Friday morning’s ‘mini-Budget’ felt more like a full fiscal plan for the UK as Kwasi Kwarteng delivered a sweeping set of measures.
The ‘pro-business’ Chancellor cancelled a planned rise in corporation tax from 20% to 25%, which – at the lowest rate in the G20 – he said would plough almost £19 billion a year back into the economy.
Simplification of the much-maligned IR35 rules governing how temporary contractors are paid – in effect placing the burden on freelancers, not the recipients of their services, to determine the tax status of the contractor – would “remove unnecessary complexity and costs for business”, he told Parliament. The government plans to repeal the 2017 and 2021 IR35 reforms from April 6th next year.
Annual Investment Allowance – the amount companies can invest in plant and technology tax-free – will remain at £1 million permanently, rather than allowing it to return to £200,000 in March 2023.
The seed enterprise investment scheme (SEIS) has been widened, giving investors tax relief on startup funding up to £250,000 – 66% more than previously – while share options for employees have also doubled from £30,000 to £60,000.
Meanwhile, the government is in discussions to set up investment zones with 38 local areas in England potentially offered measures such as no business rates and waived stamp duty to encourage growth.
Kwarteng also scrapped the 45% top rate of income tax – benefiting society’s highest earners – and cut the basic rate from 20% to 19%; scrapped European Union-inspired rules which limited bankers’ bonuses; scrapped a planned increase in duty on alcohol; introduced VAT-free shopping for overseas visitors; and revealed details of the plan to support businesses and citizens with spiralling energy costs.
Update on October 3rd 2022: The government has U-turned on its plan to scrap the 45% top rate of income tax following widespread criticism, including from within its own party.
Investment reform
Moray Wright, CEO at Parkwalk Advisors, described the Budget as a “pivotal moment for high-growth technology businesses”.
“We very much hope that a significant portion of the new £500 million in capital for high-tech and fast-growth investments is allocated to seed-stage investments rather than later-stage VC,” he added. “This is where intervention is most needed.”
Russ Shaw CBE, founder of Tech London Advocates and Global Tech Advocates, said the unlocking of pension fund investments into UK assets and high-growth businesses – including new innovation funds and tech scaleups – was significant. “To ensure this all takes shape however, the government and the private sector must invest in the digital skills necessary to kickstart true economic growth.
“As a nation, the UK urgently needs diverse talent to fill vacancies in the digital sector to cultivate an ecosystem that can be at the forefront of our economic recovery.”
Seb Wallace, investment director at Triple Point Ventures, added: “It is promising to see the long-discussed policy around pension reform come to fruition, unlocking investment into innovative high-growth companies in the UK.”
Sarah Barber, CEO of Jenson Funding Partners, described the measures as a “huge boon for fast-growth businesses”. “Until now, it’s felt like successive governments were sleepwalking on EIS and SEIS. It felt like we’d grown complacent, as the news agenda was dominated by crisis after crisis, with limited room left for long-term planning,” she said.
“No longer. Scrapping the sunset clause will give investors and entrepreneurs alike a much clearer path to future growth, and the increase to the SEIS investment cap will let entrepreneurs raise more money in less time.
“The impact of the latter point cannot be overstated: entrepreneurs should now have to spend less time fundraising, and more time doing what they do best – building a business. This is a fantastic commitment to British businesses from the new government.”
Stephen Page, founder and CEO of SFC Capital, said: “We have heard rhetoric about making the UK ‘a nation of entrepreneurs’ before – but proposed measures such as reform to SEIS, an extension to EIS, making £500 million in new funds available for investment in high-tech innovation and fast-growth tech businesses, and unlocking pension funds to invest more in higher-risk asset classes such as venture capital are all very encouraging.
“SEIS reform in particular is something that SFC Capital as the UK’s most active SEIS fund — alongside allies such as the EIS Association and Coadec — has been campaigning for for several years. It’s a wonderful programme that has given countless innovative companies a kickstart on their growth journey, but it was increasingly a victim of its own success — the cap was rapidly outpaced by the impact of the growth it was itself driving on early-stage companies’ funding needs.”
Corporation tax increase scrapped
Katie Gallagher, managing director of Manchester Digital, said members of the trade body welcomed the reversal as well as the increase in National Insurance and reduction in income tax.
“This will give early-stage businesses a boost to ensure they are given every chance to succeed. However, tech companies and startups are nervous for the economic future, having seen investment drying up, hiring freezes and the ongoing skills shortages,” she said.
“This Budget leaves many questions about costings, but in the short term we are glad to see some measures to support businesses. We look forward to seeing the full economic and fiscal forecast later this year.”
