Appetite for deals in the consumer sector was strong for the second quarter in a row. 16 deals of UK head-quartered retail and consumer businesses were completed this quarter, bringing the total for the first half of the year to 31.
What is striking about the deals this quarter is that only one had explicit insolvency involvement – the sale of Peacocks Stores. All other deals have been completed through a solvent M&A transaction. You have to go back two years to the second quarter of 2019 before you find a quarter which had no insolvency deals. Is this the strongest indication yet that retail and consumer has rebalanced itself coming out of lockdown? Or will we start to see an increase in insolvency processes as the government’s financial support is gradually withdrawn?
Three key deals in Q2
Online, data and technology led consumer businesses hold their lead in M&A
Although government support has undoubtedly reduced the need for businesses to enter into an insolvency process, mainstream M&A has also continued apace because many retailers have continued to trade strongly coming out of lockdown. Attention is still very much on those businesses who have strong online trading, and which also use technology and customer data to disrupt traditional retail models.
Outlook: private equity still values the UK retail sector
There is still a wall of money to invest in the sector from private equity, and we're also starting to see more interest from trade in processes where there is a strategic rationale. This is starting to increase valuations on deals where buyers had been nervous about whether lockdown trading could continue as the high street opened up.
Although the outlook for the sector remains difficult to predict, the continuation of strong M&A activity suggests that there is rising confidence in future opportunities and performance.
If you’re looking for a confidential conversation about taking on development capital, releasing cash out of your business, or exiting completely, get in touch with Nicola Sartori.
Our latest Business Outlook Tracker has shown that over 70% of UK retailers think the outlook for the country's economy is positive, and that they expect their own revenues to grow.
This growing confidence follows a broader UK and global pattern highlighted in our recent International Business Report, which has seen record levels of economic optimism as business confidence returns to pre COVID-19 levels.
Business investment intentions are rising too, with a clear focus on improving productivity over increased capacity. For many, it's a case of looking to squeeze performance out of what they already have, ahead of making any significant capital outlays. This feels sensible given the ongoing uncertainty and increasing concerns over 'red tape' messaged which come across clearly in both the data and our conversations with clients.
Overall, the message is positive, but there are clear reminders that further challenges lie ahead.
What is the retail sector thinking now?
Now that ‘freedom day’ on 19 July has passed and most restrictions have been lifted across the UK, retailers are navigating the dilemma of trying to appease those keen to shop mask-free, while not alienating those who are yet to be vaccinated, or are uncomfortable with the idea of shopping with no social distancing measures in place. Many retailers, including Waterstones, Sainsbury’s, Tesco and John Lewis have announced that they'll be asking staff and customers alike to continue wearing masks in store.
Eight months into 2021 and Brexit challenges for the sector remain. Businesses are now navigating complex new VAT and customs procedures, as well as supply chain disruption and border delays, leading to higher costs and inefficiencies.
The industry is also facing labour shortages as thousands of European retail workers returned home after Brexit. Many retailers are feeling the pressure with reduced talent pools and labour inflation.
However, it’s not all doom and gloom. According to the British Retail Consortium (BRC), the easing of the winter lockdown has led to the fastest quarterly UK retail sector growth on record, for both shopping in stores and online. There was a surge in consumer spending in Q2 – driven by significant pent-up demand and growing consumer confidence. This is a continuation of significant growth that occurred since the start of lockdowns, with increased ecommerce sales and new demographics of online shoppers beginning to spend.
While the next few months still feel uncertain, there are lots of opportunities for those retailers who can stay nimble and ride the wave.
Three things to prepare for in the next six months
Changes to coronavirus restrictions and support
Most restrictions have been eased across England, although many retailers have decided to continue to enforce social distancing and mask-wearing. Depending on the outcome of this easing as we move into the colder months, some restrictions may return. This might also bring a potential restart of government support, but it's difficult to assess the likelihood of this.
A burst of new initiatives from the UN Climate Change Conference (COP26)
In November world leaders will be meeting in Glasgow to debate how we tackle climate change. Many new initiatives and requirements are likely to be announced at the summit and will inevitably mean greater expectations on retailers to lower their emissions.
'Full border implementation' from 1 January 2022
As HMRC prepares for 'full border implementation' at the start of next year, retailers are likely to see further guidance and activity from Government, explaining any future changes and challenges.
The full impact of developments from Q2 are not yet apparent, but the mix of confidence amid uncertainty is likely to continue for some time.
For more insight on the outlook for the retail sector, and our international business report, contact Tom Rathborn.
The Research and Development Expenditure Credit (RDEC) scheme offers large retailers a 12% gross tax credit in relation to eligible projects and activities. If you're managing a project that is seeking a technological or scientific advance you should consider looking into it.
For many retailers, COVID-19 and the post Brexit environment are opportunities to innovate, and optimise their economic performance. Significant investment in software development is eligible for the research and development tax credit. In this area, the costs of internal labour and external agency staff usually form the vast majority of retail claims.
Claiming for the research and development expenditure credit has historically been a lower priority for FDs and CFOs, but the impact of coronavirus on cashflow, raised it up their agenda.
You should also be aware that HMRC's definition of research and development in business might cover projects that you never considered eligible when you were designing them.
It's also worth thinking about previous projects. You can claim for projects from the two preceding accounting periods: e.g., to claim for the period ended 31 December 2019, you will have to make an RDEC claim by 31 December 2021.
