machinery but excluded assets bought for leasing. Jeremy Hunt, Rachel Reeves’ predecessor at the Treasury, said that he would explore extending full expensing to assets bought for leasing or hiring, when fiscal conditions allow. This was the same message repeated again today by Reeves.
In fact, such was the absence of any kind of support for the construction industry, that government’s aspiration to see 1.5 million new homes built by 2029 looks increasingly deluded.
Tom Allen, managing director of construction contractor Signature London. said: “For the first Labour budget in 14 years, we see nothing but hot air for the construction industry. First construction’s omission in Labour’s new industrial strategy and now a series of measures that either ignore construction entirely or potentially suffocate firms already treading water in our sector. How can we get Britain building again without the construction industry?
“Investment and innovation in infrastructure is essential to build the strong economy the chancellor has committed to delivering. Yet, a rise in employer national insurance contributions is fundamentally a tax on growth for construction and these measures fail to recognise the impact it will have on cash flow particularly for medium sized businesses. From higher staffing costs and impacts on profit margins to broader pressure on budget planning and investment. The chancellor may say that the hike will raise an extra £25bn per year to deliver strength and stability, but if half the firms that would benefit from an improved economy have been forced to downsize or shut down, what’s the point?
“In reality, these measures will do nothing but kill competition in our industry. What we really need is construction to be taken as a serious industry for growth that can directly contribute to economic stability, rather than it being shunned in all critical planning by our government. Only then can smart, targeted interventions and investments be made that deliver for our industry and for our country.”
Richard Beresford, chief executive of the National Federation of Builders (NFB), said: “The 2024 budget was always going to be challenging due to the ongoing £22bn black hole narrative. Nevertheless, it is positive to see the suspected fuel duty rise did not happen, especially as the construction industry is already paying considerably higher fuel costs after the last government cut their access to red diesel.
“We also welcome the £5bn funding boost for affordable housing, commitment allowing councils to retain 100% of Right to Buy receipts and, the £3.4bn for retrofitting.
“However, the government’s target to deliver 1.5 million homes is now at a considerable risk due to the increase in employer national insurance contributions. This announcement will hinder the industry’s ability to take on and train new staff and support the next generation of skilled workers. While some may point to planning reforms as the solution, those reforms have not yet been implemented, and it will take years before new projects avail of them.”
Included among the other announcements is the chancellor’s move to not extend the freeze on income tax and national insurance thresholds beyond 2028, an increase on capital gains tax, a rise in national minimum wage, and commitments to increase funding for transport and energy infrastructure.”
Federation of Master Builders chief executive Brian Berry said: “The chancellor’s decision to significantly increase employers’ National Insurance contributions will create major headaches for firms looking to take on staff at a time when the building industry in desperate need of new workers. However, it is good that the chancellor has shielded small companies by increasing employment allowance, as is the rise in the apprenticeship wage, which will help increase the appeal of a career in construction for young people. Capital gains increases may also hit builders looking to sell off their companies when they look to retire.”
Eddie Tuttle, director of policy, research and public affairs at Chartered Institute of Building, said: “Nearly a fifth of UK SMEs operate in construction and the cyclical, boom-bust nature of the sector, as well as recent economic hardships, have created a difficult environment for these businesses. So far in 2024, they have accounted for 20% of business insolvencies and alarmingly, around 11,000 firms have collapsed since 2022.
“While we understand the need to build up public finances and reorder the fiscal rules to channel greater investment, the impact of increased costs on construction SMEs could be devastating. SMEs play a vital role in the delivery of new homes and infrastructure as well as the repair and maintenance of existing buildings.
“Increased tax rises without consistent monitoring of the impact they have on the health of crucial sectors, such as construction, run the risk of damaging the pivotal role SMEs play.”
Suppliers to the industry are also like to struggle with the additional burdens being place upon them. Builders Merchants Federation chief executive John Newcomb said: “We fully expected this to be a difficult budget for our members, with many of the revenue raising measures flagged in advance.
“The majority of our merchant members are classified as SMEs, with over 70% having an annual turnover below £12.5m. While there was one piece of good news relating to fuel duty, this is far outweighed by the increases in minimum wage and national insurance contributions. Our members will be hugely impacted by these extra costs which will immediately come off their bottom line.
“This is extremely disappointing at a time when we are seeking to increase recruitment and skills in the building materials sector. Skills which will be essential if we are to fulfil the additional product demand to deliver 1.5 million new homes, which the government has pledged, but provided little detail as to how they plan to achieve this target.”
Anyone deciding that now might be a good time just to sell up and retire will notice the hike in capital gains tax. Expect the growth of tax-free sales to employee ownership trusts start to mushroom next year.
On the lack of movement in full expensing, Hire Association Europe chief executive Paul Gaze said: “We are relieved that extending full expensing for hired assets remains under active consideration, albeit disappointed that members cannot make use of this incentive from today and start planning their investments in new equipment. As a capital intensive sector, which epitomises the circular economy, extending full expensing would support the transition to net zero and enable fresh investment in newer, more efficient equipment.”
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