The Chancellor’s Budget: Balancing the Books through Stability, Growth and Public services

What a contrast! Having heard a Chancellor who made a huge virtue out of tax cuts only eight weeks ago, Chancellor Hunt has made tax increases (albeit many by stealth) the core of his budget and financial plan. The Chancellor’s focus today was on stability, growth and public services as a means to rebuild our economy, whilst being honest about the challenges and the need to take difficult decisions. This budget, unlike Kwasi Kwateng’s budget, was set against a backdrop of the OBR’s gloomy forecast, indicating that inflation is expected to rise to 11.1%, growth drop by 9.7% and the steepest rise in cost of living and biggest drop in personal disposable income since records began in the 1940s. Jeremy Hunt was however predicting that his budget would achieve a shallower downturn and higher longer term growth whilst rebuilding public finances and more than halving pubic borrowing over the next five years.

Taxation: His approach to tax was based on asking that those with more to contribute should be paying more. It is clear that these measures are likely to directly impact many in our community both investors and scaling entrepreneurs. Measures include reducing tax thresholds at which the 45p rate now becomes payable from £125k, whilst inheritance tax threshold will also be frozen. At the same time the dividend allowance cut from £2000 to £1000 next year and then right down to £500 from April 2024 may affect a significant number of small businesses.

For many of our investors, the cuts in Capital Gains Tax allowances from £12,300 to £6000 next year and then ultimately down to £3000 may be challenging for many investors looking to realise their investments this year and also for entrepreneurs who have been wanting to cash in their successful growth , especially in the face of the reduction of Entrepreneurs Relief. However, this actually offers real opportunities for further promotion and take up of the Enterprise Investments scheme and the Seed Enterprise Investment scheme offering CGT reliefs for investment in start ups and which is also deferred as long as gains are rolled into further investments in small businesses .

Whilst deciding to freeze the employers National Insurance contributions threshold until April 2028 he is retaining the employment allowance at the NYU higher level of 5000 which he maintains enables 40% of all businesses to pay no NICs at all. Comfortingly ,VAT registration threshold is being maintained at that same level until March 2026. The Chancellor was also pleased to announce however that big tech and large multinational corporations would be paying more tax in the countries where they operate and he would make sure that the UK gets its fair share.

In relation to R & D Tax Reliefs, he expressed his concern over reports of abuse and announced his decision to cut the deduction rate for the SMEs scheme to 86% and the credit rate to 10%, whilst increasing the rate of the separate R&D expenditure credit from 13% to 20%. This may well be one of those situations where due to the misuse by certain intermediaries a significant number of small R and D intensive businesses may be unnecessarily deterred from gaining the benefits of the scheme. However, the Chancellor has committed that ahead of the next budget he will work with industry to understand what further support our R&D intensive businesses may require.

In looking at business rates, he was keen to emphasise that they should actually reflect market values, but he announced that nearly 2/3 of business properties will not pay a penny more next year and thousands of hospitality sector businesses and small retail shops could benefit. The measures will include a new government funded transitional relief scheme as called for by the CBI, FSB and others which would benefit around 700,000 businesses.

Public Spending: The Chancellor was clearly facing some difficult decisions in committing to grow public spending, but more slowly than the growth of the economy However he did commit to protect the increase in departmental budgets for the remaining two years of the Spending review in cash terms, but from then on spending would be held at 1% a year in the three years that follow. The implications of this would most certainly mean cuts in many public services especially in the face of inflationary pressures and these could affect services and support to small businesses, although these cuts have yet to play out given the long term plan around this.

Jeremy Hunt was concerned to reflect their commitments to the long term growth of the NHS and ensuring a world class educational system. In relation to education, he announced a new skills reform programme to raise the skill level of school leavers and a £2.3 billion additional commitment to schools over the next two years. Recognising that health and social care would remain the overriding priorities for spending , he underlined the need for a long term plan for NHS staffing, more efficiency and more joined up working whilst announcing an increase of 3.3 billion per year for the next two years for the NHS ,totalling an £8 billion package for the health and social care system.

Growth Plan: The Chancellor’s plan for growth was based on the premise that you can’t borrow your way to growth, but set out his ambition to build a high-wage, high-skill economy that leads to long term prosperity. In addition to people and skills, he set out the Government’s core growth priorities for energy, infrastructure and Innovation.

Energy, the key focus was on energy independence and efficiency to reduce demand and climate impact. Whilst seeing Britain as a global leader in renewable energy he was keen to support offshore wind carbon capture and storage and nuclear, announcing that he will proceed with the new plant at Sizewell C and committing a further 6 billion to energy efficiency to 2025. Leveraging private sector investment is clearly vital and it will be important for the Government to recognise and support the important role that the angel and early stage investment community plays in accelerating innovative solutions and applications across the energy sector.

Infrastucture: it was heartening to see that the Chancellor will continue with infrastructure plans for the regions and would not be cutting capital budgets in the next two years maintaining the same level in cash terms. This will enable many of the infrastructure plans for the regions to still go ahead including delivery of the core Northern Powerhouse rail HS2 to Manchester, also East and West rail and broadband roll out. This includes continuing with round two of the Levelling up fund at least matching the 1.7 billion set out in round one. This will be important news for all players in the ecosystem across the northern regions and the Midlands and enable many of the businesses in those regions to continue to build and grow increasing their connections and access .

Innovation: It was extremely heartening to hear that the Government intends to protect the entire R&D budget and confirmed that there will be an increase in public funding for R&D to £20 billion by 2024- 5. Maintaining this commitment will be vital to leveraging private sector finance across the UK and to ensure successful commercial exploitation of science and innovation.

The Chancellor recognised that we needed to be better at turning world class innovation into world class companies announcing an ambition to combine our technology and science leadership with our strength in financial services to “turn Britain into the world’s next Silicon Valley!” ( haven’t we heard this before?). In taking this forward, he committed to announcing changes to EU regulations in five growth industries: digital technology; life sciences; green industries; financial services and advanced manufacturing . Notably he has invited Sir Patrick Vallance Chief Scientific Advisor, to lead new work on how to change regulation to better support safe and fast introduction of new emerging technologies. Further measures include removing import tariffs on over 100 goods used by UK businesses in production and supply chains. He also confirmed that the new Investment Zones which were previously announced were to be re-focused on leveraging our research strengths to help build new Innovation clusters, to be announced ahead of the spring budget.

The Chancellor also restated the government’s mission to make the UK the world’s most innovative and competitive global financial centre and used this opportunity to announce the intention to publish the decision on Solvency II . This will unlock 10s of £billions of investment for growth businesses and is a long-awaited decision that many parts of our investment community will welcome.

Compassion: He was keen to emphasise that, alongside these hard- nosed economic decisions, the Government remained compassionate and wishing to protect the most vulnerable. The package on further energy support from April, with additional targeted support to both individuals and small businesses is extremely welcome ,whilst also setting this alongside the increase in the National Living wage, increasing pension credits and keeping state pension in line with inflation. These measures will be seen as extremely welcome against the backdrop of the dire OBR forecasts of the drop in so many peoples living standard, but it will not detract from the very severe challenges that so many people will be facing in the year ahead.

The Chancellor clearly hopes that through this budget he has proved that he could not only move towards balancing the books, but could achieve a strong economy with stability, growth and public . He has set himself a huge task and we can only hope that he has got it right!

We will continue to monitor developments at UKBAA and welcome your thoughts and ideas.

Jenny Tooth OBE

Executive Chair

UK Business Angels Association

17 November 2022

By UKBAA 17 Nov 2022