Autumn Statement: Growth prioritised but does it go far enough for entrepreneurs?

The autumn statement was the third fiscal event in eight weeks so you’ll be forgiven if you’re somewhat confused about what remains in force.

On 17 November 2022 the Chancellor, Jeremy Hunt, announced the priorities of the autumn statement were “stability, growth and public services”. Growth has been at the forefront of recent fiscal events - Kwasi Kwarteng labelled his a “new growth plan” and whilst the chaotic fallout has been met with criticism the Chancellor recognised “the motivation of my predecessor’s mini-budget and he was correct to identify growth as a priority”.

We are living in very uncertain times with high inflation, the fallout from the war in Ukraine and a recession looming. The autumn statement attempts to fill the black hole in the government’s finances with various tax hikes, a reduction in certain reliefs and prospective cuts to public expenditure.

Tony Danker, the Director- General of CBI, recently said “we need to make the UK an attractive place to invest” and firms are deciding “whether to invest for next year or whether to go into hibernation.” In our experience most entrepreneurs are interested in any schemes which promote investments and any reliefs they can claim to keep expenditure as low as possible, especially when they are just starting out.

In this blog we consider what remains from the original mini-budget in September 2022 as well as reforms announced in The Chancellor’s recent autumn statement, with particular focus on the impact this will have on entrepreneurs:

1. Seed Enterprise Investment Schemes (SEIS)

The government have remained committed throughout the fiscal announcements to reforming SEIS. The Chancellor said the “government is increasing the generosity and availability of the Seed Enterprise Investment Scheme and Company Share Option Plan” as well as remaining supportive of Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT). 

As explained in our previous blog Mini-Budget U-turn – what does this mean for entrepreneurs from April 2023 companies can raise up to £250,000 under the scheme, whilst the gross asset limit will be increased to £350,000, the age limit from 2 to 3 years and the cap for investors will be doubled to £200,000.

The retention of this reform is key to entrepreneurs as it promotes investment into start-ups by providing tax breaks for those investing into these projects. As detailed in our previous blog, investing into start-up companies is seen as risky by many, so this scheme aims to decrease the risk for individual investors, thereby making the investment more attractive. Founders will be particularly relieved to see this reform has remained as it incentivises investment. Keeping these provisions appears logical, as they arguably support the government’s objectives too. This should help start-ups to succeed, and a successful start up generates material tax (VAT, PAYE, corporation tax etc).

2. Annual investment allowance (AIA)

As with SEIS the government has retained their commitment to AIA. From April 2023 the £1 million level of AIA will be made permanent. Businesses can deduct 100% of the costs of qualifying plant and machinery up to £1 million in the first year.

The Chancellor has confirmed this allowance increase will be made “permanent” which will help give some certainty to entrepreneurs seeking to claim this tax relief.

3. Dividend allowance and capital gains tax (CGT) rates

The Chancellor introduced in the recent autumn statement cuts to the dividend allowance and CGT annual allowance. The dividend allowance will be cut from £2,000 to £1,000 in 2023/24 then to £500 in 2024/25. The CGT annual allowance will be cut from £12,300 to £6,000 in 2023/24 then to £3,000 in 2024/25.

These changes will particularly penalise entrepreneurs who pay themselves by way of dividends as the amount they will be able to be paid in this way will significantly reduce. The 1.25% increase on dividend tax remains and therefore the dividend rate will remain at 8.75%, 33.75% and 39.35% for a basic rate, higher rate and additional rate taxpayer, respectively.

The dividend allowance cut combined with the recent increase for tax on dividend income will make payment of dividends unattractive for entrepreneurs. The dividend allowance reduction comes into force from 2023/24 so entrepreneurs should give careful thought to declaring any dividends before this comes into effect.

4. Business rates

The Chancellor has frozen the business rates multiplier for another year to protect businesses, confirmed the rating revaluation will go ahead as planned, as well as increasing rates reliefs.

This is expected to save companies £9.3 billion over the next five years. Business rates have been a bone of contention for many years and the announcements in the autumn statement should have a positive impact on businesses especially within the retail, leisure and hospitality sectors. As the business rate multiplier has been frozen until 2023/24 this provides businesses with a little bit of certainty for the year ahead which is especially important given the country is going into a recession if we are not there already.

Many are still calling for a complete reform of the business rates system but for now there is some positive news.

5. Investment zones

The previous fiscal announcement introduced this scheme which designed investment zones in 38 areas which would “benefit from tax incentives, planning liberalisation, and wider support for the local economy." The Chancellor said the government will now “refocus” the investment zones towards "leveraging our research strengths, to help build clusters for our new growth industries.”

Whilst little was known about the investment zones it was anticipated this could have been particularly lucrative for entrepreneurs setting up a business and trying to keep expenditure as low as possible. Time will tell how the government “refocuses” however from a founders perspective it is a shame these zones have been scrapped in their entirety.

6. Research and development (R&D)

From 1 April 2023 the research and development expenditure credit rate will increase from 13% to 20%. For small and medium-sized enterprises the additional deduction will decrease from 130% to 86% and the credit rate will decrease from 14.5% to 10%. Whilst the government says the R&D tax relief reforms from the 2021 autumn statement remain, these changes are not going to be legislated until the Spring Finance Bill 2023.

The Chancellor said this reform was to stop fraud “with the generosity of the relief making it a target for fraud.” Whilst the aim is to curb abuse of the relief the increase in the tax rates may discourage businesses to invest in technology and innovation. Perhaps the focus should be on enforcing the rules to combat any fraud rather than punishing business with an increase in the tax rate.

 

The autumn statement aims to deliver “a consolidation of £55 billion and means inflation and interest rates end up significantly lower.” Growth is highlighted over and over again in the autumn statement however some of the announcements may make investing in start-ups less attractive. If there is less investment there will be less tax to pay on those investments and consequently the aim of the government to increase the amount of tax paid may in fact be the opposite of what happens.

In the autumn statement the Chancellor said “I want to combine our technology and science brilliance with our formidable financial services to turn Britain into the next Silicon Valley.” The Chancellor’s ambition is commendable. However, the tax hikes and scrapping of investment zones lead to some concern over how this will be achieved.

Entrepreneurs will be encouraged by the focus on “growth” and the SEIS, AIA and business rates reform are positive for entrepreneurs. The business rates reforms and AIA will provide entrepreneurs with a way to make some savings and provide some certainty over the next year. This combined with the SEIS will encourage investment in start-up companies.

However, the tax cuts to the dividend allowance and CGT rate, reduction in R&D relief and scrapping of investment zones will negatively impact entrepreneurs and with everyone facing the squeeze may make investment into start-up companies less attractive. It will therefore be important for start-up companies to consider any relief, funding and incentive arrangements available to them.

FURTHER INFORMATION

If you have any questions regarding this blog, please contact Matt Spencer from our Corporate, Commercial & Finance team.

ABOUT THE AUTHOR

Matt Spencer is a partner within the corporate and commercial team, specialising in tax law, advising on and efficiently structuring a wide range of corporate and real estate transactions including M&A, land transfers, developments and leases.