UK’s SME Tax Breaks Intensify Golden Triangle’s Growth Inequity

August 18, 2023

UK Treasury report calls for more targeted support for small and medium-sized technology businesses. The report focuses on tax incentives for regional SMEs. In this article, the specialists at Payrow will explain what changes are being made to UK law and how they will affect businesses.

Reflections on Tax Relief Schemes in the UK

Tax relief schemes in the UK may need to be reviewed to compensate for regional differences in venture capital investment, a new report has said. A study of the state of venture capital investment by the UK Treasury Select Committee found that funding in the country is heavily concentrated in the “golden triangle” consisting of London, Cambridge, and Oxford. 

According to recent research, investment deals in London-based SMEs made up almost half (47%) of all investments in 2020, although they only account for 19% of all SMEs in the country. 

While regional inequality in venture capital has long been considered a major barrier to companies outside of London, the current tax relief framework could further exacerbate this problem, the report stated. 

The Current Tax Relief Requirements 

There are currently three tax relief schemes for businesses in the UK. These include the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCTs).

The specific terms of the tax relief schemes, such as the requirement for companies to have existed for between seven to ten years, mean that businesses based outside London may be at a disadvantage. According to the report, this is due to the traditional growth challenges faced by companies operating in other parts of the UK.

This means that small and medium-sized businesses in other cities may take too long to reach the same level of business maturity as companies based in the golden triangle. Hence, they will no longer fall within the age limits for tax relief, further stifling potential development.

With companies in other parts of the UK taking longer to establish themselves, the maximum prescribed company age for tax relief of seven to ten years is currently holding back economic growth, the committee said in their statement. 

Based on the data and findings from studies of companies in different parts of the UK, the following conclusion was reached: this age limit should be extended to support the growth of regional SMEs.

Tax Incentives Are Being Evaluated

HMRC is currently assessing tax relief schemes, the report notes. HMRC has told the Treasury that the results of the EIS and VCT assessment will be published in late summer/early autumn 2023 and will provide clarity on any future changes. 

Chair of the Venture Capital Trust Association, Will Fraser-Allan, welcomed calls to extend the limits on tax relief. He said that this organisation supports the Treasury Committee’s report and its recommendations.

Fraser-Allan added that the findings clearly reflect the concerns of the VCT community and present a positive vision for the future. He believes it is vital to continue to support the development of the sector and ensure continued investment in small businesses across the UK. 

The VCTA hopes that the Treasury will take these recommendations into account because, as the April 2025 deadline approaches, the lack of a clear plan could seriously harm investments that rely on certainty.

SMEs Not Thrilled with Tax Relief Package

Tax breaks for UK technology companies have been the subject of controversy in recent months following the Spring Statement. The industry is divided on the government’s tax incentive package for SMEs, saying, “It’s still not great”.

Chancellor Jeremy Hunt has revealed the government’s plans to introduce an enhanced package of tax breaks for SMEs across the country. The proposed package would allow companies that currently spend 40% or more of their total expenditure on R&D to claim a credit of £27 for every £100 spent. Hunt said that the package of measures to support SMEs in the UK would amount to more than £1.8bn and help around 20,000 companies get vital support.

Critics labelled the move a “partial reversal” of the widely criticised cuts introduced during the Autumn Statement. They pointed out that the tough economic climate would still leave many SMEs in financial difficulty.

Jay Bhatti, R&D tax relief specialist at MHA, said the new SME tax credit does not fully offset the damage caused by the Autumn Statement, which reduced the tax credit rate from 130% to 86%. Research by Coadec found that start-ups will lose up to £100k on average as a result of previous commitments. The chief executive of Coadec said the enhanced package represented some progress, but it’s still not great.

There is now a widespread sense of disbelief among SMEs about how the tax relief fiasco will be handled. The government keeps talking about innovation-driven growth but discriminates against R&D-intensive start-ups. “The Spring Budget does partially represent a climbdown, but not a complete one”, Bhatti said.

In addition to what has been said, some feel that the Spring Budget prioritises large businesses. For example, CEO of Amadeus Capital Partners Anne Glover said that while the changes to tax credits are to be welcomed, the announcement may raise concerns about the apparent prioritisation of support for large companies. The government’s decision still carries some risk of undermining the next generation of companies.

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