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Bank of England holds interest rates at 5.25%

The Bank of England's Monetary Policy Committee (MPC) decided by a 7-2 majority to hold the interest rate at 5.25%. ?

The Bank of England remains cautious, with commentators suggesting it is unlikely to cut rates during the election period. The Bank of England's stance aligns with the US Federal Reserve, which has indicated it will maintain current rates for the foreseeable future. In contrast, the European Central Bank reduced rates for the entire eurozone to 4.25% earlier this month.

There are also indications that inflation is expected to rise slightly to 2.5% in the second half of the year due to the drop in energy prices last year. Despite the significant pressure on mortgage holders and businesses, the Bank of England stated that monetary policy will need to remain sufficiently restrictive for a long enough period to sustainably bring inflation back to the 2% target in the medium term.?

High inflation in the services sector appears to have influenced the Bank of England's decision. The inflation data for the services sector in May (5.7%) was still too high, a key factor in the MPC’s decision to maintain the current interest rate.

UK inflation rate lowers to 2% target

After staying elevated for 34 consecutive months, the UK inflation rate has finally lowered to the Bank of England's 2% target for the first time.

A 0.3% drop in food prices was the largest factor in the May decline. Food and non-alcoholic beverage prices rose by 1.7%, compared to a significant 18.4% increase in the same period last year. This marks the 14th consecutive month of decline since the high of 19.2% in March 2023, which will be a significant relief for many nationwide.

Overall, prices in 9 out of 11 subcategories, except for oils, milk, cheese, and eggs, decreased.? On the downside, the transportation sector offset the positive impact of declining food inflation, with automobile fuel costs continuing to exert upward pressure. The transportation sector rose by 0.7% in May, with a 0.3% increase in the 12 months up to May 2024, largely driven by rising gasoline and diesel prices. In May, the average price of gasoline was 148.8 pence per litre, up 7 pence from April.

Other factors contributing to the decline in inflation included a 0.2% increase in furniture and household goods prices, down from 1.1% in May 2023. Additionally, the prices of recreation and cultural activities saw a slight decline to 0.2%.

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Record tax gap of ￡39.8 billion

In 2022-2023, the UK tax gap was estimated at 4.8% of the theoretical total tax liability, an absolute value of ￡39.8 billion, an increase of ￡1.7 billion, with unpaid taxes accounting for 4.8%, of which small businesses made up nearly two-thirds.

As in the previous year, small businesses were the worst offenders for tax evasion and non-payment in 2022-2023, accounting for 60% of the tax gap, amounting to ￡23 billion, up from 59% in 2021-2022.?

HMRC appears to have failed to crack down on high levels of non-compliance in this area, likely due to the large number of small businesses, the complexity of the tax system, and the declining standards of service and limited support for small business customers.

By tax type, the largest components of the tax gap were corporation tax (34%), income tax, national insurance contributions (NIC), and capital gains tax (34%), while VAT accounted for 20% of the tax gap. The corporation tax gap was ￡13.7 billion, up nearly ￡3 billion from last year's ￡10.8 billion. This figure has soared over the past five years, from just ￡5.6 billion in 2018-2019, marking the worst total ever and continually worsening since the COVID-19 pandemic.

‘Big Four’ accounting firms launch ethical investment schemes for employees

To prevent conflicts of interest for partners and auditors from investments, employees of the Big Four accounting firms can now access professional external support from investment management company Quilter Cheviot.

Quilter Cheviot has signed agreements with the Big Four accounting firms (PwC, Deloitte, EY, and KPMG) to provide a service supporting employees in managing their investment portfolios, avoiding conflicts of interest with clients, and adhering to ethical standards.

The revised ethical standards from the Financial Reporting Council directly require the creation of a platform with a more streamlined approach for employees. These standards raise the ethical behaviour bar for accountants and auditors, requiring staff and immediate family members of large accounting firms to obtain investment approval to avoid conflicts of interest.

KPMG set to lay off 200 employees in cost-cutting drive

As part of a cost-cutting plan, KPMG, one of the Big Four accounting firms, plans to cut 200 back office and customer service positions.

The layoffs will affect multiple back office and client-facing roles and will be finalized by the 1st October after consultations with affected employees. This reduction will account for about 1% of the firm's total workforce of 17,239 employees. The firm reported that in its latest annual results for the fiscal year ending 30 September 2023, fee income was ￡2.96 billion, but profits fell 22% to ￡364 million, despite a 9% increase in revenue from the previous year.

KPMG made this decision after reviewing the company's cost base, given lower-than-expected business growth and concerns over continued market volatility and changing client demands, and have stated that all affected employees will receive support through the company's employee assistance programme.? It also noted that due to strong recruitment channels in recent years and fewer employees leaving due to ‘challenging market conditions’, employee retention is higher than usual.