Focus on Tax: how will start-ups and venture capital be affected?

Friday 23rd September, 2022

UK Mini Budget 2022

Following the recent change of the leader of the UK Government, the new UK Chancellor delivered his first Mini Budget on the 23rd September 2022. Despite its title, the Mini Budget included a £45 billion tax cut and financial support package of measures that, according to the Chancellor, were designed to address the anticipated high energy costs this winter and release the UK economy’s potential.

The Growth Plan 2022 published alongside the Mini Budget acknowledged that the UK was facing a period of high inflation and made an emphasis on the Government implementing strategies to strengthen the growth of the UK economy. Having emphasized that “business is the engine room of the economy”, the UK Government announced a wide range of measures to support UK businesses alongside several important tax cuts to help individuals in these difficult times.

The key Mini Budget tax announcements included the following tax measures and proposals for future tax reforms:

Businesses

Venture capital/private investment/start-up/growth sector

  • The previously announced corporation tax rate increase from 19% to 25% will be abolished and will no longer take place after April 2023. With the objective to maintain competitive business environment at an international level, all UK companies will continue to pay tax at 19% on their taxable profits.
  • The Government announced that the Annual Investment Allowance will be set at a permanent level of £1 million, instead of reducing it to £200,000 as was previously proposed. This measure will continue after 31 March 2023 and means that business can deduct 100% of the costs on qualifying plant and machinery investments up to the higher £1 million limit.
  • A measure that will support UK technology businesses was announced that would allow the companies to raise up to £250,000 in Seed Enterprise Investment Scheme (SEIS) investment from April 2023, which is an increase from the current £100,000. In addition, the gross asset limit will be increased to £350,000 together with the age limit from 2 to 3 years. Alongside these changes, the annual investor limit will be doubled to £200,000. According to the Government, these combined measures would allow more companies to use the SEIS investment.
  • The Government has also announced that the tax-advantaged Company Share Option Plans (CSOP) share option scheme would be expanded to allow qualifying companies to issue up to £60,000 options to employees which is an increase from the current £30,000. In order to enable more companies to access the CSOP scheme and align it closer with the EMI scheme, certain other conditions will be eased.
  • The Government also confirmed that it remained supportive of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) and considers them sufficiently important to be extended in the future beyond 2025.
  • The Growth Plan intends to introduce the Long-Term Investment for Technology & Science competition, providing up to £500 million to support new funds designed to increase investment from pension schemes and other investors into the UK’s pioneering science and technology businesses. In addition, with anticipated reform of pension scheme investment regulations, the Government plans to introduce more flexibility for pension schemes to allow them to invest in the UK’s most innovative businesses and productive assets. The Government expect that this would allow billions of pounds of additional investment in technology and science focused businesses.
  • With the objective to remove complexities from the tax system, the Government plans to remove the reforms to the off-payroll working rules (IR35) to free businesses from the requirement to determine the employment status of the individuals providing services via an intermediary or a personal service company. With the change coming into effect from 6 April 2023, the workers will regain the responsibility to establish their working status and income tax and national insurance contributions liability.
  • Following the Government’s review of the Research and Development (R&D) tax reliefs and introduction of several reforms, including bringing pure mathematics research within scope of the reliefs, including data and cloud computing as new qualifying costs and refocussing the reliefs towards innovation in the UK, the Government confirmed that it would continue the review and expects to introduce further reforms.

Finance business/services sector

  • With the objective to reduce unnecessary regulation in the financial sector, the Government plans to abolish the EU rules applied to financial services (including Solvency II) and replace them with the rules tailored to the UK market.
  • The Government also announced that the Prudential Regulation Authority would repeal the EU rules that limit variable pay for senior bankers (i.e. “banker’s bonus cap”) to ensure that the financial sector is not impeded in its growth and stability.
  • Designed to support the growth within the UK banking sector, the expected rate of Bank Corporation Tax Surcharge will be abolished. While banks will continue to pay an additional 8% rate of tax on their profits, the new measure will ensure that the combined rate of tax on profits paid by banks will be maintained at 27%.

Individuals

  • The Government announced the following package of measures improving the income taxes and national insurance contributions position for UK individuals:
    • The measure to reduce the basic rate of income tax by 1% will be introduced earlier from April 2023 and will apply to both savings and non-savings income.
    • The additional tax rate of income tax of 45% that currently applies to income above £150,000 will be removed from April 2023, so that the highest rate of 40% will apply for all income above £50,271. This unexpected measure is designed to attract the best and the brightest to the UK workforce and to help businesses innovate and grow.
    • The additional dividend tax rate of currently 39.35% is also expected to be abolished from April 2023. In addition, the government plans to reverse the 1.25% increase in the dividend tax rate, taking the highest dividend tax rate down to £32.50%.
    • In addition, the current additional taxpayers will be able to benefit from the personal savings allowance of £500 that is currently available to higher rate taxpayers.
    • The Government announced that from November 2022 the national insurance contribution rates will be reduced by 1.25% and the Health and Social Care Levy will be cancelled from April 2023.
  • With respect to property-related taxes, the Government announced that as of 23 September 2022:
    • The threshold for stamp duty land tax (SDLT) on a purchase of residential properties in England and Northern Ireland above which SDLT must be paid has been increased from £125,000 to £250,000.
    • The threshold at which first-time buyers begin to pay residential SDLT will increase from £300,000 to £425,000.
    • The maximum value of a property on which first-time buyers relief can be claimed will also increase from £500,000 to £625,000.

If you have any questions or would like to discuss any issues raised in this publication, please get in touch with Katerina Heal.

Articles by Katerina Heal