What does the Chancellor’s mini-budget mean for entrepreneurs?

On 23rd of September the new Chancellor of the Exchequer, Kwasi Kwarteng, unveiled his mini budget which is effectively the Government's new growth plan. As everyone now knows this signified the Government's intention to focus directly upon economic growth. To this end, the Chancellor set out dramatic tax cuts (not all of which were either expected or pre-announced) and reforms for individuals and businesses, the like of which we have not seen for a very long time. Unfortunately it does now seem clear that the City was unprepared for the extent of the reforms, and they have been received very badly by many. 

The adverse reaction may yet bring about a retraction of at least some of the proposals in the coming weeks. However, it nevertheless remains clear that the Government intends to dig in its heels for a while yet, and calls for the removal of the new Chancellor seem very wide of the mark. 

So with all the noise around its introduction, it is important from an entrepreneurial point of view not to lose sight of the content of the proposals and, in particular, how they have been designed to a significant extent to benefit the entrepreneurial community. It is on this that we focus in this blog. 

We set out below the changes that have been announced of particular relevance to entrepreneurs. Provided things do not change drastically over the next few weeks, it is as well for attention to be paid to what can now be achieved under the new regime.

1. Seed Enterprise Investment Scheme (SEIS) – 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 SEIS particularly benefits entrepreneurs, promoting investment into start-ups by providing tax breaks for backing these types of projects. Increasing the amount companies can raise through the scheme will benefit start-up companies as it will allow their founders to raise more money (both in total and from any one individual) and the additional year allows new companies to offer a slightly more stable (and attractive) investment proposition. Furthermore the Government said they remain supportive of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). EIS and VCT reliefs were due to expire in April 2025 but the Budget confirmed that the Government would extend the schemes. These schemes combined with the reforms in SEIS should encourage investment into UK start-ups.

2. National Insurance and income tax – the national insurance increase of 1.25% (on earnings) will be reversed from 6 November 2022 (and from next April for dividends), the basic rate of income tax will be cut to 19% from April 2023 and the 45% income tax rate will be abolished from April 2023.

Small businesses will particularly benefit from this reform as it will reduce the cost of employing people and help them retain and employ new talent. We anticipate small business owners will defer declaring dividends (if they can afford to) until next tax year now, to benefit from the lower tax rates. Likewise, any imminent bonuses will probably be pushed back, either to after November 6th, or even next tax year (if employees were paying the top rate of tax).

3. Corporation tax – the proposed corporation tax rate rise to 25% has been scrapped and it will remain at 19%.

Whilst this is a benefit as companies will not have to pay more tax on their trading profits this will primarily benefit businesses with high-profit and will have little impact for many start-up companies.

4. Annual investment allowance (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.

For entrepreneurs who are struggling, if they are eligible to claim this tax relief it will be a huge benefit that the £1 million allowance has been made ‘permanent’, and will provide them with more stability and some certainty in these unpredictable times.

5. Investment zones – the Government is in talks with 38 areas to create investment zones which will “benefit from tax incentives, planning liberalisation, and wider support for the local economy."

This reform could be very lucrative for entrepreneurs thinking of setting up a business as businesses working in these areas will benefit from lower taxes as well as employees living or working in these areas. This reform will be particularly helpful for start-up businesses trying to keep expenditure as low as possible whilst they try to get established and generate a profit. The full budget later this year will contain greater detail on these investment zones.

6. IR35 – The previous reforms to the off-payroll working rules will be repealed from 6 April 2023 so personal service companies rather than ultimate engagers will be responsible for determining the workers employment status.

This will save companies time and money sorting out a workers status and instead effectively places the burden back onto the worker.

Does the mini-budget go far enough? Will it work?

It has been a challenging time for those start-up companies that have been struggling with consumer price inflation, supply chain issues and increasing costs, at the same time as surviving a potential lack of income during the pandemic. The mini-budget incentives, looked at in isolation, will be positive for many entrepreneurs and offer them new opportunities including raising capital investment through the SEIS, EIS and VCT schemes and reducing costs as a result of the tax cuts. However there were some noticeable absences for entrepreneurs, including reforms to business rates and VAT. 

Looked at in a wider context, as a result of the mini-budget the pound plummeted to a record low against the dollar. Former Bank of England Governor Mark Carney recently said the tax cutting measures were “undercutting" the UK’s key economic institutions. Tax savings might therefore be offset by an effective higher cost of services and goods. It appears the budget announcements might stoke further inflation. The UK has its “highest debt burden since the 1960s at 96.6% of gross domestic product (GDP)” and there is scepticism about how the Government will fund the reforms. Kwasi Kwarteng is due to unveil further financial packages in the coming months in his Autumn Budget and given the criticism the Government are facing, retractions or further reforms may well be announced sooner. 

While tax savings looked at in isolation are encouraging, whether the overall impact of the Budget is positive or negative for entrepreneurs is still to be decided. But what should not be overlooked is the fact that there are some potential benefits that entrepeneurs would do well to consider.