Following Wednesday’s blockbuster Spring Budget announcement by Chancellor Rishi Sunak to parliament, Business Leader spoke to a selection of industry experts on how the various measures will impact the UK entrepreneurs.
On the announcement of a 25% Corporate Rate and a 130% Super Deduction, Sam Dumitriu, Research Director of The Entrepreneurs Network said: “A higher corporate tax rate will discourage investment and make the UK less competitive internationally, so it is right that the Chancellor has combined it with a new 130% Super Deduction for investment.
“However, when the two years are up and Corporation Tax rises to 25%, the UK will fall far down the list on international tax competitiveness. Although, we currently have a low headline rate, the effective rate that businesses actually pay is mid-table by international standards due to stingy capital allowances.
“To avoid an investment slump, as the OBR forecast, when the Super Deduction expires, the Chancellor should allow businesses to write off the full value of their investments – the so-called full expensing he mentioned at the despatch box.
“But a high rate, even with full expensing, increases the incentive to engage in sophisticated tax avoidance and shift headquarters. To counter that, the Chancellor needs to think hard about fundamentally reforming how international profit is taxed.”
On the announcement of Help to Grow, a new scheme designed to help businesses adopt management best practices and productivity-enhancing software, Sam Dumitriu, author of Management Matters said: “Management practices explain almost a third of the differences in productivity between and within countries. And pre-pandemic data suggests that if the UK’s 1.1m micro businesses doubled their uptake of key digital technologies, it would lead to a £4,050 average productivity for the millions of workers they employ.
“It’s right then to harness the UK’s world class business schools to deliver a programme of peer mentoring to get more businesses to adopt best practice. It’s also right that they’ll be provided with free, impartial advice and financial support to purchase productivity enhancing software. But there’s a risk innovative business-to-business startups will be cut out from the scheme. It is vital that startups are involved in the design of the scheme and that software vouchers do not only go to tech giants.”
On the new ‘elite points-based visa’, Philip Salter, Founder of The Entrepreneurs Network, said: “UK entrepreneurs will welcome the new ‘elite points-based visa’, which will come into force by March 2022, allowing those with a job offer from a recognised UK scale-up to qualify for a fast-track visa. Also, allowing holders of international prizes and winners of scholarships and programmes to automatically qualify for the Global Talent visa will offer the necessary assurance to the very best and brightest that they are welcome in the UK.
“We welcome the expansion of the Global Entrepreneur Programme and review of the Innovator visa. The Innovator visa is currently unfit for purpose, needing fundamental reforms to align incentives so the pricing is clear and more high-quality organisations become endorsing bodies. As our Job Creators report has found, prior to Brexit 49 per cent of the fastest growing businesses in the UK had at least one foreign-born founder. If we are to continue this record, we need to ensure that the visa process is as fast and unbureaucratic as possible.”
On support for businesses to offset corporate tax losses against their last three years of tax, Sam Dumitriu said: “This will be a boost to businesses who have run up large losses due to the pandemic providing much-needed cashflow.”
On the Chancellor’s decision not to raise Capital Gains Tax, Dumitriu continued: “Before the budget entrepreneurs warned the Chancellor against ill-thought out plans to equalise the rates between Capital Gains and Income Tax. If the UK is to remain a destination for entrepreneurs and support repeat entrepreneurship, it is vital that we keep Capital Gains Tax rates competitive and take into account the risk taken by the job creators across the UK.”
What does the future hold for entrepreneurs?
Ray Abercromby, Tax Partner at the Birmingham office of Smith & Williamson said: “The Government is seeking to lay the foundations for a recovery driven by the private sector and, for entrepreneurs, the announcements focused on recovery, growth & support rather than increasing taxes.
“For entrepreneurs, the 2021 Budget was very much about what was not announced, following mounting speculation regarding capital gains tax (CGT) rate increases in the run up to the Budget. This was driven primarily by the November 2020 report by the Office of Tax Simplification (OTS) in which a key recommendation was to more closely align income tax and CGT rates; the OTS report followed a substantial erosion of Entrepreneurs’ Relief announced in the 2020 Budget.
“The retention of current CGT rates will be welcome news to entrepreneurs working to eventually realise capital value from their business, although the Chancellor could still revisit the issue in his Autumn Statement. The Government will also be releasing a number of tax consultation papers on 23 March, which may provide further insight on potential wider tax changes that could be introduced as the economy recovers. These consultations may include recommendations from recent reports on more wholesale reforms to capital gains tax and inheritance tax.”
Looking at pensions, Ray comments: “Pensions would appear to be unchanged; entrepreneurs can still make payments of up to £40,000 per year – either personally or from their companies – into their pension schemes. The standard Lifetime Allowance will, however, be frozen at £1,073,100 until 5 April 2026 at the earliest. In real terms, that provides a significant erosion of the amount that can be put into pension schemes. An increase in inflation rates would exacerbate this.
“There were also no changes announced to tax reliefs available to individuals when they invest in businesses, including the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and the lesser known Investors’ Relief, which can enable investors to pay a 10% rate of capital gains tax on gains up to £10m. With Business Asset Disposal Relief (the replacement for Entrepreneurs’ Relief) having a reduced £1m lifetime allowance, Investors’ Relief may attract increased attention.”
