Among the noise, drama and stabs at humour in this weeks Autumn Budget 2017, entrepreneurs have emerged as the best placed to take advantage of the changes to VAT, investment schemes and R&D proposed by chancellor of the exchequer, Philip Hammond.
With the Tories having to back-peddle and revise the last budget in the Spring, the chancellor needed a hard hitting, positive budget to galvanise the nation into the muddy waters of Brexit. And while this budget is not necessarily the turbo-charged budget we perhaps needed, it is a large step in the right direction to turn the economy round and encourage growth in the nations businesses.
Emma Jones, founder of small business support group Enterprise Nation, says, “This was a solid budget with a strong emphasis on the Industrial Strategy, technology and R&D – and getting the UK into good shape for Brexit and beyond.
“This is what we’ve been saying for a while should be the role of government when it comes to enterprise creation and support; build the right environment and conditions for businesses to prosper and thrive, and then let businesses do what they do best.”
After upping the tax burden for SMEs by hiking flat-rate VAT to 16.5 per cent in last year’s Autumn Statement, the chancellor produced some excellent news to the nations businesses. While Hammonds jabs and jibes to illicit a laugh might have fallen flat, the chancellor did tease a reduction in the turnover level above which a business must enter the VAT system before pledging not to do so.
The threshold below which firms don’t need to register will remain at £85,000 until at least 2020. It remains one of the highest in the world, except for Singapore and dwarfs the EU average of £20,000.
This goes against recommendations made by the Office of Tax Simplification in its recent review of VAT. It said in the dossier that reducing the figure to £25,000 could raise as much as £2 billion each year for the exchequer, by bringing as many as 1.5million small businesses into the system.
Dominic Allon, vice president and managing director of Intuit Europe, says, “Small businesses across the country will be breathing a sigh of relief following the Budget announcement. Despite much fanfare over the lowering of the VAT threshold, the chancellor stood firm with the nation’s small businesses.
“Following his U-turn over the self-employed national insurance hike last spring, it’s not wholly surprising. The government is sitting up and taking note of Britain’s self-employed and small business owners. As the chancellor said, we need ‘a dynamic and innovative economy’ and we rely on the UK’s start-ups and entrepreneurs to drive this and prop up our economy in a time of continued turmoil.
“While the government has pledged not to lower the threshold for another two years, he will look at reforming it. The chancellor talked about a fairer vision for Britain, let’s hope he keeps this in mind when looking at the VAT reforms.”
The budget also listened to calls to scrap the near four per cent rise in business rates due next April by announcing a switch in the inflation measure used to calculate the rates each year from the RPI to CPI from April 2018 – two years earlier than originally planned.
CVS had predicted the RPI inflation formula would have added an extra £781 million in bills over the next two years compared with the lower CPI measure.
What’s more, to avoid a repeat of the turmoil caused by the first business rate revaluation in seven years early this year, the chancellor announced a cut in revaluation periods from five to three years. This change will come into effect after the next revision.
The chancellor also called time on the so called ‘staircase tax’ which hits businesses in England and Wales with offices in communal blocks business rates based on how many rooms are being used and how they are linked.
The government will legislate retrospectively so that businesses hit will have original bill reinstated.
Robert Gordon, CEO of Hitachi Capital UK, adds, “Bringing forward a planned business rate switch from RBI to CPI by two years, to April 2018, worth a reported £2.3 billion to businesses over next five years, can only be a good thing. The reduced business rates will help to free up capital, providing the right conditions to stimulate growth.
“Establishing a new £2.5 billion Investment Fund, incubated in the British Business Bank, is also a positive move. By co-investing with the private sector, the government estimates this could unlock £7.5 billion of investment in the coming years. The British Business Bank has a strong track record, however we’d encourage the government to publish further details in order to attract suitable private investment and make the new fund operational.”
Enterprise Investment Schemes
A change in the rules on these, often abbreviated to EIS, were widely tipped ahead of the budget, but few could have predicted what actually came to fruition.
