Technology: how will the key announcements from the Autumn Budget 2018 impact the tech sector?

A key theme from the Autumn Budget 2018, was the pivotal role the UK government sees the technology sector playing in driving the UK’s economic growth in years to come. As a result, a number of measures were announced or proposed, to support innovation – but also to address the issue of ‘fairness’ in the tax regime for large digital businesses.

We have summarised some of the key announcements concerning the technology sector.

UK pushes ahead with a Digital Services Tax

The Chancellor has made good his promise on leading the reform of international tax systems and how they should apply to the digital economy. Targeting ‘global giants’ and ensuring they contribute to a ‘fair and sustainable’ UK tax system, the new Digital Services Tax is the first step towards wider long-term global tax reform.

The announcement of the new tax is not unexpected; it follows the Government’s position paper last year on corporate taxation and the digital economy, as well as the EU’s proposals published in March 2018. The Government’s position paper recognised the need for a temporary measure, such as a revenue-based tax. Frustrated by the slow progress towards reaching a global agreement on how to tax digital businesses, the Chancellor has now confirmed the Government’s commitment to introducing a 2% tax on the revenues generated by large digital businesses from April 2020. 

The new Digital Services Tax will be narrowly targeted to search engines, social media platforms and online marketplaces that are linked to value generated by the participation of UK users. It will only affect large businesses generating global revenues in excess of £500 million a year from the targeted activities. There will also be a £25 million annual allowance for taxable revenues linked to UK users.

Safe harbour provisions will be included to ensure that the introduction of the new tax does not adversely impact start-ups. These will exempt loss-making businesses and give relief where the activities generate very low profit margins.

The Government recognises that the most effective way of dealing with the taxation of global digital businesses is through international agreement. The Digital Services Tax is therefore designed to be a temporary measure until a global long-term solution is identified.

Further consultation on the introduction of the rules will follow in due course, with legislation being included in the Finance Bill 2019/20.

R&D SME scheme

SME companies that invest in R&D are entitled to surrender  tax losses arising from R&D expenditure in exchange for payable R&D tax credits.

In order to prevent abuse, including fraud, the Government will introduce a new safeguard whereby the payable tax credits will be restricted to three times the company’s total PAYE and NIC liability for that year. Losses that cannot be surrendered for tax credits would be carried forward for offset against future profits. The intention is for R&D companies to pay workers using UK payroll rather than external contractors or non-UK group companies.

HMRC’s newly introduced cap on R&D tax credits attempts to prevent abuse. However, the safeguard will come as a detriment to SME companies who have a lot of subcontracted costs but not many staff. Such companies (many of which may be start-ups) will have lower R&D tax credit as a direct result of the new cap. The intention of this cap is welcome, however the question has to be asked:  Is there no other way? Would responsibility better sit with regulated accountancy firms?

If you do submit R&D claims, and you have a large spend on subcontractors with a low number of staff, it will be vital to assess the impact of this cap going forward. 

Grants

As part of the Government’s intention to raise total R&D investment to 2.4% of GDP by 2027, the Budget is committing an extra £1.6 billion to R&D through new grant funding opportunities in a number of sectors including:
 
  • digitally-enabled technologies including the Internet of Things and virtual reality; electric motor technologies;
  • quantum technologies;
  • computing, sensing and communications;
  • artificial intelligence and data-driven innovation;
  • blockchain and cryptoassets;
  • cyber security.
The grant funding landscape can be complicated – but is often an underutilised source of funding for innovative companies. If grant funding is not an area your business has explored in the past – our team have experience in supporting tech companies to identify and apply for the most relevant grants.

Changes to Entrepreneurs’ Relief (ER)

ER is an attractive tax relief. It allows an individual to benefit from a flat 10% tax rate on disposals of certain business assets. The Government has introduced two important changes to ER.

From 6 April 2019, the minimum holding period for all such disposals will increase by 12 months to two years, with an exception for businesses that ceased prior to 29 October 2018. We welcome this change as a longer-term involvement would be more indicative of genuine entrepreneurial activity, which in turn promotes sustainable business and economic growth.

Under the second measure, which is effective immediately, an individual disposing of shares in their personal company will only qualify for ER if they are entitled to 5% of the distributable profits and net assets of a company – in addition to 5% of share capital and voting rights previously required.

Equity structures and the economic rights attributable to shares should be reviewed carefully, particularly where different share classes, preference shares or growth shares are in issue. The extension of the 5% entitlement condition may impact businesses who have established share classes to allow for a degree of flexibility, and therefore the entitlement to ER for shareholders should be reviewed.

For all the latest information and analysis on the 2018 Autumn Budget, click here.

If you’d like to discuss the impact of these changes on your business, please contact your usual Moore Stephens adviser, or get in touch.
 

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