Derek Ryan, UK MD at Bibby Financial Services, said the previous proposal to increase corporation tax to 25% would only have applied to those making profits of £50,000 or more, which is approximately 70% of businesses.
“For a significant number of the UK’s 5.6 million small-to-medium-sized businesses, profits fall well short of this threshold,” he said. “Consequently, today’s announcement makes little or no difference to their prospects for growth or survival.
“Small-to-medium-sized businesses clearly need more direct, long-term support if they are to make a meaningful contribution to Mr Kwarteng’s ambitions.”
Tax reform
Glenn Collins, head of ACCA UK, welcomed the aim of simplifying tax. “The tax system as it stands is overly complex and burdensome for businesses, individuals and public bodies. The reform in April 2021 to IR35 left many businesses without the support they desperately needed due to confusion surrounding the rules and regulations,” he said.
“Now more than ever, simplicity is key. A simpler tax system avoids the potential for mistakes and enquiries, which too often distracts HMRC from addressing serious and deliberate evasion.
“However the dissolution of the Office of Tax Simplification is worrying and will impact UK businesses. The OTS previously worked with holding agencies and provided guidance on previous tax reforms and regulations.
“Without the OTS and with further details needed on how the government will simplify tax many UK SMEs will still be facing a complicated and unclear tax system.”
Investment zones
Gavin Poole, CEO at Hackney innovation and technology campus Here East, said the creation of Special Investment Zones will attract talent, investment and spearhead growth for the regions around the UK that need it most. “Having been a part of the evolving journey of East London since 2012, we know that private and public sector collaboration is crucial – and the government must not forget to listen to the communities that will sit within these regions,” he said.
Janine Hirt, CEO of Innovate Finance, said the zones will encourage FinTechs to scale outside of London. “This will help create growth nationally and provide people around the country with the chance to access well-paid, skilled jobs in the sector,” she added.
“It is critical that we provide FinTechs with the resources they need to help consumers and SMEs get through the next 18 months, and it is promising to see this reflected in the government’s plans.”
Manchester Digital MD Gallagher added: “We tentatively welcome the concept of the new low tax Investment Zones. We call upon the government to work hand in hand with the existing regional tech ecosystems which already understand the local economy and where investment is needed to really flourish.”
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More reaction
Murray Campbell, business consultant at RegTech AutoRek, said it was a clear priority for the government to increase competition in the UK’s financial services sector, demonstrating that the UK is an attractive market for both FinTechs and more traditional financial firms.
“But with announcements regarding regulatory reform not coming until later in the autumn, the government must move quickly or risk chaos and confusion which threatens the new era they’re looking to establish,” he said.
Mike Elton, director at logistics & supply chain tech firm FarEye, said the Chancellor had “dealt his trump cards all at once”, adding: “We needed a growth plan to help attract and retain staff right across the industry, and on the surface, we got it.
“But will it be enough to keep the shelves stacked and books balanced? Retail businesses and their supply and logistics chains are really in dire straits.
“The big question is whether these initiatives ultimately rob Peter to pay Paul… simple economics tells us that inflation is fuelled by too much money chasing too few goods and services, so a short-term reprieve through these tax cuts is likely to further push inflation – including wage inflation – upwards. For many, the maths still won’t add up.
“Many details are still unclear, including the criteria to qualify as a ‘vulnerable business’ for the longer term energy relief scheme.”
Ritam Gandhi, founder of Studio Graphene said: “This streamlined Budget offering confirms that businesses will be receiving some much-needed support with their energy bills this winter. This will protect businesses and consumers, and will prove a lifeline for many.
“However, the new price cap will do little to tend to the concerns of tech startups – many of whom are not office-based, but remain subject to the damaging influence of inflationary pressure on their costs.
“Any government setting out an ‘unashamedly pro-growth’ agenda should put tech in the driving seat, and that requires better access to talent and ongoing work to unlock the UK’s potential through better digital infrastructure. The government could look to pair their short-term aid with long-term support for aspirational tech startups, by encouraging more young people to take up digital skills training to address the urgent skills gap that could hamper the industry’s growth.”
Mohsin Rashid, co-founder of ZIPZERO – a shopping app which allows people to earn cash back towards their monthly bills – said: “This new administration has made bold claims about prioritising the growth of the economy. Enhancing consumer spending power is integral to achieving this. Yet, it seems that the government fundamentally misunderstands whom the cost-of-living crisis is hitting hardest.
“Allowing bankers to receive greater bonuses, with incalculable rises to incomes on top of six figures salaries, while providing only 63p a month more to the lowest earners seems invariably at odds with their strategy. A more tactful response would see tax support for the lowest earners – far more likely to re-enter the economy than to bolster individual savings.”