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Why Building a Business in the UK Feels Like a Punishment
Early-stage startups are a powerful engine of growth, jobs, and innovation in the UK. With 5.5 million SMEs making up 99% of UK businesses, employing over 16 million people, and generating nearly half of all private sector turnover, small businesses are clearly vital to the economy.
Startups specifically contribute 50% of all new job creation, despite making up just a fraction of the business population. Yet despite their impact, many startup founders feel the system is stacked against them.
This article draws on real founder experience and global research to explore what's broken in the UK's approach to supporting early-stage businesses — and what we can learn from other countries doing it better. More importantly, it ends with concrete actions founders can take today to survive and thrive in the system as it is.
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The VAT Trap: Penalising Growth
The UK VAT threshold of £90,000 creates a perverse incentive: go over it, and you're suddenly required to charge 20% VAT on all sales. That makes your pricing less competitive if you're dealing with B2C or micro-business clients.
Many startups deliberately hold back growth to avoid crossing the threshold — a phenomenon confirmed in Parliamentary debates and FSB research. Compliance alone adds an estimated £4,100 a year in admin costs for small VAT-registered businesses.
Worse still, lean startups that don't spend much on suppliers can't reclaim much VAT — meaning they owe VAT every quarter, despite keeping costs low. Instead of rewarding efficiency, the VAT system punishes it.
What founders can do:
Consider the Flat Rate VAT Scheme if your expenses are low — it simplifies admin and may reduce liability.
Review every supplier and expense to ensure you’re reclaiming all VAT you can.
Forecast VAT liabilities quarterly and set aside a percentage of revenue.
No Safety Net for Entrepreneurs
In the UK, the moment you become self-employed or start a business, you're treated as "employed" in the eyes of the benefits system — even if you earn nothing.
There are schemes like the New Enterprise Allowance (NEA), but these are only available to people already on Universal Credit or other benefits. And the support is minimal: a total of £1,274 over 26 weeks, and only after you've proven you're unemployed.
So unless you're already broke, you get no support. Worse still, if your household income is over certain thresholds (e.g. your partner earns over £100k), you're ineligible for almost every form of financial help.
Founders from middle-income households face a tough reality: no unemployment protection, no startup allowance, and no tax breaks — even though they are taking financial risk to contribute to the economy.
Compare this to countries like Ireland, where the Back to Work Enterprise Allowance allows unemployed people to retain 100% of their benefits for 1 year and 75% for a second year while building a business. Or Germany, where the Gründungszuschuss offers 6+9 months of financial support from the unemployment system while starting a business.
These are smart policies that back people willing to build. The UK system does the opposite.
What founders can do:
Make use of Start Up Loans or SEIS/EIS investor schemes to fund your early months.
If applicable, register unemployed before starting — you may qualify for NEA or Universal Credit.
Lean into local grants and regional growth hubs that sometimes offer overlooked micro-funding.
Bureaucracy & Fees That Drain Time and Energy
UK startups face a constant drip of minor charges and paperwork that add up to major frustration. Submitting a Confirmation Statement to Companies House — even if nothing has changed — costs £34.
Small founders are hit with fees for basic filings, annual returns, and late penalties. Every step of running a company has a price tag. Meanwhile, larger businesses have in-house finance and legal teams to absorb the burden.
These fees aren’t just administrative. They signal a mindset: small businesses are treated like revenue sources, not growth engines.
Other countries make it simpler. New Zealand can register a business in under a day. Singapore offers streamlined tax and compliance portals. Estonia offers full e-residency and digital business administration.
What founders can do:
Use services like Novabook or tools like Osome, Xero, or FreeAgent to automate filings.
Create a compliance calendar to avoid late filing fees.
Join founder communities (like Rare Founders) to get templates from other founders, tools, and reminders.
Funding Remains Elusive for New Founders
While the UK has an active VC and angel investment scene, access to capital remains a top barrier for early-stage and first-time founders. According to Virgin StartUp, 62% of UK founders say they struggle to access capital, and almost 1 in 5 list it as their biggest barrier.
Even government schemes like the Future Fund excluded many early-stage founders during COVID because it required £250k in matched private investment. That’s not realistic for first-time entrepreneurs.
And long-term incentives have been cut: Entrepreneurs’ Relief, a major tax incentive for successful exits, was reduced from £10m to £1m, weakening the reward for building a high-growth company.
What founders can do:
Make the most of SEIS and EIS — create clean, investor-friendly cap tables.
Consider alternative funding: revenue-based finance, crowdfunding, or grant-led accelerators.
Build a track record through bootstrapping before raising, even if it means small wins.
What the UK Can Learn from Global Best Practices
Other countries have taken proactive steps to encourage startup creation:
Ireland: Back to Work Enterprise Allowance lets founders keep benefits while starting up.
Germany: Gründungszuschuss allows unemployed founders to receive 6–15 months of support.
Singapore: Offers corporate tax exemption on first S$200k of profits for 3 years.
USA: SBA provides low-interest loans and free business mentorship nationwide.
New Zealand & Estonia: Lead in ease-of-starting and digital-first admin.
The UK could adopt similar measures:
Introduce a "welfare bridge" for new founders
Raise or stagger the VAT threshold
Remove pointless admin fees
Improve access to capital for first-time founders
What founders can do:
Share this article with your MP, local council, or startup support organisations.
Collaborate with founder communities pushing for reform.
Don’t stay silent — document and publish your experience to drive awareness.
Conclusion: Founders Deserve Better (But Don’t Wait for Government)
Entrepreneurs aren’t asking for handouts. They’re asking for fairness, recognition, and room to grow. Startups already create jobs, contribute tax, and fuel innovation. But right now, they do it in spite of the system, not because of it.
It’s time for policymakers to stop ignoring the startup community. A fairer system is possible. Other countries have done it. The UK can too — if we’re willing to listen.
But until change happens, founders need to find workarounds, communities, and tools to protect their energy, reduce friction, and keep building.
✅ If this resonates with you – whether you’re a founder, policymaker, or someone who believes in backing ambition – let’s start the conversation.
POLL TIME
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What’s the biggest systemic barrier you’ve faced as a founder in the UK?
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