If you are investing in software development areas of activity to consider for eligibility include:
Using and developing technology to optimise supply chains and logistics
Using data to target potential customers and enlarge your customer base
Increasing efficiency in warehousing and distribution centres through the use of automation
As the UK retail sector continues to respond to its current challenges by embracing opportunities to innovate, businesses should not miss out on the rewards for their hard work.
If you’d like to discuss how to maximise your R&D claims, please contact Lindsey Copland in the research and development tax team.
All industries have seen seismic shifts over the last few years, but while the retail sector has suffered through recent events, it has also had no choice but to adapt to the rapidly fluctuating needs of its customers. To do this, it needs data.
Google’s Zero Moment of Truth retail studytold us that 70% of UK buyers research online before making a purchase. However, IT giant Wipro anticipates that integrating COVID-19 related data into current insights on consumer behaviour will be problematic, particularly where the quality of publicly held data is concerned. So, as businesses recover, they need to gather the right data themselves. The challenge is ensuring that they have the skills to do it.
The UK digital skills gap
The Royal Society reported back in 2019that the UK was vulnerable to a drastic shortage in digital and data skills. It also revealed that the data science skills shortage had more than tripled to 231% in the five years leading up to the report. In light of recent events, there is no doubt that the situation has hardly improved.
In fact, in March 2021,the BBC reportedthat the UK was heading towards a digital skills shortage disaster: the number of students taking subjects related to digital skills had dropped by 40% - while the consultancyAccenture reportedthat demand for tech jobs had dramatically jumped in the last nine months – 115% in Liverpool, 253% in Leeds and 450% in Newcastle.
A furtherstudy by the Learning and WorkInstituterevealed that 70% of people want employers to invest in teaching them digital skills on the job, but only half the employers surveyed were providing those opportunities, even though 76% of them believed the lack of digital skills was hitting their profitability.
With all this insight into the obvious need to substantially increase the provision of digital skills, you should be looking into digital and data apprenticeships to fill the gap. The apprenticeship levy offers all businesses the funds to support this investment.
What is the apprenticeship levy?
The apprenticeship levy was introduced in 2016 to push employers to address growing skills gaps, and develop a more sustainable and diverse workforce, while supporting industries in their search for talent. Unfortunately, a lot of employers don't really understand how the apprenticeship levy works.
Employers with a pay bill in excess of three million pounds are levied0.5%of it, which they can access to spend on apprenticeships.
A lot of smaller businesses don't realise that they can also benefit from the levy funds. For employers with a pay bill below £3 million, the government will pay 95% of the costs of training an apprentice.
Are data apprenticeships the right solution?
While apprenticeships have traditionally been alternative entry routes to university – the introduction of apprenticeship standards now enables these training programmes to respond to skills needs at any level.
Apprenticeships are generally a robust solution to the digital skills gap. In fact, data skills development is available at level three, four, six and seven: from developing people across various functions where performance would be improved with additional data skills, to developing early career data analysts, and degree-level development of internal analysts.Apprentices practice in the workplace as well as developing with academic studies, building the behaviours and professional skills needed to operate at the necessary level. This helps them become data citizens, influencers, storytellers and senior advisors to those who are making tough decisions for your business.
It's true that getting stakeholder buy-in for a scheme that includes 20% off the job training might seem like a substantial obstacle, but the alternative to this investment in the future is bigger problems caused by our digital skills shortage getting even worse. So, if you're looking for a proactive approach to training employees to fulfil your data demands, think about apprenticeships.
If you’re interested in offering data apprenticeships in your business, contact Anita Ibrahim in our talent solutions team.
The spring Budget always grabs the headlines, but a key talking point in 2021 was the changes to capital allowances. The super deduction for plant and machinery is especially good news for the retail sector, just as footfall is set to rise.
There are also other reliefs available, such as loss carry-back provisions. That's why it's even more important for businesses to understand which reliefs they're eligible for, and how they can apply for them.
Super-deduction on qualifying plant and machinery
Businesses with qualifying plant and machinery can now benefit from 130% tax relief. This attractive scheme is further supported by other measures:
Another consideration is the increased flexibility of the loss carry back provisions: rising from one year to up to three years. Claiming the super deduction could result in a significant loss carry back claim, and secure a valuable repayment of corporation tax.
Surprisingly, the expenditure qualifying for the super-deduction is unlimited. This will be welcome news for those with a capital expenditure programme in excess of the £1 million annual investment allowance (AIA), and comes without the complexity of the AIA sharing rules.
The UK’s wide array of capital allowances now means that potentially all capital investment will receive some form of tax relief.
It will, however, be crucial to take careful note of the timing rules. The new allowances apply to expenditure incurred between 1 April 2021 and 31 March 2023, and only where a contract was entered into on or after the Budget announcement. Careful consideration is required to ensure tax relief is not unclaimed. A number of exemptions that could disqualify a super-deduction should also be noted, for example, leasing and connected party transactions.
In my experience, the biggest barriers to maximising a claim for capital allowances is data quality and interrogation. Problems can be caused by errors in manual data handling, poor communication between property and accounting teams, records of development expenditure not being kept, and claims for tax relief being made long after development teams have moved on to a new project.
Businesses can successfully claim tax relief by ensuring that they have accurate and up to date information, and carefully considering the application of the often-complicated capital allowances legislation.
To benchmark and optimise your claims for capital allowances tax relief, get in touch with Peter Stoddart.