UKBAA’s thoughts on the Budget announcement
The Chancellor Rishi Sunak has demonstrated a positive commitment to protecting jobs and livelihoods, fixing public finances and beginning work on rebuilding the economy. He has brought in important measures to boost sustainability, innovation and business growth with a strong focus on supporting scaling tech businesses. Whilst announcing that he will do whatever it takes, offering a further £65bn of measures for the coming year, he has a massive challenge ahead, having given £280bn support over the past 12 months to address the impact of the pandemic, and with an economy which has shrunk by 10% since last March and an enormous bill of £355bn in public borrowing. This has resulted in some difficult choices in bringing in new taxes on business future growth as the economy bounces back by 2023.
With this scenario laid down, the Chancellor set out his measures to provide continuing support for employment and business. Of course, we have had many of these key measures already trailed in the press and by Rishi Sunak himself. For the many small business that we back who are still struggling, it is good to know that the Furlough job retention scheme is being continued until September and that Self-employment grants are also being supported, enabling more recently self-employed to access grants. Notably, there is clear attention being given to businesses in the sectors most affected by the lockdowns with £5bn support to hospitality, non-essential retail, gyms to support their reopening and good to see that £700m has been added for further support of the creative and cultural industries, as well as sport. These additional grants combined with Business rates holiday to end of June and 12.5% for rest of the year, combined with VAT reductions to end September, will help to address the needs of many in the hardest hit sectors, although may still be too late for many.
It was very good to hear that the Chancellor has announced a new Recovery Loans Scheme offering loans of between £25k and £10m with 80% loan guarantees beginning from April and available until end 2021. This will replace the loans provided under the BBILS and CBILS schemes which have been important lifelines for many small businesses across the UK and many of those backed by angel and early stage investors have taken advantage of these schemes. See further details below*
Having said it was irresponsible to withdraw support too soon, whilst needing to address the rising costs of public borrowing, the Chancellor has decided to focus on increasing Corporation tax and freezing personal tax thresholds. Whilst it is useful that the CT rise to 25% will not be brought in until April 2023, this will apply to profits of £250k and over, with the rate for small businesses with profits of less than £50k remaining at 19%. This will be a very significant for very small businesses and early stage start-ups that many of us are backing. However, this could have a significant impact for many scale-up businesses and may affect the aspirations of many growth-focused businesses that we are backing as they all seek to take advantage of economic recovery. This rate of CT is still less than US, Canada, France and Germany, but we will need to understand the impact on the attractiveness of the UK as place to invest and establish a high growth business. It was however, a relief to know that the Capital Gains Tax increase to the level of Income tax which had been mooted in the run up to the Budget, was not announced, but may only be regarded as ‘on hold” for further consideration alongside other tax measures (The Chancellor is revisiting these measures in a tax consultation day on 23rd March). However Annual Exempt Individual Capital Gains Tax Relief is frozen at £12,300 until April 2026.
A useful measure alongside this, is the new tax treatment for business losses, enabling businesses who have had to address the challenges of the pandemic, to carry back up to £2m against their tax bill for up to 2 years. In addition, the Chancellor stated his clear commitment to stimulating capital investment, announcing that from April 2021 until the end of March 2023, companies will be able to claim 130% capital allowances on qualifying plant and machinery investments; and a 50% first-year allowance on special rate (including long life) assets. This could be very useful in offsetting other taxes, but may be less useful for the service sector.
It was especially heartening to see the Chancellor’s commitment to addressing the funding gap for innovative scaling businesses with a number of key measures announced as a key part of his strategy for recovery for 2021. His announcement of the new £375m Breakthrough Fund represents a significant new measure. With so many businesses benefiting from the Future Fund, the Chancellor confirmed his commitment to support the growth of Scale Up businesses here in the UK. This will be delivered on similar terms to the existing Future Fund, but specifically focused on providing match funding to businesses seeking to scale, whilst acknowledging that we have lost too many tech scale-ups from the UK due to the lack of sufficient growth funding. The fund will specifically co-invest alongside equity investors in scaling businesses areas of breakthrough technology and innovation where the costs of development are high such as life sciences, quantum and clean tech, seeking £20m minimum in investment, enabling the Government to take stakes in these high growth scaling tech businesses. This will be an important boost to the supply of growth funding here in the UK and may be more appropriate for growth VC funds, however, it is likely that the same parameters will apply, using convertible loans and thus excluding EIS and SEIS investors from participating as match funders. We will keep you informed of the Fund requirements and opportunities as these emerge.
It also worth noting that whilst no change has been announced to either EIS or SEIS schemes, there has been an extension of Social Investment Tax Relief for a further two years, covering investments made before 6 April 2023. The Chancellor has recognised the importance of the R&D Tax Credits scheme and the Enterprise Management Incentives scheme to the growth of innovating small business and has announced a review of these schemes. This will provide an important opportunity to ensure that these two schemes are revised and maintained. See details of the Review and Consultation arrangements for these two schemes* .
As part of the Government’s approach to addressing the lack of growth funding here in the UK, the Chancellor also announced his intention to change the rules to make it easier for DC Pension Funds to invest in funds to back growing small businesses. This has been an ongoing issue here in the UK that we need to tackle and it is hoped that a solution can finally be found to tap into the extensive institutional fund assets. The Chancellor also announced the Government’s support for the review by Lord Hill on the UK IPO and Listings market which has been found to be unfavourable for younger high growth tech businesses. His recommendations will aim to encourage more high growth, scaling business to list on the UK Public markets, changing some of the listing rules and processes, including offering greater control to the founders, along similar lines to the US and other international exchanges.
Access to talent is vital to support economic growth and the Chancellor further reinforced his commitment to supporting access to talent through a new Visa scheme, providing special access for those with scientific innovation and technology skills. This will be a significant boost to support the growth of UK scaling tech businesses and ensure the growth of Science, Research and innovation here in the UK. Further support measures announced included the Help to Grow Scheme offering support to increase management and leadership skills, providing access to executive training through the UK’s Business schools.
The Chancellor emphasised his continuing concern with the levelling up of regional economies across the UK under the title of a “New Economic Geography”. His measures included creating a new Government economic campus in Darlington for many the key Government departments including HMT, BEIS, DIT and DCLG. He is also providing £1bn for 45 new Town deals offering £1bn across the UK regions and establishing 8 new Freeports in key parts of the UK, as new economic and trading zones. This will build on the already extensive infrastructure boost to the UK regions. As you know, there remains a very fragmented level of equity funding to support innovating growth focused businesses across the regions outside the Golden triangle and we will continue our efforts at UKBAA to build further capacity for angel and early stage investment, but there remains a need for Government to support the environment for investment in the regions, including the need to raise wider awareness of the opportunity and leverage investment through EIS and SEIS enhanced tax breaks and dedicated co-investment funds. We hope that with the allocation of further funding to British Business Bank under the Budget, that the Regional Angel Programme co-investments funds can also be further boosted to support the growth of many more angel groups.
I think we can all conclude that the Chancellor has shown a clear focus on protecting jobs and supporting businesses that are still addressing the effects of the crisis, whilst seeking to boost sustainability, innovation and business growth with a strong focus on supporting scaling tech businesses. This Budget has laid some important foundations and there were some difficult choices, whilst there remain challenging times ahead for us all. At UKBAA, we will continue to work with Government in the months ahead to ensure an effective environment to support the early stage investment market. I hope that we can all build on these measures to support our mutual objectives to support the growth of innovating entrepreneurs across the UK, as the lifeblood of economic recovery in the years ahead.
I welcome your comments, so do keep in touch.
