Budget 2021

The Budget could be sliced and diced in a hundred different ways. You’ll be pleased to know I won’t do that. I’ll just focus on three areas where our work has had some influence on what was announced.

First off is the so-called “super-deduction”. The biggest announcement for the UK’s competitiveness is the proposed increase in the main rate of corporation tax to 25% on 1st April 2023. This will only apply to businesses making a profit over £250,000, with it tapered between £50,000 and £250,000, and a small profits rate (SPR) of 19% for companies with profits under £50,000.

Even if you won’t pay this, as the Office for Budget Responsibility states, it “will increase the cost of capital, lowering the desired capital stock and business investment”. As Paul Johnson from the Institute for Fiscal Studies writes: “With this increase Mr Sunak is taking a gamble that raising corporate taxes further up the international pecking order won’t have too terrible an effect on investment.”

On the face of it, at 19% it looks like the UK should be able to raise corporation tax without too much trouble – only Hungary, Ireland and Lithuania are lower. However, while former Chancellor George Osborne was gradually cutting corporation tax, capital allowances were also being scaled back, meaning that in 2019 the UK’s effective marginal tax rate was only the 25th best out of the 36 OECD countries analysed.

That’s why the Chancellor had to pull the “super-deduction” rabbit out of the hat. It’s an idea I’m very familiar with because our Research Director, Sam Dumitriu, has been instrumental in making the case for increasing capital allowances since 2017. He was one of the first to raise the idea of full expensing in the UK, with his report for the APPG for Entrepreneurship, and last year in a more detailed report, with Pedro Serôdio, estimating that moving to a system of full expensing would permanently boost investment by 8% and overall productivity by 3.5%.

He has written an article explaining the policy, which I recommend reading if I haven’t explained it clearly enough. If you read it, you’ll learn we need to do two more things to help offset the negative impacts of the increase in corporation tax. First, we (and others) are trying to get clarification that intangibles can be included under the super deduction. Some commentators assume they can’t, though there is already wiggle room for claiming tax relief for them.

Second, Rishi should have announced that when the 130% super-deduction ends, we will move to 100% full expensing. The stakes are high. Without this, in 2023 we could have one of the worst tax systems for businesses in the OECD.

Good points

As quoted in City AM, I think UK entrepreneurs will welcome the new ‘elite points-based visa’ announced in the Budget. It will come into force by March 2022 and allow those with a job offer from a recognised UK scale-up to qualify for a fast-track visa. Setting the criteria for what counts as a scale-up or high-growth firm will be a challenge, but if it leads to more high-skilled immigration then I’m supportive of it.

Also, allowing holders of international prizes and winners of scholarships and programmes to automatically qualify for the Global Talent visa will offer the necessary assurance to the very best and brightest that they are welcome in the UK.

We also welcome the expansion of the Global Entrepreneur Programme and a review of the Innovator visa. The Innovator visa is currently unfit for purpose, needing fundamental reforms to align incentives so the pricing is clear and more high-quality organisations become endorsing bodies. As our Job Creators report found, prior to Brexit 49 per cent of the fastest growing businesses in the UK had at least one foreign-born founder. If we are to continue to attract the best and brightest then we need to ensure that the visa process is as fast and unbureaucratic as possible.

And we had more good visa news yesterday. As our Adviser Zenia Chopra writes, the new Graduate visa will be returning on 1st July 2021. This is the much anticipated return of the post-study work visa and will mean that graduates can stay in the UK for two to three years after they have graduated. For startups, it will mean that it will be a lot easier to employ graduates out of university, with no need to worry about visas – at least for the first couple of years.

And yet more good news. Apparently the UK is prepared to offer good terms on high-skilled migration as part of a free trade deal with India. Don’t forget: Indian high-skilled migration played a big part in building Silicon Valley.

Grow up

The Budget also announced Help to Grow (you can already register on the website), a new scheme designed to help businesses adopt management best practices and productivity enhancing software. We have long championed the value of management practices and technology for improving UK productivity.

Our Management Matters report showed that management practices explain almost a third of the differences in productivity between and within countries. And as our Upgrade report argued: “If the UK’s 1.1m micro businesses doubled their uptake of key digital technologies, it would lead a £4,050 average productivity boost for the 4.09m workers employed by micro businesses, restoring four-fifths of lost productivity growth since the financial crisis, enabling businesses to bounce back faster post-lockdown.”

As Sam says: “It’s right then to harness the UK’s world class business schools to deliver a programme of peer mentoring to get more businesses to adopt best practice. It’s also right that they’ll be provided with free, impartial advice and financial support to purchase productivity enhancing software. But there’s a risk innovative business-to-business startups will be cut out from the scheme. It is vital that startups are involved in the design of the scheme and that software vouchers do not only go to tech giants.”

For those of you who are subscribed to the APPG for Entrepreneurship Newsletter, you’ll have seen our broad summary of the reactions of some of the main business groups (there's more in the News and Views section). And we will send out Policy Updates (sign up here) in the coming weeks as the practical implications of the Budget announcements are unpicked.

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