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Earlier in 2023, UK Chancellor Jeremy Hunt was accused by 180 entrepreneurs of “putting British startups at risk” with his tax policies. As a network dedicated to helping investors find early-stage EIS investment opportunities, this naturally piqued our interest at Bure Valley Group. We wanted to offer some reflections on the state of the British startup landscape as of September 2023, especially in light of some recent government policies.
We hope these insights are useful to you. To find out more about our EIS pipeline and other opportunities, visit our portfolio page here. For enquiries regarding our latest projects and funding, you can reach us via:
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Why is the Chancellor being criticised?
Hundreds of UK startups wrote to the Chancellor in early 2023, warning of a “cashflow crunch” risk for British tech companies in the early stages of growth. This followed the collapse of Silicon Valley Bank (SVB), with the Bank of England (BoE) putting its UK branch into insolvency.
The fall of SVB was the biggest bank crash since the 2008-9 Financial Crisis. Fortunately, the contagion did not spread to the wider financial sector as it did before. To calm the markets, the BoE pointed out that SVB was not deeply embedded into the UK’s ecosystem like other large, established banks are.
With that said, the collapse of SVB did send shockwaves across the Atlantic – with important knock-on effects for the UK tech sector. With the UK branch suddenly no longer operating, hundreds of tech startups suddenly faced a critical shortage of access to funds. Many founders wrote to the Chancellor claiming that they were struggling to make payroll and pay suppliers.
The government, to its credit, was quick to hold crisis talks with tech sector stakeholders and discuss potential solutions. In the end, the government arranged a takeover of SVB’s branch in the UK by HSBC, for £1 – effectively overriding the BoE’s decision to put it into insolvency.
Naturally, the Chancellor has received criticism for allowing the conditions to lead to these events. Perhaps warning signs at SVB should have been identified sooner by authorities. Thankfully, the panic seems to be over for now in the UK. Hunt reassured investors on Twitter:
“Deposits will be protected, with no taxpayer support. I said yesterday that we would look after our tech sector, and we have worked urgently to deliver that promise.”
What is the situation now in September 2023?
The rescue deal arranged by the government over 6 months ago seems to be offering stability for UK tech startups for the time being. However, the collapse of SVB is an urgent reminder for founders – and their investors – to ensure that their companies’ finances are built on firm ground.
At UK banks, most deposits are insured up to £85,000; or, £170,000 for joint accounts. However, this protection under the Prudential Regulation Authority did not stop many tech startups from struggling to make payments, make deposits or withdraw cash in March 2023.
One idea for founders to protect their cashflow is to hold multiple bank accounts with different providers. Whilst this may add complexities for the internal finance team, it could also buttress startups’ finances if things go wrong with a single account.
With this all said, investors are still waiting for the government to confirm whether three tax incentives for early-stage opportunities will be renewed. Whilst Chancellor Hunt promised in November 2022 to extend the schemes, this has not yet been put into legislation.
Some encouraging changes have come into effect this year. In April 2023, startups can now raise up to £250,000 from the Seed Enterprise Investment Scheme (SEIS), compared to £150,000 before. The yearly limit that investors can claim back against their tax bill has also doubled to £200,000.
The March 2023 budget also featured some new tax breaks to try and encourage UK investment (after the pain of watching UK microchip designer Arm list on the New York Stock Exchange and AstraZeneca opening a new factory in Dublin). Companies which invest in IT equipment and machinery can now write it off against tax on their profits – i.e. “full expensing”.
However, this new measure is less generous than the one it supplanted. It is only guaranteed to last for three years and the previous “superdeduction” used to allow firms to claim back 130% of their research and development (R&D) spend as tax credits.
As a result of the scale-back, the Federation of Small Businesses (FSB) said that nearly 50,000 of its members have claimed they are now less likely to invest in R&D. New market entrants are mostly likely to cut back.
On this point, a strong argument can be made that the Chancellor needs to rethink Treasury innovation policy to avoid the UK getting left behind other nations.
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