On 22nd November, the UK Chancellor Philip Hammond announced the latest budget. With a downgrade on the UK’s growth forecast, many may expect a turbulent time ahead for start-ups. However, after acknowledging that small businesses are under great pressure, the Chancellor announced a series of changes that many start-ups will welcome. The following details those key announcements.
Venture Capital Schemes
For knowledge-intensive companies, the annual limit for individuals investing under the Enterprise Investment Scheme (EIS) will double from £1m to £2m. Additionally, the annual EIS/VCT limit on tax-advantaged investments that a knowledge-intensive company can receive will be increased from £5m to £10m. These changes are set to apply from April 2018 and will be well received by those who qualify.
It should be noted however that the budget signalled a crackdown on those looking to invest via Venture Capital Schemes in low-risk businesses. The Chancellor commented that the spirit of these schemes was to encourage investment in companies with high-growth potential, and not for those who are looking for capital preservation. A ‘risk to capital condition’ will need to be satisfied in order to qualify for investment. This involves a two-fold test:
- Does the company looking for investment have objectives to grow and develop over the long-term?; and,
- Is there a significant risk that there could be a loss of capital to the investor of an amount larger than the net return to the investor?
These conditions will apply to investments made later in the year after the Finance Bill 2017-18 is published.
VAT threshold
Against what many predicted, the Chancellor chose to maintain the current VAT threshold for small businesses at the current amount of £85,000. The decision came after the Federation of Small Businesses (FSB) strongly criticised an independent review conducted by the government which proposed significant changes to the VAT threshold (amongst other things). The review argued that the VAT threshold provides an incentive for small businesses to deliberately supress their turnover to avoid registering for VAT and that the high threshold causes distortions.
The commitment to freeze the VAT threshold has only been made for 2 years starting from April 2018. In the meantime, the government will consult in more detail on the impact of lowering the threshold. It is expected by many that the VAT threshold will be lowered at the end of the 2-year period.
Business Rates
Initially planned for 2020, the annual increase to business rates will be pegged against the Consumer Price Index (CPI) measure of inflation and not the current Retail Prices Index (RPI). The CPI rate is known to be lower than the RPI rate with many saying that the lower rate is a step in the right direction in balancing the playing field for brick-and-mortar businesses with digital businesses. The Chancellor claimed that the move was worth £2.3bn to businesses over the next 5 years.
It was also announced that rate valuations will be undertaken every 3 years rather than the current 5 years. However, this change will not take effect until the next revaluation in 2022.
Another welcome change to business rates came in the form of the proposal to scrap the so called ‘Staircase Tax’ which imposed individual rates bills for businesses occupying multiple floors of a property with more than one tenant. The proposed adjustment means that many who have been charged under the regime (dating back to April 2015) will receive compensation for the loss of income.
Corporation Tax
Corporation Tax is to stay at the current rate of 19%.
However, the Chancellor also announced that the corporate indexation relief that is applied when calculating the chargeable gains of companies will no longer apply in order to ‘bring the UK in line with other major economies and broaden the tax base through removing relief for inflation that is not available elsewhere in the tax system’. This will apply to any disposal of assets on or after 1 January 2018. As such, no inflationary relief will be available for companies disposing of assets.
R&D Expenditure Credit
Used to encourage innovation and enterprise within the UK economy, the budget announced that the rate of R&D tax credit will increase from 11% to 12%. Despite not a large increase, the news will be welcomed by many start-ups who are reliant on these tax credits. It should also be noted that this announcement was made in the context of Prime Minister Theresa May recently announcing a commitment from the government to invest a further £2.3 billion in research and development by 2021-22.
This new 12% rate will begin from January 2018.
Start-up bible 