Dr Keith Arundale, Senior Visiting Fellow at Henley Business School who specialises in private equity and venture capital delved into the statistics surrounding the announcement. He said: “The big shock to UK businesses is of course the huge jump in corporation tax to 25% in 2023, the upper end of what had been expected. Fortunately, small businesses with profits of £50,000 or less will continue to pay tax at 19%. Businesses will be keen to see the detail on the new super deduction whereby they can reduce their tax bill by 130% of cost of investment.
“The anticipated and feared capital gains tax reform did not materialise, at least not for now, much to the relief of entrepreneurs and to private equity firms who dread their carried interest being taxed as income. The Chancellor is to be applauded for focusing on getting Britain working again as we hopefully come out of the lockdown.
“What we also need is more financial support for start-up businesses, not just government matching funding for companies that have already received third party investment. Whilst the Future Fund has invested £1 billion in 1,000 start-ups this had to be made on the back of third party investment already received. SME businesses raising money for the first time have seen a 44% decrease in finance in the period since March 2020 compared to the prior year and 20% fewer deals*. VCs and business angels are avoiding this space.
“Furlough must end eventually; we need support for the many people expected to be made redundant and encouragement to start their own businesses. The new recovery loan scheme to replace the bounce back loans and Coronavirus Business Interruption Loan Scheme, continuing business rates relief to end of June, and the 5% reduced rate of VAT for hospitality businesses to end of September are certainly welcomed. As is the first ever UK Infrastructure Bank which will support some £40bn of green, innovative, fast growing businesses.
“Going forward, if and when the Chancellor does eventually raise capital gains tax rates, this could result in entrepreneurs moving overseas and PE firms also relocating to avoid their carried interest being taxed as income. A recent report from Beauhurst revealed that 85% of founders would consider moving their companies abroad and 72% of business angels would be less likely to continue investing in UK companies if capital gains tax reform came in – scary figures!”
Has the chancellor forgotten the importance of entrepreneurs?
The Chancellor has missed a big opportunity to instill confidence within the entrepreneurial community, key stakeholders in boosting the economic recovery, say audit, tax and advisory firm Blick Rothenberg. Milan Pandya a partner at the firm spoke to Business Leader.
It is clear that the Chancellor has listened to cries of business and households but why have entrepreneurs, who represent the backbone of the UK economy, fallen on deaf ears?
Employing the majority of people and accounting for over half of the turnover of the UK economy, SMEs are the engine room the country and just under 100% are privately owned. Behind all SMEs there is an entrepreneur – those who take significant financial risk to get a business of the ground and help it to grow, often at significant personal cost.
The Chancellor’s budget has been silent on supporting this community to invest further and help turbo charge the economic recovery.
Entrepreneurs, like the businesses they support, need long term confidence and incentives to take the risk of investing, especially at a critically low period in the economic cycle when the risk of failure is much greater. Furthermore, given the high levels of bank deposits accumulated by individuals during the pandemic this was the perfect opportunity for the Chancellor to incentivise entrepreneurs and unleash capital to help fuel the economy. This was an opportunity missed.
The Chancellor should have enhanced the personal tax reliefs associated with investing in UK businesses under the Enterprise Investment Scheme or Venture Capital Trust regime. Currently, these schemes offer a 30% Income Tax credit, and this should have been increased for investments made over the next 12 months. Furthermore, the tax reliefs should have been extended for investment through loans (and not just shares) to facilitate more immediate cash to UK businesses from private lenders and the extent of qualifying companies should have been broadened.
Whilst the extension of the key support measures coupled with the introduction of new initiatives provides a great short-term stimulus there is a real risk that the pandemic leaves a long-lasting scaring effect on business and households which requires continued government intervention.
The private sector, and entrepreneurs in particular, are a key part of the overall long-term solution to re-energise the economy and allow the government to limit its continued involvement. Such businesses and its owners make a significant contribution to tax receipts collected by the Government and are increasingly at the forefront of innovation, another cornerstone of the long-term prosperity of the country.
The Chancellor should also have reinstated Entrepreneurs’ Relief lifetime limit to £10m. He must fairly reward those who make such a contribution. He has taken a ‘support now, tax later’ approach, without providing any incentives for business owners. Also, leaving the uncertainty of not knowing how they will be taxed in the future, creates a perfect recipe for this community to limit their investment. This cannot be good for the economy.
Business Leader then spoke to Luke Davis, CEO of IW Capital on the subject.
The huge amount of money spent during the pandemic has become a problem for this Government, one that needs addressing, but we cannot afford to look at public finances with a short-term view. Creating an eco-system for businesses to thrive, grow and hire more workers is a sure fire way to increase tax receipts in the long run and while immediate tax increases give an immediate result, it is often lower taxes that see long-term success.
There is a clear sentiment for growth among business owner, but this is now met with income and corporation tax rises. The incentive to grow is now heavily burdened and this will furthermore impact future entrepreneurialism here in the UK.
We understand that the money has to come from somewhere, but this is something that needs to be balanced out. This rise in corporation taxes, which is the first we have seen in over 40 years, provides no incentive for companies to be profitable and therefore hinders the future growth of our economy.
Although we also saw a number of incentives to invest here in the UK announced yesterday, the increases we are now seeing around both corporation and income tax could in fact decrease our appetite to invest and undermine this push towards investment, which is meant to be the main focus.