Guest post: The budget is a win for startups

This is a guest post by Danvers Baillieu, an associate solicitor at Winston & Strawn and co-founder of Bootlaw.

A few weeks ago on these pages, I reviewed the history of capital gains tax (CGT) in the UK and made my predictions for the first budget from Britain’s new coalition government. Luckily for me, I’m neither a betting man or an investor, because my predictions were pretty much complete rubbish.

Unless you rely on TechCrunch as your primary news source, you’ve probably heard by now the headline news that VAT will be rising to 20% in January 2011, that a number of welfare benefits have been cut and public pay has been frozen.

On CGT, I predicted that the rate would rise to 40% and that Entrepreneurs’ Relief would be abolished and Taper Relief restored. Instead the Chancellor restricted the rate increase to 28% (for higher rate taxpayers only), did not restore Taper Relief and has embraced Entrepreneurs’ Relief so that the 10% rate now applies to the first £5 million of capital gains made by the sale of a qualifying business over a person’s lifetime.

Only three months ago, before the final Labour budget, this allowance stood at £1 million, so taken together the last two budgets have seen a massive expansion of Entrepreneurs’ Relief for the benefit of those who build businesses.

However, I was correct in predicting that the Enterprise Incentive Scheme (EIS) and venture Capital Trust (VCT) schemes would be maintained. Alongside the budget itself, HMRC produced a short note [pdf] confirming that the government will press ahead with some minor reforms to these schemes to ensure that they comply with EU rules on state assistance, but that otherwise it is business as usual.

Elsewhere in the budget there were some bright spots for business. The reduction of the headline rate of corporation tax from 28% to 24% over 4 years will promote the UK’s international competitiveness, although the reduction of the small business corporation tax rate from 21% to 20% will have more relevance for most business owners reading TechCrunch. Although this does not quite make the UK a corporation tax haven, it does mean tax rates for large and small companies alike will be significantly lower than in the US – which is something to think about before rushing off to incorporate in Delaware.

Outside of London, the South East and East of England, start-ups are being encouraged with a three year scheme which will give them up to £5,000 of relief from Employers’ National Insurance Contributions per employee for up to 10 employees hired in the first year of business. This scheme should come on stream in September but will apply to any qualifying new business incorporated from 22 June.

We’ll have to wait and see whether a potential tax break of £50,000 will make any difference to the location plans of those starting businesses, but it is sure to be welcomed by those promoting the start-up ecosystem outside of London – and those providing temporary desk space in London for visiting start-ups.

George Osborne also made positive noises about reviewing the taxation of intellectual property, R&D tax credits and the future implementation of the Dyson Review [pdf] (on supporting high tech industries), which was commissioned by the Conservatives when they were in opposition. Freelancers and IT contractors will be pleased to hear that IR35 is also due for an overhaul, but with details to be announced.

Not much has been done to income tax rates. Progress has been made towards raising the threshold of the personal allowance to £10,000 – and there has been a slight reduction of the threshold for the 40% tax rate. Higher earners will no doubt be disappointed that no end is in sight for the 50p tax rate, but may be relieved that they have not been singled out for any further punishment.

Clearly the debate will continue as to whether the cuts are too big, too small, too soon or too late and on a macro economic level businesses everywhere will be hoping for a sustained recovery. For those of us in and around emerging technology companies, it is hard to see that this budget could have been much better – in particular the more modest than expected rise in CGT and the expansion of Entrepreneurs Relief must be a considered a WIN.

Although perhaps this week’s big economic news for the tech sector is not really the budget at all, but the revaluation of the Yuan….?