On 29 October 2018 Phillip Hammond delivered his Autumn Budget, the first to be held on a Monday since 1962, for the studious ones amongst you 🙂
We were told that the “end of austerity is upon us at last.” The assumed growth in the economy has been set at 1.5% per year based on the OBRs forecast, although tellingly, we were told that this would need to be revised down in the event of a bad Brexit. But of course, what really matters is how this will affect startups, so here we go, scoring tally and all.
Several of the changes announced by Mr Hammond are noteworthy and will alter the tax landscape for our community. These included changes to Entrepreneurs Relief (“ER”), R&D tax credits and the Annual Investment Allowance (“AIA”). Additionally, Mr Hammond announced a £215 million funding boost for innovation centres.
Since it was introduced in 2008, Entrepreneurs Relief (ER) has given founders piece of mind that any gains they make upon a disposal of their Company would be subject to a reduced capital gains tax rate of 10%. To qualify for the relief you are required to meet certain conditions including holding a material stake of the company (you need at least 5% of the voting rights and ordinary share capital) and you also need be an employee or officer of the company.
The main change announced within the Autumn Budget is that the minimum qualifying period for the above conditions to be satisfied has now been extended from 12 months to 24 months, up to and including the date of disposal.
Additionally, the government confirmed that individuals must now hold a 5% interest in both the distributable profits and the net assets of the Company, as well as the share capital and voting rights.
Notably, the two-year requirement also applies to the ER criteria to be satisfied in respect of EMI options. Therefore, any EMI share options now need to run for two years before the reduced 10% capital gains tax rate can be unlocked.
So not a major change and we are glad ER is still here but, we preferred what we had before. 0-1
R&D Tax Credits
It was announced that a PAYE restriction will be re-introduced for SMEs to prevent abuse of the R&D tax credit scheme. “NO!” we hear you say, indeed, NO! The cap historically limited a startups ability to use the scheme where they were dependant on 3rd party contractors (vs employing people). The cap will be three times the Company’s total PAYE and NICs payment for the period. This is more generous than before, which is great, but it’s a cap nonetheless.
Here’s an example of how the changes will affect claims
Company X intends to make an R&D tax credit claim for a previous financial year. During the year in question Company X had a PAYE and NIC liability of £50,000 and qualifying expenditure of £500,000. Therefore, Company X’s R&D tax credit calculation will look as follows:
|Qualifying Expenditure||Enhancement (A*1.3)||Total Qualifying Expenditure (A+B)||R&D Tax Credit (C*14.5%)|
If the year that Company X was making the above claim for was prior to 1 April 2020 then they would be able to claim an R&D Tax Credit of £166,750, as shown in the table above. However, if the claim was for a year that was post 1 April 2020 then their claim would be capped at £150,000 (3*£50,000) as per the PAYE and NIC rules outlined above.
It should be noted that the government is still due to consult on the above proposals and they may be subject to change – which we will be backing they do by retracting the cap altogether.
Not a great start boss, 0-2
If you’re wondering whether your Startup could extend your runway with an R&D claim, it’s worth reading our our breakdown of how it works on our blog, here.
Annual Investment Allowance
The AIA significantly benefits businesses by allowing a 100% deduction in the year of expenditure for most capital items, the notable exception being cars. Since January 2016 the Allowance has been capped at £200,000 but this has now been increased to £1 million per year from 1 January 2019 to 31 December 2021. Not too useful to early stage companies but a definite plus for the Ms of the SME space.
He’s pulled one back….. 1-2
Four innovation centres are due to receive £215 million in a bid to assist in cementing the UK’s role in developing the “technologies of tomorrow”. These include Digital, Medicines Discovery, Future Cities and Transport Systems Catapult centres. This announcement of additional investment was especially encouraging as Mr Hammond only recently announced a grant of £780 million for the centres.
Final score: 2-2. We’ll call this one a draw.
Get in touch
If you have any further queries on how the Autumn Budget will affect you and your startup, you are more than welcome to give us a shout by sending an email to [email protected], or call the team on 020 7788 7880.