Chancellor of the Exchequer Rishi Sunak’s first budget will be a ‘borrowing’ budget to allow the UK to deal swiftly with the impact of Coronavirus and improve public services and the business landscape for SMEs. Government is to borrow £14.6bn more this year than previously forecast, equivalent to 2.1% of GDP. Total additional borrowing of £96.6bn forecast by 2023-2024 to pay for spending commitments.

The government is seeking to protect business and the public.

• Highlights
• The view from Pegasus Funding
• Support for SMEs
• Innovation
• Tax relief
• The tax burden

What are the highlights?

• Firms with fewer than 250 staff will be refunded for sick pay payments for two weeks
• Small firms will be able to access “business interruption” loans of up to £1.2m
• Business rates in England will be abolished for firms in the retail, leisure and hospitality sectors with a rateable value below £51,000
• Business rate discounts for pubs to rise from £1,000 to £5,000 this year
• System of High Street business rates to be reviewed later this year
• Firms eligible for small business rates relief will get £3,000 cash grant
• Entrepreneurs’ Relief will be retained, but lifetime allowance will be reduced from £10m to £1m
• £5bn to be spent on getting gigabit-capable broadband into the hardest-to-reach places
• Science Institute in Weybridge, Surrey to get a £1.4bn funding boost
• An extra £900m for research into nuclear fusion, space and electric vehicles
• VAT on digital publications, including newspapers, e-books and academic journals to be scrapped from December

The view from Pegasus Funding

Richard Olsen, director of Pegasus Funding Solutions, said: “From a funding perspective, we have already seen an increase in the number of enquiries with companies wanting to find out more about the Business Interruption Loan Scheme and the £3,000 cash grant.

“The Business Interruption Loan looks set to replace the EFG Scheme, so we have an idea of how this might work. The problem is this isn’t really sorting out the issue. If businesses are forced to shut for four weeks, then will a business interruption loan actually assist or compound the problem; if you can get one?”

Support for SMEs

Global professional services provider KPMG also noted that this budget is all about protecting SMEs. In the short term the government is supporting SMEs with a short-term loan scheme to provide working capital in event of business interruption up to £1.2 million and funding to help with statutory sick pay during the Covid-19 outbreak.

The government has also said there will be a significant increase in public investment over the next five years. There will be substantial additional funding for transport and communications infrastructure, housing and R&D.

Higher public investment should boost longer term economic growth, which is critical as the Office for Budget Responsibility’s (OBR) new forecasts imply only modest trend GDP growth of around 1.5% per annum in the medium term beyond the period of the Covid-19 crisis.

Greater public spending without net tax increases will mean higher public borrowing: the average annual budget deficit over the four years to 2023/24 is now projected by the OBR to be around 2.5% of GDP, as compared to around 1.5% of GDP previously. The implied increase in annual borrowing of around 1% of GDP, or over £20 billion a year, is significant, according to KPMG.

Innovation

Reaction to the budget has been largely positive, particularly as the government is now supporting innovation. Rachel Moore, innovation incentives lead at Price Waterhouse Cooper, said: “The increase in the Research and Development Expenditure Credit (RDEC) from 12% to13% is a welcome step and continues to make the UK one of the more attractive regimes globally. This is a clear sign that the Government is actively supporting investment in innovation by UK business and is serious in its ambition to increase UK investment in R&D to 2.4% of GDP by 2027.

“The credit enhances operating profits and is payable to a company irrespective of its tax position which makes it particularly attractive to business. The rate increase suggests it will be here for the long term, enabling qualifying companies to plan their future cashflow.”

Tax relief

Talking about entrepreneur’s tax relief, Alex Henderson, tax partner at PwC, added: “Changes to entrepreneurs’ relief, while not meaning complete abolition, do amount to a 90% reduction and could cut the tax relief that business owners were expecting when selling their business by £0.9m.

“This takes us back to when the relief was originally introduced in 2008. But employees and business owners may be hoping the Government looks back even further to the days of taper relief which incentivised both employees and business owners with a tax rate of only 10%.

“With over 1,000 reliefs in the system, the Government may want to look more broadly at how it provides incentives for employees and business owners.”

Commenting on plans to reform Entrepreneurs’ Relief, Annabel Denham, director of communications at the Institute of Economic Affairs (IEA) said: “Entrepreneurs’ Relief is a loophole in an already complex tax code. It isn’t what we would advocate if designing from scratch. But it does give Britain a competitive edge in attracting foreign talent and the Chancellor has struck the right balance in keeping the scheme while lowering the lifetime limit.

“An overlooked element of Entrepreneurs’ Relief is how it interacts with the Enterprise Management Incentive. EMI shares qualify for the discounted rate on capital gains and Entrepreneurs’ Relief gives the UK the lowest effective tax rate on stock options for early-stage employees in the world. Given many scaling businesses lure talent with equity in place of higher salaries, scrapping Entrepreneurs’ Relief altogether would have risked making it harder for UK start-ups to compete with larger incumbents.”

The tax burden

The reaction to the budget was not all positive. Matthew Lesh, the head of research at the Adam Smith Institute, a leading independent policy and economic think tank, said: “In the longer run, spending like a drunken sailor will not create a thriving entrepreneurial economy. Expansive vanity projects won’t make us better off. Bureaucrats picking winners does not support risk-taking by entrepreneurs — the Government should be cutting red tape on innovation like limits on biotechnology, not presuming to know what is best.

“The tax burden is already at the highest it has been in forty years. We spend an extraordinary five months of the year working for the state before earning for ourselves. We should welcome the increase to the national insurance contribution threshold, the fuel and alcohol duty freezes, and maintaining the Entrepreneurs’ Relief albeit in a scaled-back form. But it is disappointing that the Chancellor has not used this opportunity to take more radical, longer-term steps to reduce the burden of the state and reform taxes. The targeting of environmental bogeymen, like increasing the gas levy and tax on plastic packaging, is not the right approach to environmental concerns — we need a broader approach.”

For information on help and funding for business contact Pegasus Funding Resources and one of our experts will be happy to help.