The UK’s Chancellor of the Exchequer will announce the UK’s first post-Brexit budget on 3 March 2021. This budget looks set to outline the next steps in tackling the COVID-19 pandemic. It is expected to provide an extension to the economic support measures available for businesses, with an emphasis on protecting jobs. We set out our predictions for Rishi Sunak’s upcoming budget.
Impact on the technology sector
The pandemic has been challenging for most businesses in the technology sector. However, some technology businesses have flourished in the changing environment. Generally, 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-based tech companies must continue to attract investment in a fragile economy. They must also focus on recruiting and retaining the best workforce from around the world in a post-Brexit environment. With this in mind, we are not anticipating any significant changes being announced in the March Budget but would welcome positive changes in the following areas.
It would be advantageous for the Government to do more to encourage banks to support fledgeling technology companies.. Several COVID incentives are currently available, but we feel a more permanent and directed approach is required.
Research and development tax relief
The R&D scheme provides companies with tax relief for innovation and encourages specialised development activities. A key benefit is the ability to reclaim the tax credit as cash from HMRC. This applies if the company has yet to generate profits. Historically, the rate of relief was restricted by EU state aid rules. An increase in the rate of relief would help ensure the UK sets itself apart from the rest of the world. It would support the UK’s intention to identify as a nation actively seeking to become a centre of excellence for technology.
Our recommendation post-Brexit would be that the Government carefully considers the detail of its immigration policy. This would limit administrative barriers. These can sometimes serve to restrict the ability of UK technology companies to attract highly skilled workers.
Online sales tax
Recently, we have 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.
We would recommend that this is 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.
Capital Gains Tax (CGT)
Undoubtedly, tax changes will be required in the near future to finance the COVID measures. However, we would be surprised if changes were enacted before we have a full grasp on the COVID situation. 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.
The technology sector in particular is reliant on private investment. This funds research and development and creates intellectual property. This is approach is crucial for tech businesses. 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.
EIS and SEIS
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. To allow 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 the UK continues to be in lockdown, 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 lockdown and help them to forecast effectively for a brighter future.
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