What does the Chancellor’s Autumn 2024 Budget mean for SMEs?

The Chancellor, Rachel Reeves, delivered her first budget statement on Wednesday (30 October 2024), declaring it to be a budget to fix the foundations of our economy and rebuild Britain. Over the last two weeks, I have been thinking about the impacts the budget statement might have on the UK’s SME community and hearing the concerns of individual businesses. For me, there are five big themes:

Profits and revisiting investment plans

First and most dominatingly, SMEs will be worried about profit and will be revisiting investment plans as a result of the major reduction in the threshold for payment of a higher rate of Employers National Insurance (NI) Contributions, coupled with both a higher minimum wage and a change to the actual Employer NI rate. These are big effects and might mean additional costs of on average £700-800 per employee annually. For a low margin business with quite a high number of employees, these changes will reduce the financial freedom of manoeuvre for many to invest. I don’t know how many SMEs will alter or reduce their investment plans as a result of these increased costs, but my guess is that it will be a significant proportion of SMEs. Some SMEs maybe able to pass on costs in prices to their customers, but some small businesses might become unviable. This may not be harmful to an economist’s eyes as weak businesses are replaced by stronger ones…..but some sectors, like food processing or transportation, are naturally high labour cost/low margin and so may suffer disproportionately.

A clear roadmap and stability

Second, the good news is that there appears to be a serious-minded government in charge, promising a clear tax roadmap and the intent to modify tax regimes rarely and in a measured way. Frankly, there is relief that the waiting for the budget (and the anxiety over the unknown) is now over and businesses can at least start to plan accordingly. Will this translate into SMEs taking initiatives, making investment decisions and planning constructively for the future? Yes, I think it will. We will look forward to investment and ambition returning to the business community now that it knows what the fiscal and tax context is. Overall, interest rates make a great deal of difference to those SMEs that borrow and so what I guess is ‘a modest rise’ in government bond yields should not alter SME investment behaviour much. That is my guess and hope.

Research & Development

Third, leaving largely untouched the very constructive regime that surrounds Research & Development (R&D) investment in the UK is hugely to be welcomed. I think the promise of ‘no change’ to R&D budgets, EIS, SEIS, VCT and R&D tax credit regimes will ensure that SMEs seeking to develop breakthrough innovations will continue to do so and the highly effective ‘innovation ecosystems’ of the UK should continue to function pretty well (see later for one key negative note). I also note that while these regimes are unchanged, it is likely that the Industrial Strategy that is going to emerge over the coming months might alter the R&D arrangements or cause funds to be allocated to different government R&D priorities. I hope that any such alterations would include enhanced Innovate UK grant and loan funding as this crucial ingredient of the UK’s innovation economy works well and would work even better with higher grant application win rates!

Investment in innovation

Fourth, reduction in exemption from Inheritance Tax is likely to harm the flow of capital into early stage businesses that are the innovation engine of the UK. One of the great appeals of taking the risk of investing in EIS and SEIS certified businesses was the prospect that any returns from such risky investments would be outside the reach of inheritance tax. This is no longer assured. Reducing the volume of investment by High Net Worth Individuals (HNWIs) into innovative and early stage business in the UK would be a great pity as these HNWIs play an important part in financing our innovation economy as well as in providing support and advice to those businesses to ensure their investment succeeds in generating a return for them. It feels to me that by including EIS and SEIS capital within the envelope of inheritance tax, the government is going to cause much greater harm to the vitality of the economy and the longer term potential tax revenues from such companies thriving, than it will gain from the extra taxes that this measure will raise.

Encouraging entrepreneurship?

Finally, are there some messages in the Budget that will deter entrepreneurs from starting a new business here? Many SME owners will not change their plans because of Business Asset Disposal Relief or changes to CGT; and many would-be entrepreneurs will go ahead and start turning their business idea or scientific breakthrough into a new business regardless of tax rules. However, I am a little concerned that the Business Asset Disposal Relief hike, the CGT rise and the Employers NI rise will all suggest a government whose posture might be assumed to be a little against the grain of business owners, rather than in favour of encouraging more of them. This effect is indirect and a matter of mood rather than maths…..but it would be very harmful for the country and the vibrancy of the innovation that drives economic growth, if those would-be entrepreneurs believe that they should start their new businesses in another country.

So, overall, do the measures in this Budget look like they are likely to work on the innovative and small business community by encouraging economic growth? I think the answer is overall ‘neutral-to-no’. It is a guess whether the positives – stability, clarity, improvements in public services (one hopes will flow from increased investment), R&D budgets unchanged and mood change – outweigh the negatives such as the major change to NI thresholds and inheritance tax changes. I think on balance that they probably don’t.

David Crichton-Miller, Group CEO