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Budget 2020: Tech sector predictions

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Stephen Hemmings - Menzies Accountant

Stephen Hemmings – Tech sector specialist

The UK Tech sector are crying out for Fiscal Incentives (now not at the end of transition period)

The UK is navigating an uncertain Brexit transition period, that makes it essential the UK’s Tech sector has support from fiscal incentives, to promote investment.

Despite the Confederation of British Industry (CBI) announcing a “welcome lift in business confidence” at the start of 2020, the Government must not neglect the needs of SME businesses, which form the backbone of the UK economy. 

What incentives could help to increase confidence and promote investment in Britain’s thriving Tech sector?

R&D relief

During the Budget announcements, many tax specialists are urging the Chancellor to confirm that the rate of R&D relief available to large companies to claim under the Research and Development Expenditure Credit (RDEC) scheme will in fact increase by one per cent (from 12 to 13 per cent). Along with this the Chancellor should take the opportunity to increase the scope of the existing scheme, making it include costs for investment in cloud computing and big data analytics

Annual Investment Allowance

Further certainty is needed surrounding the Annual Investment Allowance, which is currently set at £1 million but is expected to revert to £200,000 from 1 January 2021.  

Investment requires confidence, and this can’t happen in a climate of uncertainty. Technology businesses need to know what is happening to the AIA so they can understand the costs 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 at least the end of 2022. 

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 (say, of up to 110 per cent of cost) – for example, investments in robotics, AI systems, data integration, 3D printers and other value-driving tech.

Entrepreneurs’ Relief

This Budget may be the end of Entrepreneurs Relief (ER, the scheme was intended to encourage business investments by providing favourable rates of Capital Gains tac to business owners on the disposal of all or part of their business. The relief may be under threat after saving business owners an estimated £2.2bn per year, following a report that suggested the relief was not boosting entrepreneurialism in the way it was intended.

While it would be a big step for the 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 £10m lifetime allowance, or limiting access to new businesses, or those who reinvest their sale proceeds within a limited window.

We hope 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.

Digital Services Tax

It is also expected that the Chancellor with deliver a final verdict regarding the controversial UK Digital services Tax, if it goes ahead, the tax could impact the UK’s competitiveness significantly although there is still time to soften its impact or defer it altogether.

It’s important to bear in mind 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. Hopefully we will see this tax deferred for a year pending the outcome of the OECD work on taxation of the digital economy, which it is hoped will reach an agreement by the end of 2020.

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Stephen Hemmings - FCA

Partner

Stephen Hemmings is a Menzies Tax Partner in our London office specialising in business tax planning. He also heads up the Technology sector team