Focus on Tax: What’s in the Budget for Venture Capital?

Monday 20th March, 2023

On 15 March 2023, the Chancellor delivered his Spring Budget, in which he set out several promising announcements for the venture capital sector, with new policies to grow the technology and life sciences industries, encourage research and development and expand share incentivisation schemes. The Government hopes these changes will support its goal for the UK to have the most “pro-business” tax regime in the world.

Below is a summary of the Budget’s key changes for the VC sector, including:

  1. EIS, VCTs, and SEIS
  2. EMI options
  3. CSOP
  4. R&D
  5. Corporation tax
  6. Artificial Intelligence (AI) prize
  7. Quantum computing
  8. Innovation Accelerators
  9. Future of Web Technology

For a summary of all the main tax changes, see our article here.

Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)
No new announcements were made on EIS in the Budget. However, in the Chancellor’s letter published by the Treasury Committee on 7 March 2023, he expressed the Government’s firm intention to extend the EIS and VCT beyond 6 April 2025 (when it is due to end) and recognised the need to provide certainty to investors and companies. The VC community is hopeful that these schemes will not be withdrawn given their extensive use by companies and their ability to attract new investment.

Seed Enterprise Investment Scheme (SEIS)

No new announcements were made on SEIS, although the Finance (No. 2) Bill 2022-23 will include the previously-announced changes to increase :

  • the annual investment amount on which investors can claim relief (from £100,000 to £200,000);
  • the limits on the size and age of companies that can access the SEIS (gross assets limit: from £200,000 to £350,000; age limit: from 2 years to 3 years of trading activities); and
  • the maximum amount that can be raised by a qualifying company under SEIS (from £150,000 to £250,000).

The Government’s express policy objective behind these changes is to encourage additional investment in start-ups and young companies by widening access to SEIS and increasing limits. It is believed that SEIS has always been viewed as an attractive feature of the tax system allowing many innovative businesses to get access to initial capital to expand. These changes take effect from April 6 2023.

Enterprise Management Incentive (EMI) Share Option Simplification Measures
The Budget contains some welcome changes that will simplify administration of EMI share option schemes, reduce the overall compliance burden for companies and facilitate a more efficient process of incentivising employees. Subject to the implementing legislation, the following relaxations have been announced:

  • Longer window for grant notifications: From April 2024, a company will need to notify the grant of options to HMRC by the 6 July following the end of the tax year in which the option was granted (rather than within 92 days from the grant date).
  • Removal of working time declaration requirement: From 6 April 2023, companies will no longer need to declare that an employee has signed a working time declaration, which confirms the employee works 25 hours a week or that 75% of their working time is for the company. Note, while the declaration requirement is being removed, the requirement itself remains in place.
  • Simpler EMI documentation: From 6 April 2023, companies will no longer need to set out details of share restrictions within the option agreement. This is a welcome update which will simplify setting up an EMI tax-advantaged share option scheme and reduce the risk of companies inadvertently being disqualified.

While the above requirements will apply to new EMI share options granted from 6 April 2023, it is expected that existing EMI share options granted before 6 April 2023 that have not been exercised will also benefit from the changes.

Company Share Option Plan (CSOP)
As was announced in 2022, the Government plans to introduce improvements to CSOP rules to facilitate the running of the scheme. Amongst the measures, the share options limit under CSOP will be increased from £30,000 to £60,000. In addition, the “worth having” condition, which limits the types of shares eligible for inclusion in a CSOP scheme, will be removed. For VC backed companies, with multiple share classes, these changes will be welcome news. The changes will be effective for options granted under CSOP schemes on or after 6 April 2023, but existing options granted before will also benefit from them.

Research & Development (R&D)
R&D was the area that included most of the changes announced by the Chancellor. It is expected that the changes will affect a large number of companies in the VC sector. Although some changes are very welcome as they intend to increase the ability of companies to qualify for R&D expenditure and their capacity to reduce taxable profits or generate further losses, others will likely increase the administrative burden due to additional requirements for supporting R&D claims. The following announcements were made:

  • Extension to qualifying R&D: The Government is introducing two new types of qualifying R&D expenditure that will include the costs of data licences and cloud computing services.
  • R&D intensive companies: The Government has reaffirmed its commitment to support R&D spending, noting OECD research that a 1% increase in R&D increases productivity by around 0.15%. To this end, additional tax relief will be made available for certain loss-making SMEs from 1 April 2023. Where these SMEs are R&D intensive businesses spending more than 40% of total expenditure on qualifying R&D, they will be able to claim a higher payable credit of 14.5%. This is an enhancement of the 10% credit rate for eligible companies.
  • Digital claims for R&D reliefs: To tackle R&D relief abuse, from 1 August 2023, the Government will require digital submission of all R&D relief claims through HMRC’s portal, accompanied by a compulsory information form. Certain companies will also need to inform HMRC in advance that they plan to make an R&D claim and within 6 months of the end of the accounting period to which the claim relates.

Corporation Tax
Consistent with the previous Government announcements, corporation tax will rise from 19% to 25% on 1 April 2023 for companies with profits above £250,000. However, according to the Chancellor, only 10% of UK companies will pay the full 25% rate, whilst the remaining companies with profits under £50,000 are expected to be subject to the “small profits rate” of 19%. A system of marginal relief will apply to companies with profits between £50,000 and £250,000.

Artificial Intelligence (AI) Prize
The Government intends to award £1 million every year to a person or team making progress in the AI sphere. This forms part of the Government’s plan to improve the UK’s science and technology prospects. Further details on this initiative are expected to follow.

Quantum Computing
The Quantum Strategy outlines the Government’s commitments to the sector, including a new and ambitious research and innovation programme. The Government has announced investment of £2.5 billion into quantum computing, to be spread over 10 years, focusing on realising 4 goals: ensuring the UK is home to world-leading quantum science and engineering; supporting businesses through innovation funding opportunities; driving the use of quantum technologies in the UK; and creating a national and international regulatory framework.

Innovation Accelerators
The Government has allocated £100 million funding for the Innovation Accelerators programme and will shortly publish the details of the 26 transformative R&D projects in the Glasgow City Region, Greater Manchester and the West Midlands.

Future of Web Technology
The Government is committing to undertake work to maximise the potential of the future of web technology, sometimes known as Web3 or the Metaverse, to spur UK growth and innovation, alongside empowering individuals to influence how their data is used, while managing downside risks to privacy, security and harms.

If you have any questions about any of the new tax measures outlined above, please contact David Strong or Katerina Heal.