Growing pains: How the government can really help entrepreneurs

In summary

• The call for evidence on support for entrepreneurs closes this week 
• It asks many of the right questions and identifies “cliff edges” in tax support  
• One of the big issues for many growing businesses is not the amount of reliefs but the speed with which tax credit claims are processed, however 
• And the biggest gift the government could give is stability and certainty in the tax system 

The call for evidence on how to better support entrepreneurs through the tax system – and deliver some badly needed growth for the UK – was published as part of the 2025 Budget. It seeks views, as the Treasury’s Exchequer Secretary Dan Tomlinson puts it, on “what works, what doesn’t, and how we can make improvements”. 

It closes this week on 28 February, so we’ll soon find out how ready the government is to listen. Even if it does, it might find there are some other conversations it badly needs to have.  

The document rightly notes that there’s plenty to celebrate in the UK’s start-up scene. The country has the third largest venture capital market in the world; half of Europe’s top ten universities for spin-outs are British; and the UK is sixth out of 139 economies in the Global Innovation Index – a ranking of “innovation capabilities and performance” by the World Intellectual Property Organization, a UN agency. 

The UK has a good claim to the title of the start-up capital of Europe.   

Even the government’s boast that early-stage funding is supported by “generous tax reliefs” isn’t without merit. By international standards, many UK reliefs, particularly for R&D, are generous (if not quite as munificent as in the past).  

But while the outlook for UK start-ups remains robust, there are significant gaps as they grow. One is for businesses too big for the government’s Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) but too small to interest series A funders, who typically look for annual revenues well north of £1 million and evidence of significant scalability. The other gap is further along the journey, when businesses are turning over £20m to £25m. It’s often difficult to find finance to take the enterprise to the next level at that point, too.  

To its credit, the call for evidence acknowledges this.  

“The UK faces a particular short-fall in domestic scale-up capital, creating an ‘incubator’ economy, where some of our most innovative ideas, companies and founders feel compelled to move abroad,” it notes. 

The call for evidence also successfully identifies some of the ways tax policy has contributed to the problems.  

One of these is what it calls “cliff edges” in tax support that can create “perverse incentives”; it cites the example of investors benefiting from tax incentives dropping out of later funding rounds once they’ve reached their investment limits – and potentially spooking other investors by doing so.  

Another barrier it touches on is the failure to reward serial entrepreneurship.  

“Compared to some other countries, some have suggested that there may not be sufficient incentives, including within the tax system, to motivate those who have themselves built successful companies to reinvest in the generations of start-ups and scale-ups that follow them,” it notes. 

That’s no small criticism of the status quo, and a genuine brake on the economy. The UK tax system often makes it pretty tempting for talented and ambitious entrepreneurs to flee overseas for their exit and call it a day once they’ve secured a comfortable future for themselves and their family. 

As the government points out, it has sought to address some of these issues. November’s Budget doubled the annual investment limit and lifetime limits for EIS and VCT. It also doubled the threshold for accessing the Enterprise Management Incentive (EMI), allowing bigger businesses to offer tax-advantaged share options to attract and retain talent.  

The government is unlikely to improve the terms of some of these; the call for evidence says the Budget changes have taken EIS and VCTs (as well as the Seed Enterprise Investment Scheme) “as far as is feasible within their current design”. But it’s encouraging that they’re seeking further thoughts on additional help.  

Less encouraging, though, are some things the document doesn’t mention.  

For a start, while it’s true that incentives are still generous, they’ve been getting less so. R&D credits, particularly, have been squeezed over the last few years. The range of qualifying activity remains broad, but the reliefs are less generous. Even the doubling of VCT limits was accompanied by a cut in the relief from 30% to 20%.  

Perhaps more significantly, the scrutiny of R&D claims has increased, and so has the time taken to process even those that are successful. That’s a key issue for young businesses.  

Many fast-growing firms won’t make substantial profits, or any at all, until they start to reach maturity. Competitive corporation tax rates do little for them. Getting cash they’re entitled to quickly so they can support continued growth is much more important. If they’re waiting up to a year to have their R&D claims assessed and credits paid, that can be the difference between successfully scaling and hitting a wall – or worse.  

Having seen the Prime Minister speak at Tech Nation’s Future Fifty event last year, I don’t doubt there’s genuine government frustration with the inability to quickly transform some of the UK’s administrative bottlenecks. But frustration won’t help scaling businesses. Radically accelerating the processing of reliefs and tax credit claims would.  

The final change that would help Britain’s entrepreneurs, however, is just less of it: less tinkering with the tax system; fewer changes increasing complexity; and eliminating endless speculation in the run-up to each Budget.  

Entrepreneurs and businesses need to know they can make plans based on rules that will survive at least one parliament. Meaningful fiscal events every 12 months undermine that. Repeated tax raids and a scattergun approach to raising revenue have created a system that seems consistently in flux.   

For business leaders, that’s limited their ability to move forward with confidence. Too often, they end up sitting on their hands during months of uncertainty, waiting to see which way the government will go on major tax changes. Simplicity, certainty and a period of stability may do as much as any tax change to unleash Britain’s entrepreneurs. If the government wants them to succeed, it should let them get on with it.  

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