A Contrarian Analysis of the UK Spring Budget 2023: Opportunities and Challenges for Startups and SMEs

R&D Expenditure: Reduction in R&D Tax Relief Rate

The new enhanced credit for R&D expenditure may not be as valuable as it appears to be. Although it offers a £27 credit for every £100 spent by qualifying SMEs with 40% or more R&D expenditure, it represents a reduction from the current R&D tax relief rate of 33%. Coupled with the increase in Corporation Tax, this change could hinder R&D-intensive companies, hampering innovation.

R&D Tax Credits Reforms: Adding Complexity and Creating Barriers

The Chancellor's R&D tax credit reforms intended to counter fraud and inaccuracy may not be beneficial for genuine innovators. While these changes may help reduce malpractices, they could also add complexity and create barriers for startups and SMEs.

Note, we've written an article on the full scope of R&D changes and you are free to watch our Youtube video below.

Opening Investment Opportunities: Promising Proposals but Lack of Concrete Measures

While Hunt's plans to make investment in high-growth companies more accessible to a broader range of investors show potential, the lack of concrete measures in the Spring Budget announcement raises questions about the government's commitment and ability to deliver these promises by the Autumn Statement.

AI, Medtech, and Green Initiatives: Bright Spots for Startups

The government's commitment to fund and support AI, medtech, carbon capture, and nuclear energy initiatives offers hope for future growth and innovation. By investing in these sectors, the UK could establish itself as a leader in emerging technologies and sustainable practices. However, it's crucial that the government not only provides financial support but also creates a conducive ecosystem that fosters collaboration between academia, industry, and investors.

Infrastructure Investment: Potential for Economic Growth

The proposed £640 billion investment in infrastructure over the next five years has the potential to stimulate economic growth, create jobs, and improve the overall quality of life in the UK. However, the success of this initiative depends on the government's ability to efficiently allocate resources and ensure timely completion of projects. Moreover, it's crucial that these projects prioritize sustainability and long-term benefits.

Skills and Education Agenda: Ambitious Goals but Lack of Specifics

The government's focus on skills and education is a positive step towards addressing the skills gap and ensuring the UK workforce is prepared for the future economy. However, the Spring Budget lacked specific details on how the government intends to achieve its ambitious goals. It's essential that the proposed investments in education and skills training are tailored to meet the evolving needs of various industries, with a particular emphasis on technology, sustainability, and innovation.

Diversifying the Financing System: Potential for More Investors and Funds

Hunt's announcement of plans to diversify the financing system and make investment in high-growth companies more accessible to a broader range of investors is promising for startups. Allowing investment from defined contribution pension schemes and making the London Stock Exchange a more attractive place to list when exiting via IPO could result in more investors and funds interested in investing in startups.

Faster Approvals for Medtech: Streamlining the Approval Process

The announcement of £10 million of funding for a swift, new approval process for cutting-edge medicines, medical devices, and tech is good news for medtech startups. Streamlining the approval process could mean less red tape and a faster route to market.

More Funding and Support for AI: Strengthening the AI Sector

The government's increased funding and support for AI could strengthen the AI sector in the UK. The launch of an AI sandbox to help innovators get cutting-edge products to market, working with the IP Office to clarify IP rules about generative AI, and the commitment of £900 million to fund an exascale computer are all positive steps towards establishing the UK as a world-leading, quantum-enabled economy by 2033.

Reforms to Get More People into Jobs: Encouraging Workforce Participation

The Chancellor's measures to encourage more people to join the workforce, such as scrapping the Work Capability Assessment for disabled people and funding up to 50,000 places for the disabled in an employment scheme called Universal Support, are positive steps towards addressing the UK's skills gap. Moreover, more support for occupational health and returnerships, a new type of apprenticeship for over 50s who want to retrain and return to work, could help boost the UK workforce.

Childcare Reforms: More Accessible and Affordable Childcare

The significant reform to subsidised childcare, phasing in up to 30 hours of free childcare a week for working parents for all children from the age of nine months, is a welcome change. This could make childcare more accessible and affordable, resulting in more job applicants for startups and SMEs.

Pension Reforms for Higher Earners: Encouraging Higher Earners to Stay in Work

The Chancellor's pension reforms to encourage more higher earners over 50 to stay in work for longer could benefit startups and SMEs. Increasing the annual pension allowance to £60,000 and abolishing the lifetime allowance on tax-free pensions could encourage more "more experienced" workers to stay with or join companies.

A Less Competitive Corporation Tax Rate

In addition to the measures announced in the Spring Budget, it's important to note that the government's decision to increase Corporate Tax rates from 19% to 25% starting from 1 April 2023 will have a significant impact on startups and SMEs.

While companies making a profit of up to £50,000 will continue to pay the current rate of 19%, those with profits over £250,000 will pay the new rate of 25%. Companies with profits between £50,000 and £250,000 will also be affected, paying a marginal rate relief which will reduce their tax to between 19% and 25%.

This increase in Corporate Tax rates could impact the ability of startups to reinvest profits and scale their businesses. It's crucial that startups and SMEs take this into account when planning their financial strategy and seek advice on how to navigate these changes.

Changes to Dividend Allowance: Reduction to £1,000

In addition to the increase in Corporate Tax rates, the government's decision to reduce the dividend allowance from £2,000 to £1,000 starting from April 2023, and further to £500 from April 2024, could impact the income of startup founders and shareholders. This means that individuals who receive dividend income from their investments or businesses will face higher tax bills. It's important for startup founders and shareholders to consider the impact of these changes on their personal finances and plan accordingly.

Capital Gains Tax Changes: Reduction in Annual Exempt Amount

The government's decision to reduce the annual exempt amount for capital gains tax from £12,300 to £6,000 starting from April 2023, and further to £3,000 from April 2024, could have significant implications for individuals and directors of startups. Capital gains tax is paid on the profit made from selling assets such as property or shares, and the reduction in the annual exempt amount means that individuals will have to pay more tax on any gains above this threshold. It's important for individuals and directors of startups to seek professional advice on the impact of these changes and plan accordingly.

SEIS Threshold Increase: Expansion of Tax Relief for Startups

The government's decision to increase the Seed Enterprise Investment Scheme (SEIS) threshold from £150,000 to £250,000 is a positive development for startups. The SEIS scheme provides tax relief to investors who invest in early-stage startups, making it easier for these companies to raise capital. By increasing the threshold, more startups will be able to benefit from the scheme and attract investment from a wider pool of investors. This expansion of tax relief for startups is a step in the right direction towards supporting entrepreneurship and innovation in the UK.

In Conclusion: The Budget Doesn't Go Far Enough for Startups

In conclusion, the Spring Budget announcement offers both opportunities and challenges for startups and SMEs. While there are some positive measures such as investment in AI, medtech, and green initiatives, and the SEIS increase, the potential challenges such as limited timeframes for full expensing, and reduction in R&D tax relief rate could hinder innovation.

It's crucial that the government provides concrete measures and a conducive ecosystem that fosters collaboration between academia, industry, and investors to support the startup ecosystem.

Partner with a startup and small business specialist

So, if you're a startup or SME looking to make the most of the opportunities and challenges presented by the Spring Budget 2023, reach out to us at the Accountancy Cloud. Let us help you navigate these changes and stay on top of your finances, so you can focus on growing your business. We are here to help.