Comments provided by Will Sweeney.
In comparison to recent years, the weeks leading up to next week’s first Autumn budget have been particularly turbulent with some reports that the Government are seeking an ‘eye-catching’ budget while others caution that the ongoing focus on austerity and uncertainty surrounding the ongoing Brexit position mean that now is not the time for major change. Based on this confusing and contradictory advice, what should technology firms be looking out for in the November budget speech?
With the focus on austerity continuing, concerns are growing that the Chancellor could remove some tax breaks intended to incentivise entrepreneurial investment. This could have disastrous consequences for the UK economy.
Enterprise Investment Scheme (EIS)
There is speculation that access to the EIS scheme, and its related scheme the Seed Enterprise Investment Scheme (SEIS) could be tightened or altogether withdrawn.
Since its introduction, the EIS and SEIS have encouraged external investment into developing technology companies by providing significant income tax reliefs, as well as exemption from Capital Gains Tax on disposal of the shares as long as they are held for a set period.
These reliefs primarily appeal to individual angel investors who have provided an important source of finance for growing businesses, investing some £15.9bn via the EIS since 1994 and £1.6bn in 2016 alone.
Over the summer however, the Treasury carried out a consultation into the schemes which indicated that, rather than being incentivised to invest in young, high-risk growth companies that would struggle to access other sources of finance, most EIS fund were actually motivated by capital preservation. Moreover it estimated that 40 per cent of the companies that received EIS funding could have accessed other forms of credit.
This appears at odds with the schemes’ goals of driving growth and employment in the UK economy. However, it would seem counterproductive to reduce an incentive for investment in this area at a time when the Government is telling the world that the UK is open for business. Instead, it is more likely that we will see a tightening of the rules to restrict their availability to ‘safer’ investments in asset backed companies, and so help to counter any perceived abuses of the schemes.
On its introduction in April 2016, Investor’s Relief was welcomed as a tax break for individuals wishing to invest in a trading company without necessarily being a direct employee or a named director – a useful incentive intended to encourage further capital investment by an important group of investors, who wouldn’t normally qualify for Entrepreneurs’ Relief because they aren’t remunerated by the business they are investing in..
As the tax relief requires individuals to hold shares for a minimum period of three years, no one has yet benefited from the tax break, which will allow them to pay tax on eligible gains from share disposals at the discounted rate of 10%. While it is too early to say how many individuals are expecting to benefit from the tax break, it is likely to be at least as many as currently claim Entrepreneurs’ Relief, and possibly more.
Tax reliefs in this area have begun to attract more attention from the Treasury however, as they are costing more than expected. A report published by the National Audit Office in 2013 revealed that the cost of Entrepreneurs’ Relief was £2.9 billion in 2013/14, three times more than originally expected. Part of the increase was probably due to the fact that the annual threshold for Entrepreneur’s Relief claims has risen from £1 million to £10 million, but the NAO also wondered whether there was undetected avoidance.
Uncertainty surrounding the future of these tax reliefs could create issues for some entrepreneurial investors because they are claimed at the point an investment is disposed of, rather than on acquiring a qualifying investment (as with EIS), and so it is harder to plan ahead. If the Chancellor decides to restrict Entrepreneurs’ Relief or to remove Investor’s Relief before it has had chance to get started, this could leave individuals holding investments that will attract a higher tax liability than they had expected, which could reduce investor confidence and discourage future entrepreneurial activity.
It is unlikely that this budget will see significant changes to such a new relief, and indeed the Treasury has given no indication that that this is on the cards at the current time.
Labours and Skills
It is widely rumoured that this Budget will announce the expansion of the IR35 changes to the private sector. The main likely change being to make the engager responsible for determining whether IR35 applies, rather than the individual and their personal service company PSC). Where it does, PAYE will be applied on payments to the PSC, as if the payment were made to the individual.
Why roll this out? There is perceived widespread non-compliance under the current system and it is expected that engagers will apply the rules more effectively in the knowledge that they will be responsible for the tax if they get this wrong.
Why now? Since April 2017, public authorities have struggled to recruit and retain contractors with potentially disastrous effects on many projects. The exodus of workers from the public to the private sector needs to be addressed. It is unlikely that changes regarded as a success by HMRC will be reversed and the obvious way of levelling the playing field is to extend the changes to the private sector. There is also the factor of the additional revenues collected by HMRC from public sector contractors.
Clearly this will make contracting less attractive, particularly if engagers take a cautious approach and err on the side of IR35 applying. Rates could fall to reflect the additional costs to engagers and this could be good news for those businesses that train up employees only to lose them to contracting once they become really valuable.
It would be a shame to overlook an opportunity for a blatant plug and I would therefore like to mention that there are many ways of encouraging staff retention and Menzies can help introduce these with our specialist people solutions, employer solutions and share incentive scheme teams.
Get more input on the Autumn Budget 2017 implications for the Technology sector by speaking to our sector team.
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