Did George Osborne Deliver a ‘Budget for Business’?
George Osborne has delivered his eighth Budget as Chancellor. Sugar took a not-so-sweet hit, while tax on alcohol and fuel duty was frozen. However, through all the soundbites of this being “a Budget for the next generation” and the Government “acting now so we don’t pay later”, what did the announcements actually mean for Britain’s small to medium sized businesses?
To contextualise what is at stake: Britain’s small to medium enterprise (SME) market accounts for 99% of the private sector, contributing a massive £1.8 trillion to the UK economy. And while there were some announcements that would have been welcomed by small businesses, there were other issues that were overlooked.
For SMEs the most notable change to come out of the 2016 Spring Budget was the increase of the small business rates relief. Osborne said that from April 2017 the threshold for the business rates relief would more than double from £6,000 to £15,000. Consequently, as of next year, 600,000 small businesses will no longer pay any business rates at all. IW Capital’s Tax Bulletin outlines the changes to business rates relief, along with the other major tax reforms included in the 2016 Spring Budget, in more detail. It is available here.
Other positive announcements came in the form of greater infrastructure investments to help the ‘devolution revolution’ and Northern Powerhouse initiatives. This included upgrading the A66 and A69; creating a four-lane M62; giving the green light to High Speed 3 between Manchester and Leeds; and developing the case for a new tunnelled road from Manchester to Sheffield.
Despite these positive steps forward, there was still an important area that was not addressed – primarily upscale funding for mid-sized firms that have been hailed by the CBI as the “forgotten army” in private sector growth. To put some numbers behind the rhetoric, 600,000 of Britain’s smallest start-ups and microbusinesses will benefit from the business rates relief announced today. However, there are 5.4 million SMEs in the UK at present. The numbers clearly show a deficit that needs to be addressed, with more done to support not only Start-Up Britain but Scale-Up Britain. In terms of financial contribution, scale-up enterprises added £59 billion to the UK economy between 2010 and 2013, making the difference between recession and recovery. With access to finance cited as the number one reason for business failure, tax reliefs will help reduce SMEs’ outgoings, but not to such an extent that growth finance will no longer be a road-block to success.
Moreover, given its significant role in the recovery of the UK’s economic collapse, the Chancellor did little to support, protect or develop Britain’s growing alternative finance market. This lack of action comes in spite of the fact that just 13 months ago David Cameron acknowledged that “many fast-growing firms find it hard to access finance”, which had resulted in a £1 billion “valley of death” funding gap. While improvements were made for businesses and investors (as we will explore) this deficit was not directly addressed by the 2016 Spring Budget.
For the Enterprise Investment Scheme
From an investment perspective, the shining light to come from the Budget was the change to Capital Gains Tax (CGT). Specifically, Osborne announced that as of April 2016 CGT rates will fall from 28% to 20%. The change is positive for investors generally, but it also provides a greater incentive for them to take advantage of one of the tax reliefs offered by the Enterprise Investment Scheme (EIS).
Investment into EIS is exempt from CGT, however gains upon exit are subject to the tax. If capital gains are invested through the scheme the tax to be paid on them is deferred; it does not disappear but it does not have to be repaid until the shares are sold – now at the lower rate of 20% (down from 28%). Moreover, investors can defer on CGT payments from the past 36 months, which means any capital gains tax payments that they have amassed through the sale of other investments over the last three years can be offset by utilising the EIS effectively. By doing so, investors would not have to pay the previous 28% rate of tax on these gains, but instead, when they come to sell their business shares, they will pay it at the new lower rate of 20%.
The result is an anticipated upturn in investors using the EIS. This marries with the findings of IW Capital’s Taxpayer Sentiment Report 2016, which found that a staggering 54% of the UK’s serious investors are considering investment through the EIS over the coming financial year. Read the full report here.
More and more businesses today rely on alternative finance for the cash injections they need to upscale. Osborne said he wanted to “light the fires of enterprise” but he did little to commit to keeping the fires of Britain’s booming SME community burning brightly. The Spring Budget, while delivering some positive news for small businesses, did little to directly address the pertinent issue of the £1 billion funding gap facing the UK’s scale-up businesses. At IW Capital, an anticipated outcome to the Budget’s changes would be further investigation around the EIS, in light of the new lower CGT rates, with a subsequent uptake that in the long-run supports SME progression.