As Kwasi Kwarteng unveiled the UK’s new government’s first major fiscal policy package in today’s ‘mini-budget’, all eyes in the UK tech scene were on how much support the new chancellor would give to the country’s startup ecosystem.

Its predecessor Rishi Sunaka’s brand was focused on being “startup Treasury” agenda was put on hold when he resigned earlier this year.

Kwarteng has made some key policy changes that some startups believe will help them grow. Most involve making it easier to invest various parts of the UK’s institutional wealth in “riskier” SMEs.

Here’s everything startups need to know about the proposed changes.

Plan: SEIS is extended

  • Kwarteng plans to expand access to and increase the generosity of the Seed Enterprise Investment Scheme (SEIS). This is a scheme which is designed to give tax relief to investors who back early stage UK start-ups.
  • Under the SEIS scheme, investors get an upfront tax break of 50% on investments up to £100k and an exemption from capital gains tax (CGT) on any gains on their SEIS shares.
  • From April 2023, the amount companies can raise through SEIS will increase by two-thirds from £150,000 to £250,000, and the annual limit for investors will be doubled to £200,000. The age limit for companies accessing SEIS will increase from two to three years, and the gross asset limit (all assets on a startup’s balance sheet) will be raised to £350,000.
  • The Treasury predicts that these changes to SEIS will help more than 20,000 more companies a year. In 2020-21, 2,065 companies raised a total of £175m under the SEIS scheme.

Why is this important and what do people think?

  • British investment fund SFC Capital has been campaigning for SEIS reform for years alongside the EIS Association and Coadec. Its founder and CEO, Stephen Page, attributes the initial success of countless UK startups to the SEIS program. “But it increasingly became a victim of its own success — the cap quickly outpaced the impact of the growth it had spurred on the funding needs of early-stage companies,” he says. “The changes will go a long way in fixing this – and it’s also encouraging that the annual investor limit is being doubled so more people can invest through the scheme.”
  • Sarah Barber, CEO of Jenson Funding Partners, which manages SEIS funds, believes the change will also save UK founders valuable time and resources. “Entrepreneurs will now have to spend less time raising funds and more time doing what they do best, building businesses,” she says. “Until now, it has seemed that successive governments have been sleeping on SEIS.’
  • Janine Hirt, chief executive of Innovate Finance, adds that expanding SEIS will “encourage founders of high-growth businesses to come to the UK”.

Plan: The EIS is extended beyond 2025

  • The Enterprise Investment Scheme (EIS) is the name of a series of tax credits that were introduced in 1994 to encourage business growth in the UK by making it more attractive to invest in small businesses.
  • These tax breaks were due to expire in April 2025 due to a sunset clause that was introduced by the EU. But now Kwarteng has expanded the scheme, which the government hopes will boost investment in UK start-ups.

Why is it important and what are people saying?

  • Jenny Toot OBE, chief executive of the UK Business Angels Association (UKBAA) and co-chair of the government’s Women’s Angel Investment Taskforce, says the changes will provide a huge boost to entrepreneurship at a challenging time for start-ups. “These measures will also encourage and encourage more women to become business angel investors and support the growth ambitions of the growing number of women entrepreneurs in the UK who will now be eligible for the SEIS scheme,” she says.

Plan: Rapid reform of pension regulation

  • Boris Johnson’s government has repeatedly spoken of encouraging a “big investment boom” for British business by scrapping a raft of high fees that prevent UK pension fund managers from investing in assets perceived as riskier, such as start-ups. The draft ordinance has been pending for some time, and Kwarteng’s Ministry of Finance plans to push it forward.

Why is it important and what are people saying?

  • UK defined contribution pension funds account for a large proportion of the country’s wealth. But in accordance with Johnson and Sunak, more than 80% of their investments are in exchange-traded securities, which represent only about 20% of UK assets. That means there’s a lot of cash sitting in the banks that could be used to invest in UK start-ups — and give retired owners a slice of the pack in the high-growth companies and corporates of the future, investors say.
  • “Pension funds have the financial power to transform in support of the real economy because they have to think and plan for the longer term, but they are effectively prevented from investing in higher risk and return strategies through fee caps,” says Stephen Welton, executive chairman a BGF growth investor.“Trustees should have the flexibility to better define their investment strategy with an increased focus on net returns rather than just fees. This can unlock huge pools of institutional capital that will deliver results for investee companies, UK innovation and, crucially, for pensioners themselves in terms of better long-term realized returns.”

The plan: increase the premium on stock options

  • From April next year, the Treasury is doubling the limit for a company share option plan (CSOP) so that qualifying companies can issue CSOP options worth up to £60,000 to employees, up from the current limit of £30,000.

Why is it important and what are people saying?

  • Founders and investors tell Sifted that, while encouraging, the proposed option changes could have gone further.
  • Hannah Seal, a partner at Index Ventures, says the UK has lagged behind a number of other European countries, including France, which have introduced far more attractive share option policies. This, in turn, has made it easier for startups in these countries to attract and retain talent.
  • Other countries are expected to follow suit and become more competitive, so the UK urgently needs to review its policies,” Seal tells Sifted. “We are encouraged by the steps announced today to begin reforming the company’s share option plan and look forward to continuing to work with the government to ensure the UK offers one of the most attractive schemes in the world.”

Plan: VCT tax benefits extended

  • Venture Capital Trusts (VCTs) invest in higher risk companies that may have difficulty raising capital from other typical sources such as banks and venture capital.
  • They currently enjoy a 30% tax break if these investments are held for five years. Any dividends received from these investments are also tax-free, encouraging them to make these high-risk investments.
  • Under the same sunset clause as the EIS scheme, these tax credits were due to expire in April 2025, but Kwarteng has committed to extending the credits beyond that.

Why is it important and what are people saying?

  • If these tax breaks were to expire, UK start-ups could lose around £900m, according to investment broker Wealth Club.
  • Industry bodies welcomed the proposed extension. “This is a major vote of confidence in VCT and we welcome the Government’s intention to continue the scheme beyond 2025,” says Richard Stone, chief executive of the Association of Investment Companies (AIC).

    “VCTs provide funding for the expansion of growing businesses and are fully in line with the Government’s commitment to growth, job creation, innovation funding and increased exports. We look forward to clarification on how the Government will address the current uncertainty surrounding the scheme.”

Amy O’Brien is Sifted’s fintech reporter. She chirps with @Amy_EOBrien and writes our fintech newsletter You can subscribe here.

Source link