R&D and employee ownership should top Autumn Statement startup agenda

Jeremy Hunt chancellor should focus on R&D in the Autumn Statement for startups. Image credit: Kirsty O'Connor/HM Treasury

The environment for startups has been brutal in recent years. Rising prices, elevated wage demands and swelling debt burdens provide daily tests for founders – on top of the regular challenges of hiring, fundraising and developing innovative new technologies.

Britain’s entrepreneurs have repeatedly displayed their resilience through Covid and the cost of living crisis that followed, but many are now struggling to survive. Company insolvencies are at their highest level since 2009, according to government figures.

There is no doubt that startups have been offered significant policy support over recent years, in the form of investment schemes (SEIS/EIS), R&D and lower tax rates. Yet, given the role they are set to play in the UK’s economic recovery, more must be done in the chancellor’s upcoming Autumn Statement to allow them to thrive.

With the government seeking to fulfil its ambitions to make the UK a science and technology superpower, there are four vital areas that could be addressed in some form.

Autumn Statement must support R&D

The government’s decision to cut the R&D tax credits scheme has been devastating for the innovation economy, with the tax benefit decreasing from roughly 33.4% to 18.6% on average.

Jeremy Hunt, the chancellor, did announce some additional tax support for eligible research-intensive startups in March, enabling them to claim £27 for every £100 spent on R&D. While there are clear benefits for businesses across sectors such as life sciences and AI, founders will be looking for more in the autumn statement.

Failure to provide extra tax incentives risks losing some of our brightest companies. Competition at the early stage is hotting up across Europe, with France laying out plans to inject an extra €500m per year into startups and creating its own schemes similar to the UK’s SEIS and EIS.

The UK needs to act to maintain its position as the continent’s leader in early-stage investment – and R&D support is a vital part of that that should factor into the Autumn Statement.

Encouraging employee ownership

Not only should we be encouraging investment into UK companies, but also inspiring employees to invest their own money back into businesses. With valuations falling and equity investment harder to come by, more founders are choosing Employee Ownership Trusts (EOTs) as a viable exit route because they can sell to someone they trust and retain a connection with their business.

Employee ownership is on the rise, with a 37% increase in 2022, according to the Employee Ownership Association. The Autumn Statement provides an opportunity for the chancellor to capitalise on this and put an innovative mechanism in place to support this trend.

Maintaining existing incentives, such as 100% capital gains tax relief for owners selling to an EOT, while also taking it a step further in extending benefits for employees, could have a profoundly positive effect on UK tech and the wider economy. The government could also consider extending EIS and SEIS benefits to employees who do invest in EOTs.

Don’t leave startups out in the cold

With the energy bill discount scheme set to end in March, startups will suddenly feel exposed to the elements. With so many other costs to deal with, the last thing cash-strapped businesses need is another hike in energy bills.

Simply Business’ SME Insights Report revealed that 43% of SMEs are already spending between 21% and 60% more on their monthly energy bill than last year. Even with many businesses shifting away from physical offices to save on costs, home working doesn’t necessarily protect founders because it is only possible to have a business energy account if you use 50% or more of your energy to run your business at home.

Without appropriate support in place, the knock-on effects for the startup ecosystem could be significant. It is now up to the chancellor to show he genuinely supports startups.

All eyes on the chancellor

Hunt has insisted that now is not the time to be generous with public finances and he is right to be cautious given the condition of the economy. However, the chancellor – and the prime minister – have also made the innovation economy the centrepiece of the UK’s future prosperity, which requires investment and a supportive tax system.

After years of hardship through Covid and various other shocks in the economy, the government should use the Autumn Statement as another opportunity to bolster its support for tech startups -from R&D to employee ownership – rather than shying away from it.

Thomas Adcock is a tax partner at Gravita.