Budget 2020: What does the Red Box mean for UK tech firms?

As featured on CityAM

Chancellor Rishi Sunak today unveiled a raft of new fiscal measures as he vowed to deliver on the government’s promise of “levelling up” the UK.

Sunak, who took over at No 11 just a month ago, put the coronavirus front and centre of his new policies as the number of cases continues to rise.

But there were also plenty of new measures for tech firms, as the new chancellor laid out his vision for the UK’s thriving digital sector.

Julian David, chief executive of trade body Tech UK, welcomed the Budget, saying it showed the government had “a plan and vision for the future with tech at its heart”.

However, he warned that the introduction of a new tech tax “cut against the grain”, and urged the UK to pursue a global solution.

 Here’s how other UK experts responded to the Budget.

Digital services tax

The chancellor today confirmed that online companies will face a new digital services tax, with a levy of two per cent charged on sales.

However, the government said it still supports a global solution to the issue of tech tax, and the new legislation, which will come into force on 1 April, will be repealed once a worldwide measure is agreed.

“This measure has been widely consulted on through 2019, so hopefully uncertainties on which businesses are in scope will be addressed in the final legislation to be issued next week,” said David Murray, tax policy director at PWC.

“Ongoing international negotiations — both on global corporate tax reform at the OECD and the US/UK trade deal — will be influential in whether the UK digital services tax is a short term ‘interim’ measure, or whether it takes a more permanent position in the UK tax system.”

Arun Birla, tax partner at law firm Paul Hastings, added that the implementation of the new tax would not be easy.

“Whilst Spain and Italy are following suit, implementing their own unilateral taxes, what is really needed is a multi-jurisdictional approach that encompasses all nations, preventing them from implementing multiple versions of what is fundamentally the same legislation,” he said.

“That said, setting up a global policy is no mean feat, and will only be achieved if all countries have the desire to do so.”

Entrepreneurs’ relief

The government said it will overhaul entrepreneurs’ relief, reducing the lifetime limit on claims from £10m to £1m.

Sunak said the existing system was expensive and ineffective, but resisted calls to scrap the tax break entirely.

David Bywater, private enterprise tax partner at KPMG, said investors and businesses owners would be “somewhat relieved” that the system had not been abolished.

“Entrepreneurs’ relief is one of several incentives for startup and fast growth businesses, and this announcement should help businesses to plan their long-term investment strategies whilst reassuring investors and innovators that the UK remains open and supportive of new businesses,” he said.

Alexandra Daly, founder and chief executive of AA Advisors, said: “This move by the government to maintain but reform entrepreneurs’ relief is a good step to ensuring that aspiring entrepreneurs and small business owners continue to benefit, while addressing the problems ingrained in the previous system. 

“It is further evidence that this government is committed to encouraging people to take the first step into entrepreneurship and ensuring that women in particular have access to the advice, support and funding they need to fully develop their entrepreneurial skills and scale up their enterprises.”

But the changes did not go down so well with other tax wonks.

“Small business owners around the country contending with the chill winds caused by coronavirus will see access to a valuable tax advantage when they come to sell their business severely limited,” said Michael Mowlem, managing director of private equity at Sandaire.

Research and development

In another welcome move for startups, Sunak said investment in research and development (R&D) will increase to a record £22bn per year by 2024-2025.

Michael Niddam, managing director of Kamet Ventures, said the commitment to R&D was “reassuring”.

“Given the current global climate due to Covid-19 it is vital that we are able to defend our innovation capabilities,” he said. “By reassuring entrepreneurs that support is there if they need it will go a long way in preventing any long term impacts to the startup ecosystem.”

Yael Selfin, chief economist at KPMG, said the move “could see productivity growth returning to a golden age in the long-term”.

“But more details are needed to see how that money will be spent before we can declare an end to the productivity crisis,” she added.

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