Fiscal incentives to support the UK’s tech sector and promote investment are vital as the UK navigates the uncertain Brexit transition period, and this should be reflected in the 2020 Budget. Tax experts are urging the new Chancellor, Rishi Sunak, to act now rather than waiting for free trade deals to be negotiated.
Despite the Confederation of British Industry (CBI) announcing a “welcome lift in business confidence” at the start of 2020, the UK government can’t afford to neglect the needs of SME businesses, the backbone of the UK economy. Incentives are urgently needed to strengthen confidence and promote investment in Britain’s thriving tech sector.
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For larger tech companies, changes affected R&D relief should get the go ahead. The Chancellor is expected to confirm that the rate of R&D relief that large companies can claim under the Research and Development Expenditure Credit (RDEC) scheme will be increased by 1% (from 12 to 13%). However, he may wish to go further by extending the scope of the scheme to include costs for investment in cloud computing and big data analytics. This could be enormously beneficial to a much wider range of businesses.
Annual Investment Allowance
Investment requires confidence, and this can’t happen in a climate of uncertainty. To address this, further certainty is needed surrounding the Annual Investment Allowance (AIA), which is currently set at £1 million but is expected to revert to £200,000 from 1 January 2021.
Technology businesses need to know what is happening to the AIA so they can weigh up the cost impact of new plant and machinery and invest in their growth plans. The Chancellor could address this by either increasing the allowance or extending the current limit until the end of 2022 or possibly even longer.
Alternatively, if a blanket increase in the AIA limit is considered too costly, the Chancellor could select specific areas of capital expenditure, which might qualify for enhanced tax relief, up to around 110% of cost. For example, this could include investments in robotics, AI systems, data integration, 3D printers and other value-driving tech.
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This Budget may see the end of Entrepreneurs’ Relief (ER), which is intended to encourage business investment by providing a favourable rate of Capital Gains Tax to business owners on the disposal of all or part of their business. The relief, which saves business owners an estimated £2.2 billion per year, may be under threat, following a report suggesting that it may not be boosting entrepreneurialism as intended.
While it would be a big step for the UK government to completely remove the idea of rewarding owners and investors for risking their capital, we may see reform of the relief, designed to reduce the tax cost. This might involve reducing the £10 million lifetime allowance, or limiting access to new businesses, or those who reinvest their sale proceeds within a limited window.
It is hoped that any restrictions to ER will be offset by measures to enhance incentives for start-ups and growth businesses. This would continue to communicate the message that Britain is open for business, helping tech organisations to plan their long-term investment strategy.
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Digital Services Tax
Most damaging of all to the sector, the government could also deliver a final decision regarding the controversial UK Digital Services Tax, although there is still time to soften its impact or even defer it altogether.
If the tax goes ahead however, it could impact UK competitiveness significantly. It is important to realise that the Digital Services Tax would operate solely within the UK, rather than being EU-wide. As such, the UK could find itself isolated and at odds with trading partners should other countries choose not to introduce a similar tax. This could leave the UK at a considerable disadvantage when it comes to attracting international orders and therefore could have a negative ripple effect on UK-based SMEs.
Tech businesses will be hoping that this tax is deferred for a year, pending the outcome of the OECD work on taxation of the digital economy, which could reach an agreement by the end of 2020.