Jeremy Hunt’s Overhaul of British Tech Startups’ Schemes Presents a Challenge for UK Startups
The UK economy has been through a period of uncertainty following the Brexit vote and the resulting fall in the value of the pound. Inflation has risen as a result, and businesses have been struggling to cope with the rising prices of imported goods.
But was this a budget designed for small businesses? Dissappointingly, not.
Many startups and small businesses are going to be hard hit by some of these changes, especially those investing in R&D.
Let's look at some of the main changes announced in the Budget..
The headline rate for small businesses is being cut. After 1 April 2023 the deduction will move from being 130% to 86% and the SME credit from 14.5% to 10%.
In effect this means the max amount of credit that is available to loss making businesses will be 18.6%, from 33%.
Note, this is a double whammy for small businesses as the PAYE cap that restricts development costs being incurred overseas will not change, combined with increases in corporation tax coming into effect (see below).
What does this mean for your startup? It means:
For every £1 you spend on R&D you will receive 18.6p back.
You will now receive up to 55% less in R&D credit rebate depending on how (un)profitable your business is.
Let’s illustrate this with some examples:
If you are a loss making SME - with £100k qualifying expenditure you will receive £18,600 instead of £33,000 which is a 55% reduction.
If you are an SME at break even point - £100k qualifying expenditure will give you £8,600 instead of £18,850, a 55% reduction.
If you are a profitable SME with taxable profit of £250K - the company will receive a tax saving of £21,500 vs £24,700 (a 13% reduction) on £100k qualifying expenditure.
If you are a startup that normally applies for R&D Tax Credits then reach out to us, and we can talk through the changes made to the R&D credit schemes.
The RDEC scheme goes from 13% to 20% which has given large companies a surprise but this seems to be paid for by SMEs. This means that the overall tax benefit from the RDEC scheme will increase from 10.54% to 16.2%.
Before the increase in Corporation Tax, RDEC claims will be worth 10.53p for every £1 spent on R&D. When changes come into effect from April 2023, RDEC claims for accounting periods beginning on or after 1 April 2023 will be worth 9.75p for every £1 spent on R&D.
Overall R&D funding
There’s no cut to R&D funding and in fact the UK Government has commmitted to up to £20bn of overall R&D funding by 2024-25, so expect more R&D grants available. Could this mean startups will be encouraged to apply for R&D grants in the face of a now less attractive SME credit scheme? This could be what the Government is trying to encourage.
SEIS allowance will increase
The increase to the SEIS allowance (now £250k instead of £150k) is still going ahead:
The current SEIS rules allow start-ups to raise up to £150,000 using SEIS from individual “angel” investors providing that they meet certain requirements, including that they have been trading for less than two years and their gross assets immediately prior the issue of the shares to investors do not exceed £200,000. Under the proposed changes (which will take effect from 06 April 2023):
the company lifetime allowance for SEIS investment will increase from £150,000 to £250,000;
the qualifying trading period for SEIS eligibility will increase from two years to three years from the date of commencement of trade; and
the upper limit of a company’s gross assets will increase from £200,000 to £350,000.
In addition to these company benefits, the maximum amount that an angel investor is able to invest in start-ups using SEIS in any tax year will increase from £100,000 from £200,000.
Corporation Tax increase to stay
In a bid to quell the turmoil that has ensued in the financial markets since the mini Budget, Jeremy Hunt has not changed the tax rise that means that the corporation tax rate will increase to 25% from the current 19% rate from 1 April 2023.
Capital Gains Tax threshold halved and then halved again
Capital Gains Tax’ is the tax you pay on the profit you make when you sell assets, shares or stocks.
For CGT, there’s currently a tax-free allowance of £12,300 – so you don’t pay any tax on what you sell worth less than £12,300.
The chancellor has announced that this tax-free allowance will decrease to £6,000 in April 2023 then to £3,000 in 2024.
This will affect your employees who are on EMI Option schemes because when they sell their shares, they will do so with the lower CGT rate applied.
Tax free allowance on Dividends will be reduced
Currently, there’s a £2,000 tax-free allowance on dividend earnings. When changes come into place in April 2023, this will reduce to £1,000 in 2023-24 and then to £500 in 2024-25.
If you’re paying yourself from your company via dividends, this change will affect how much tax you pay on your dividend income.
VAT threshold frozen – more small businesses will need to register
The threshold for VAT registration will be frozen at £85,000 until April 2024. With inflation at its current rates, thousands of small businesses who turnover just under this amount will soon go over the threshold.
If your small business is about to go over that threshold, you’ll need to register for VAT – get help from your accountant.
Income Tax and Wages
The threshold for when the highest earners start paying the top rate of income tax will be brought down from £150,000 to £125,140 so if you are a top earner you will pay more tax.
For the rest of us, the Income tax, personal allowance and higher rate thresholds will be frozen for a further two years, until April 2028.
The main National Insurance and inheritance tax thresholds will be frozen for a further two years, until April 2028.
Critics are calling this a “stealth tax rise”. This is because while the government isn't introducing an increase in our Income Tax rate (the percentage we’re charged), there’s no change to the tax bands (the thresholds for Personal Allowance, Basic, Higher and Additional rate).
As our pay goes up (we hope, with inflation*), we’ll actually be paying more in tax because the tax bands won’t go up in line with the population’s pay going up. Before the Autumn Budget announcement, the Income Tax thresholds had been frozen until 2026.
In addition to this the National Living Wage will be increased from £9.50 an hour for over-23s to £10.42 from April next year
*Note, UK's inflation rate predicted to be 9.1% this year (2022) and 7.4% next year (2023).
If you need any further information or support please do not hesitate to contact us.