Despite the swathe of lockdown-combatting interventions announced or prolonged yesterday, the Budget largely followed its usual formula of spending and taxation announcements coupled with, and informed by, Office for Budget Responsibility (OBR) forecasts. For a chancellor to be forecasting growth whilst the country is under stay-at-home order is a little surreal, possibly even naive. In particular, forecasting employment levels whilst nearly five million people are furloughed feels hubristic. The OBR forecasts have always needed a pinch of salt—this year you might need a whole bag.
Nonetheless, the Chancellor’s general thesis appears to be that supporting growth in the short term will allow a return to fiscal responsibility in the medium term. However, he made it clear that that responsibility will manifest itself not only through borrowing but also from increasing taxes. Although rises to personal tax rates were taken off the table, allowances and band rates would be frozen, which will lead to real terms increases. More striking, is the plan to increase corporation tax from 19% to 25% in 2023, but a new Small Profits Rate will mean only businesses with profit of more than £250k will be taxed at the 25% rate. This means only 59.5k of the UK’s 4.84m companies would be affected, were the change to be made overnight. Additionally, a new ‘Super Deduction’ will allow businesses a 130% relief against capital expenditure and will certainly drive growth in larger, more traditional firms, including many of the scaleups we track.
But this increase to corporation tax is possibly indicative of increases elsewhere. Subscribers to our newsletter and readers of our blog will have seen our recent research on the impact of proposed changes to Capital Gains Tax (CGT). Whilst it’s a relief not to have seen any change in this Budget—which our survey showed would put 3.08m jobs in the high-growth economy at risk—I don’t think we’re out of the woods yet. We’re still due an additional paper from the Office for Tax Simplification on CGT, and it’s likely that we will learn more about No 11’s thinking about this tax on 23rd March, ‘Tax Day’. We will continue to make the case wherever we can about the need for, at the very least, a proper set of exemptions and incentives for entrepreneurs.
I don’t want to be too pessimistic because there were good things in the Budget for entrepreneurs. The most immediate is the creation of Future Fund: Breakthrough, the sequel to the summer blockbuster that was the Future Fund. Broadly, we need to question whether either of the Future Funds are an intervention needed to correct a market failure, or just a good investment for the taxpayer. When we include Future Fund activity, 2020 was a record year for investment into startups and scaleups, which suggests the latter. In either case, this is good news for entrepreneurs because more capital and different financing options allows them to better arrange their finances to go for growth.
As a co-investment vehicle, neither the original Future Fund nor its sequel are wildly different to the way the taxpayer currently co-invests into funds via the British Business Bank (BBB). An important difference, however, is that the taxpayer is currently told which funds the BBB invest in, whereas we still don’t know the full list of companies that the Government has directly invested in. We will continue to make the case for that data being public and, in the meantime, are doing everything we can to identify these companies through research.
The Chancellor also announced a slew of consultations, three of which should directly impact entrepreneurs. The first could do a lot more than the Future Fund to drive even more capital to entrepreneurs. A review of pension charge caps could allow more institutional money to flow to funds that invest in startups and scaleups. As it stands, the UK currently lags well behind the US in the proportion of pension fund money invested in private companies, which this review will hopefully fix.
Meanwhile, another consultation on R&D tax credits should, at the very least, increase the scope of the relief to include data and cloud computing costs—thanks to our friends at Coadec who have been lobbying for that change for a while. And a review of the Enterprise Management Incentive (EMI) will hopefully see an expansion of the scheme. The ethos behind these consultations suggests a high-level awareness of the importance of external investment, research and development, and talent incentives to startups and scaleups. That makes me optimistic that the consultations will lead to tangible benefits for the high-growth ecosystem.
Finally, consultations and reviews commissioned previously will start to bear fruit soon. Although an initial public offering (IPO) remains a rare form of exit—only 12 UK startups or scaleups IPO’d last year—both the Kalifa Review and the Hill Review argued for reform of the rules around listing. There are currently rules (particularly around free-floats and share classes) that, if relaxed, might attract and allow more companies to list, without compromising the responsible regulatory environment for which London is respected. This strategy may have already yielded fruit, as Deliveroo has just announced that they will list in London.
This is by no means the most pro-business government the UK’s ever seen, but with Rishi Sunak on the financial tiller, the relationship is at least more supportive than Boris Johnson’s expletives.