Business confidence falls as fears grow over tax burden

Business confidence fell for the first time in a year as tax fears hit a joint record high ahead of the Autumn Budget according to sentiment tracking by ICAEW.

The ICAEW’s Business Confidence Monitor (BCM)  dropped to 14.4 on the index in Q3, the first decline in 12 months and down on last quarter’s reading of 16.7. However, business confidence remains strong and is still double the pre-pandemic average. 

The fall in confidence was likely driven by mounting concerns over the tax burden and weaker exports growth, ICAEW said, while investment remained low.

The tax burden was cited as a growing challenge by 29% of businesses, a joint record high for the survey and significantly higher than the historic average. Though the government has said it will not increase the rates of income tax, national insurance or VAT, and will cap corporation tax at its current level for the duration of this parliament, there are concerns that the Chancellor will use the Budget to announce tax increases elsewhere, such as capital gains tax, ICAEW said, which could have had an impact on sentiment.

Though almost all sectors said they were increasingly troubled by tax challenges, this concern was most prominent among firms in energy, water and mining (44%), property (38%) and retail and wholesale (32%).

Meanwhile, exports growth slowed to 2.7% in Q3, down from 3% in the previous quarter and the lowest rate since Q4 2023, likely due to concerns over demand in key overseas markets, ICAEW said. In contrast, domestic sales growth reached 3.8% – up from 3.3% in Q2 – the fastest rate for a year.

Looking to the next 12 months, companies expect domestic and exports sales to grow but expectations have weakened compared to the quarter before. 

Businesses in services sectors, as well as construction – buoyed by government announcements about reforms to planning, housebuilding and falling interest rates – were most confident. 

However, sentiment in the transport and storage sector slumped, likely due to increased regulatory concerns, including EU border changes, and the weak domestic sales expectations, ICAEW said. It also fell sharply in energy, water and mining, amid worries over tax after the government announced changes to the energy profits levy and increased regulation to punish water pollution, as well as weak predictions for future export and sales growth. 

ICAEW said that to boost confidence, the government should use the Budget as an opportunity to conduct an urgent review of the UK’s tax system and introduce reforms to stimulate economic growth, build confidence and drive investment.

Suren Thiru, ICAEW Economics Director, said “These figures suggest a slight reality check for the UK economy as weaker expected export and investment activity, alongside fears of a painful Budget, dented business confidence despite a boost from stronger domestic sales growth.

“The notable easing across the indicators of selling prices and salary costs provides reassurance that inflationary pressures remain in check and keeps the door open for a November rate cut.

“While our survey indicates that the economy will expand in the third quarter, the pace of growth is likely to be slower compared to recent quarters as the momentum from the large recent falls in inflation fades.”

Alan Vallance, ICAEW Chief Executive, said “While there remain clear reasons for optimism, this drop in confidence suggests that businesses are still cautious about the future.

“The findings show that businesses are troubled by the tax burden and increasingly reluctant to invest. As the UK prepares to host a major Investment Summit, and speculation mounts ahead of a difficult Budget, the Chancellor must give companies the certainty and stability they need. Reforms to VAT and business rates, alongside public and private investment to drive long-term growth and prosperity for the UK, could help to achieve this.”