On the 3rd March, the UK’s Chancellor of the Exchequer will announce the first post-Brexit budget, anticipated to outline the next steps in tackling the COVID-19 pandemic. It is predicted to provide an extension to the economic support measures currently available for businesses, with an emphasis on protecting jobs. Menzies Technology sector team have put together the below predictions.
Impact on the technology sector
Most technology businesses have faced challenges during the pandemic. However, some technology businesses have flourished in the changing environment and In most cases, the sector is more agile and more able to adapt to change than traditional businesses.
We anticipate the main upcoming challenges for the sector to centre around the ability to scale up businesses. UK tech companies must continue to attract investment in a fragile economy. Post-Brexit, these companies must also focus on recruiting and retaining the best workforce from around the world. Considering this, we are not anticipating any significant changes being announced in the March Budget but would welcome positive changes in the following areas.
Several COVID incentives are currently available, but we feel a more permanent and directed approach is required. It would be advantageous for the Government to do more to encourage banks to increase their support for fledgeling technology companies.
Research and development tax relief
The R&D scheme supports innovative companies with tax relief and encourages specialised development activities. A key benefit is the ability to reclaim the tax credit as cash from HMRC, which also applies if the company has yet to generate profits. Previously, the EU state aid rules restricted the rate of relief. An increase to this rate would support the UK to be identified as actively seeking to become the centre of excellence for technology.
Online sales tax
We have recently seen indications that the Government is seeking a way to impose a higher level of taxation on the technology giants. There is speculation surrounding an online sales tax, perhaps even as a one-off to fund part of the current economic deficit.
This would need to be carefully considered, ideally through a coordinated international strategy. We would not necessarily expect any detail in this next budget. A significant announcement in the Autumn Budget may be more realistic.
Our recommendation post-Brexit would be that the Government carefully considers the detail of its immigration policy. This would limit administrative barriers, which can sometimes restrict the ability of UK technology companies to attract highly skilled workers.
Capital Gains Tax (CGT)
In order to finance the COVID measures, tax changes will be required in the near future. However, we would be surprised if changes were passed before the full grasp on the COVID situation is known. The worst-case scenario for this budget would be aligning CGT to income tax rates (20% / 40% / 45%). This would mean that an additional rate taxpayer would pay CGT at a rate of 45% rather than the current rate of 28%.
CGT rates are almost certain to rise at some point, but we would recommend this is carefully thought through. Ideally, the increase would be delayed until the effect of the pandemic is known, and the impact of a rate increase properly considered.
Private investment is key to businesses in the technology sector, funding research and development and creating intellectual property. This is approach is crucial for tech businesses and an increase in CGT rates risks deterring UK investors. With EIS and SEIS reliefs in place, a company can raise up to £12m (or £20m in the case of knowledge intensive companies) from investors without any Capital Gains Tax implications.
The Enterprise Investment Scheme (EIS) provides a useful means of securing investment for early stage technology businesses. It is important to ensure the funds continue to flow for these businesses. In order for this to be maintained, we would welcome an increase in the level of tax relief. This could be offered to individuals investing under these rules for a limited time. This could involve increasing the income tax relief available from 30% to 50%, in line with the Seed version of the scheme, SEIS.
The focus for the Spring Budget must remain on supporting businesses and retaining jobs. As Lockdown restrictions continue in the UK, an extension to the available Government initiatives would be welcomed by many. This would include the Coronavirus Job Retention Scheme (Furlough) and the Coronavirus loan schemes. Rather than increasing tax rates, these would support UK businesses through the pandemic and help them to forecast effectively for a brighter future.
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