The chancellor announced the current EIS investment limit will double for people investing in knowledge-intensive companies. This will unlock an addition £7 billion of growth investment, he claimed.
This means the generous 30 per cent income tax relief, as well as capital gains tax savings, is now afforded to investors of eligible EIS schemes on investments up to £2 million each year – up from £1 million.
In recent consultation paper on patient capital, the dossier, the Treasury said majority of EIS investment funds had a capital preservation objective in tax year 2015/16, which, if true, runs contrary to the purposes of issuing tax breaks.
But the government said it will introduce a new test to reduce the scope for and redirect low-risk investment.
Richard Coleman, senior associate of Charles Russell Speechlys, says, “To prevent the inappropriate use of EIS/VCT schemes, the government has introduced a principles-based test to determine if, at the time of the investment, a company is a genuine entrepreneurial company.
“Although we lack some of the detail and today’s announcement will be developed with guidance, it seems that the winners of this are entrepreneurs, start-up companies, genuine high growth companies and those who want to invest in them. The losers will be businesses which are heavily asset backed, which was expected and has been the direction of travel for some time.”
Sacha Bright, CEO of Business Agent, adds, “Hammond’s budget today will be welcomed by the alternative investment community. More money to the British Business Bank is likely to feed through to the peer-to-peer (P2P) community and changes to EIS and VCT investments are about trying to encourage more direct investing in genuinely entrepreneurial companies which is what crowdfunding is all about.
“It seems clear that the government is targeting large sums of money invested in tax-vehicles, rather than growth company investment vehicles, with the EIS and VCT changes. This makes it awkward for some investment managers for whom tax efficient investment in so called ‘safe investments’, where the risk to your capital investment is minimised as much as possible, has been highly profitable. In effect HMRC policing of the types of companies that are eligible for EIS and VCT funds will be stricter and this may put off many current investors who prefer some degree of reassurance from their high risk growth company investment.
“But for those investors looking for long term growth in young, entrepreneurial companies the changes should be welcomed. Increased limits could make a big difference and whilst the tap of money from fund managers may temporarily reduce in flow, there appears to be an awareness and support of the role that crowdfunding has to play in funding these companies. All in all we think the news today has been positive for young, growing companies, particularly those in the digital space; direct investment is being encouraged and government funds are being deployed.”
Research and development
Young enterprises involved in the research and development spaces are among the biggest winners following the Autumn Budget – the first in 21 years.
The government will ring fence an extra £2.3 billion of its funds for investment in research and development. It also upped the main tax credit affording for young firms operating in the space from 11 per cent to 12 per cent.
Mark Tighe, CEO of the R&D tax specialist, Catax, comments, “In terms of future-proofing the UK economy, this was an extremely encouraging Budget. The fact that the Chancellor focused on the need for innovation so early in his speech shows the structural importance of R&D to the modern UK economy.
“The increase in the Research and Development Expenditure Credit from 11 per cent to 12 per cent is a crucial step forward for UK research and development.
“With Brexit looming ever closer, the need for the UK to position itself as a major centre for global R&D has never been more important. An increase to 15 per cent would have been a far more robust statement of intent, and many in the industry had quietly been hoping for it, but a rise to 12 per cent should be applauded.
“While this rate increase is targeted at large companies, it is also available to SMEs that are in receipt of state aid for their R&D – through grants, for example. Unfortunately, this is an area of tax relief that is often overlooked and under-claimed.
“While the chancellor has chosen the future, one element of his thinking about R&D remains stuck in the past: he once again made the same mistake of overly associating the research and development revolution with the most cutting-edge technologies, such as driverless cars, AI and 5G. Yes, these sectors symbolise the vanguard of innovation but we should not forget that many everyday businesses are also performing R&D day in, day out.
“The government needs to drive greater awareness of what constitutes R&D in order that the many companies performing it unwittingly can take advantage of the lucrative tax reliefs available. The lack of knowledge surrounding what constitutes R&D is a fundamental problem as the money companies get back through R&D tax credits is generally reinvested in further R&D, which is a virtuous circle for any economy seeking to increase its productivity and compete on the international stage.”