Following Brexit, to make Britain more attractive to innovative companies and tech entrepreneurs, the UK government has been promising fiscal changes. With the pandemic-related spending causing increased levels of public debt and the impact of the war in Ukraine; this has undoubtedly slowed things down. Bold tax decisions now could accelerate the way to a brighter economic future.
Instead, things are moving in the wrong direction. A key case in point is that in April, changes in the R&D tax credits are due to take effect, this will have a negative impact on small and medium-sized businesses (SMEs).The Chancellor is aiming to prevent abuse of the R&D tax relief scheme and whilst most would support this; the changes occurring are damaging to all SMEs that are investing in innovation and wanting to claim tax credits to offset some of this investment.
Contrastingly, larger companies are seeing a positive impact as they are being rewarded with a slight uplift in the tax credits under the R&D Expenditure Credit (RDEC) scheme. Although this is beneficial for them, why is there a difference?
It’s not too late for the Chancellor to recognise the problem and block the changes before they take effect, as the Spring statement is on 15th March. Instead, he could concentrate on tightening the rules of qualification for SMEs that want to bring a claim for R&D tax credits, rather than decreasing the value of the scheme for all.
CAPITAL GAINS TAX
In April, changes are also being made to the Capital Gains Tax (CGT) which entrepreneurial investors will need to be wary of. The annual exemption is being halved to £6,000, and at the start of the 2023/2024 tax year will reduce by half again, and dividend exemption rates are decreasing too. For serial entrepreneurs who invest large sums in early-stage companies regularly, the changes are unlikely to have a big impact on these activities, however they can’t be described as pro-innovation. Should the Chancellor decide to go a step further by increasing the headline rate of CGT, this could have a damaging effect on the sector and the UK economy.
FROM APRIL 2023:
HEADLINE RATE OF CORPORATION TAX
INCREASING FROM 19% TO 25%
This will affect companies with profits of £250,000 and over. This is another example of post-Brexit promises to create a tax system that will enhance UK competitiveness coming to nothing. Instead, things are shifting in the wrong direction. For tech companies, higher corporate tax liabilities will inevitably slow growth and have a negative impact on the UK’s position in fast-developing areas such as digital tech, AI and machine learning, robotics, med tech and clean energy.
ENTERPRISE INVESTMENT SCHEME
The only good news on the horizon at present are adjustments impacting the Enterprise Investment Scheme (EIS), specifically its effect on investment in smaller companies. The scope of the scheme that applies to investors in start-ups and early-stage companies – the Seed Enterprise Investment Scheme (SEIS) – is being broadened; this should help to draw in further investment. This is something to be welcomed at least, but the scheme is intricate for entrepreneurs to use in its existing form and simplification is needed to raise the flow of investment into the sector.
Decisive Action is needed
To conclude, the Chancellor has recently set out his vision for Britain with an economic plan. But to convey that the Government is really committed to producing this, decisive action is needed to protect current tax breaks and incentivise innovation in successful tech industries sooner rather than later.