Startup Life/Funding/Analysis/

What does Kwasi Kwarteng’s mini-budget mean for UK startups?

Investors and founders are encouraged by some of the new chancellor's plans

By Amy O'Brien

UK chancellor Kwasi Kwarteng

When Kwasi Kwarteng delivered the new UK government’s first major fiscal policy package in today’s “mini-budget”, all eyes in the British tech scene were on what support the new chancellor would give the country’s startup ecosystem. 

His predecessor Rishi Sunak’s brand centred around being “a startup Treasury” — an agenda cut short when he resigned earlier this year. 

Kwarteng has made some key policy changes that some startups say will help fuel their growth. Most involve making it easier for various corners of the UK’s institutional wealth to be invested into “riskier” SMEs. 

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

Plan: SEIS is broadened

  • Kwarteng plans to widen access to the seed enterprise investment scheme (SEIS) and increase its generosity. It’s a scheme that’s meant to give tax relief to investors who back early-stage UK startups.
  • Under the SEIS scheme, investors get an initial tax relief of 50% on investments up to £100k and capital gains tax (CGT) exemption for any profit on their SEIS shares.
  • From April 2023, the amount companies can raise through SEIS will increase by two-thirds from £150k to £250k, and the annual investor limit will be doubled to £200k. The age limit for companies accessing SEIS will increase from two to three years, and the gross asset limit (all the assets on a startup’s balance sheet) will be upped to £350k. 
  • The Treasury forecasts these changes to SEIS will help over 20,00 more companies a year. In 2020-21, 2,065 companies raised a total of £175m under the SEIS scheme.

Why does it matter and what do people think?

  • UK investment fund SFC Capital has been campaigning for SEIS reform alongside the EIS Association and Coadec for years. Its founder and CEO, Stephen Page, attributes the early success of countless UK startups to the SEIS programme. “But it was increasingly a victim of its own success — the cap was rapidly outpaced by the impact of the growth it was itself driving on early-stage companies’ funding needs,” he says. “The changes will go a long way to redressing this — and it’s encouraging as well to see the annual investor limit doubled to enable more individuals to invest through the scheme.” 
  • Sarah Barber, CEO of Jenson Funding Partners, which manages SEIS funds, believes the change will also save UK founders precious time and resources. “Entrepreneurs should now have to spend less time fundraising, and more time doing what they do best — building a business,” she says. “Until now, it’s felt like successive governments were sleepwalking on SEIS.” 
  • Janine Hirt, CEO of Innovate Finance, adds said that the extension of SEIS would “encourage the founders of fast growth businesses to come to the UK”.

Plan: EIS is extended beyond 2025

  • The Enterprise Investment Scheme (EIS) was the name given to a series of tax reliefs that were introduced in 1994 to spur UK business growth by making it more attractive to invest in small businesses.  
  • These tax reliefs had been due to expire in April 2025 because of a sunset clause that was introduced by the EU. But Kwarteng has now extended the scheme, which the government hopes will encourage investment into UK startups. 

Why does it matter and what are people saying? 

  • Jenny Tooth OBE, Executive Chair at the UK Business Angels Association (UKBAA) and co-chair of the government’s Women Angel Investment Taskforce, says the change will give entrepreneurship a big boost at a challenging time for startups. “These measures will also encourage and incentivise more women to become business angel investors and back the growth ambitions of the rising number of women entrepreneurs around the UK who will now be eligible for the SEIS scheme,” she says.

Plan: Fast-forwarding reform of the pensions regulatory charge cap

  • Boris Johnson’s government repeatedly spoke about encouraging an “investment Big Bang” for UK businesses by removing a set of hefty fees that prevent British pension fund managers from investing in assets that are perceived as riskier — like startups. Draft regulation has been waiting in the wings a while, and Kwarteng’s Treasury plans to bring this forward.

Why does it matter and what are people saying? 

  • UK defined contribution pension funds comprise a large chunk of the country’s wealth. But according to Johnson and Sunak, over 80% of their investments are in listed securities — which represent only around 20% of the UK’s assets. That means there’s an awful lot of cash sitting in pots that could be used to invest in the UK’s startups — and give pension holders a cut of the upside in fast-growing companies and the corporates of the future, investors say. 
  • “Pension funds have the financial power to be transformative in supporting the real economy because they should think and plan longer term, but they are effectively prohibited from investing in higher risk and return strategies by the fee cap,” says Stephen Welton, executive chair of growth investor BGF.“Trustees should have the flexibility to better determine their investment strategy with an increased focus on net returns not simply fees. This can unlock vast pools of institutional capital that would yield results for the invested companies, innovation in the UK and crucially for the pension holder themselves in terms of better long term realised returns.” 

Plan: Increasing stock options allowances

  • From April next year, the Treasury is doubling the limit for the Company Share Option Plan (CSOP) so that qualifying companies can issue up to £60k of CSOP options to employees, up from the current £30k cap. 

Why does it matter and what are people saying?  

  • Founders and investors tell Sifted that, while encouraging, the proposed options changes could have gone further. 
  • Hannah Seal, partner at Index Ventures, says that the UK has lagged behind several other European countries, including France, which have introduced much more attractive stock option policies. This, in turn, has made it easier for startups in these countries to attract and retain talent. 
  • With other countries expected to follow suit and become more competitive, the UK has needed to urgently review its policy,” Seal tells Sifted. “We are encouraged by the steps announced today to begin to reform the Company Share Option Plan, and look forward to continuing to work with the government to ensure the UK offers one of the most attractive schemes globally.”

Plan: VCT tax relief is extended 

  • Venture capital trusts (VCTs) invest in higher-risk companies that may struggle to raise capital from other typical sources like banks and VCs. 
  • Currently, they enjoy a 30% tax relief if these investments are held for five years. Any dividends earned on these investments are also tax-free, which encourages them to make these higher-risk investments.
  • Under the same sunset clause as the EIS scheme, these tax reliefs were due to expire in April 2025 — but Kwarteng has committed to extending the reliefs beyond then. 

Why does it matter and what are people saying? 

  • If these tax incentives had expired, UK startups could have missed out on some £900m, according to investment broker Wealth Club.
  • Industry bodies welcomed the proposed extension. “This is a strong vote of confidence in VCTs and we applaud the government’s intention to continue the scheme beyond 2025,” says Richard Stone, chief executive of investor industry body the Association of Investment Companies (AIC).

    “VCTs provide scale-up finance for growing businesses and are fully aligned with the government’s drive for growth, creating jobs, funding innovation and boosting exports. We look forward to clarification of how the government will remove the existing uncertainty surrounding the scheme.”

Amy O’Brien is Sifted’s fintech reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter — you can sign up here

Join the conversation

avatar
  Subscribe  
Notify of