It was an eventful Budget delivered by brand-new chancellor Rishi Sunak. As well as a £30bn package to deal with the Covid-19 coronavirus outbreak, the government is pumping billions into research and development (R&D), continuing with cash for broadband roll-outs and pushing forward with innovation.
Sunak proudly stated that “it is the Budget of a government that gets things done” – but not everything the government announced was welcomed with open arms. There are still questions around the digital services tax, being introduced by the government on 1 April, while the changes to the Entrepreneurs’ Relief received mixed reactions, and the omission of any mention of the incoming IR35 reforms did not go unnoticed.
The biggest news for the tech industry was perhaps the £22bn a year by 2024-25 that the government is pumping into R&D. The government demonstrated a strong commitment to tech innovation by putting in place a significant funding package, plans for a new blue skies funding agency, based on the US’s Advanced Research Project Agency (ARPA), and increasing the R&D development expenditure credit from 12% to 13%.
TechUK CEO Julian David said the R&D support package put in place by the government is a very positive step.
“The new government has described itself as pro-tech and this budget has provided the first indication of what this means in practice by focusing on digital infrastructure and research and innovation,” he said.
“A huge boost in R&D spend, investment in digital infrastructure to boost connectivity and a commitment to level up on skills contribute to a package that will ensure UK tech stays ahead of the game and continues to contribute to growth and prosperity for people, the economy and the planet.
“The creation of a UK ARPA shows a radical and refreshing approach from government that TechUK strongly supports.”
The Confederation of British Industry (CBI) was also pleased by the funding, with CBI director-general Carolyn Fairbairn saying the government has provided “some powerful incentives to get businesses investing”.
She added: “The significant uplift in R&D funding, creation of a UK version of ARPA, a fundamental review of business rates and spending promises on infrastructure will all bring real benefits to people, business and communities.”
The government will invest at least £800m in the UK version of ARPA, according to the chancellor. How closely it will model its US counterpart is anyone’s guess at this point, but Michael O’Brien, partner and head of technology at accountancy firm Kreston Reeves, said focusing on the right projects will be key.
“The critical thing for ARPA to do is create a tight focus on the types of areas it wishes to invest in, with the example model in the US having a relatively narrow ‘defence’ focus,” he said.
“Also, how ARPA interacts with other research funders in the UK ecosystem will be interesting. When this new agency was first mooted last year, there were some that were confused how it would compare with UK Research and Innovation (UKRI), which itself is relatively new and where much of current research funding is rooted.”
O’Brien added that work still needs to be done to ensure the research communities and political parties are supportive of the project, because “it could quite easily simply become the folly of current government rather than a new research powerhouse that it could potentially be”.
The chancellor also announced a review of the financial technology (fintech) sector, with the aim of supporting fintech firms to grow and increase competitiveness in the market. The review will be chaired by Ron Kalifa OBE, and will look to identify what industry and government can do to improve, and ensure the UK remains a leader in the sector.
Charlotte Crosswell, CEO of Innovate Finance, said the review will underpin “the future growth and prosperity of the sector across the whole of the UK”.
“The last decade has seen fintech emerge as one of the most important parts of our economy,” she said. “It is attracting record levels of investment, and as a result helping to bring new services, increased choice and value in the market, and more jobs to the UK.”
Crosswell said the review will help identify how to remain competitive on the global stage, adding: “By better understanding the needs, requirements and key focus areas for the sector, we will put ourselves in a strong position to boost the fintech industry, and in turn support the economy as a whole.”
But it’s not just the fintech industry due for a shake-up. The government also announced changes to the Entrepreneurs’ Relief, which currently gives entrepreneurs a tax break, allowing them to pay 10% capital gains tax, instead of 20%.
The changes means the lifetime limit on the relief has been reduced from £10m to £1m. While some have been calling for the relief fund to be scrapped completely, others saw the reduction as a huge step in the wrong direction.
The policy has been called “expensive”, “ineffective” and “unfair”, but there are also those who would prefer to keep it.
Mike Cherry, chairman of the Federation of Small Business, which has lobbied for changes to be made, said the changes to Entrepeneurs’ Relief were “encouraging”, whereas Martin Taylor, deputy CEO at Content Guru, found it disappointing.
“At a time when the UK economy is under huge pressure, reducing entrepreneurs’ relief doesn’t send a strong signal to businesses and the individuals behind them that they have the government’s full support,” said Taylor. “It’s dangerous to put a ceiling on entrepreneurs’ ambitions.”
The digital services tax also left some with unanswered questions. The tax, first mentioned by then chancellor Philip Hammond in 2018, will, from 1 April, see tax giants such as Facebook, Amazon and Google hit with a 2% tax on revenues, to ensure those companies that benefit from the UK economy also pay back into it.
When Hammond first announced the tax, it was with the understanding that if an agreement could be reached on an international level, that would be the best way forward, but if such an agreement couldn’t be reached in time, “the UK will go at it alone”.
In October 2019, the Organisation for Economic Co-operation and Development (OECD) said it aimed to have an international agreement in place on a digital services tax by 2020. However, as one is not yet in place, the UK has gone ahead with its own tax.
“The government remains committed to developing a multilateral solution to the challenges digitisation has created for the corporate tax system and will repeal the digital services tax once an appropriate global solution is in place,” the Budget Red Book said.
TechUK’s David said going ahead with the tax “despite clear question marks remaining on scope, cuts against the grain”.
He added: “TechUK calls on government to pause the introduction of a UK digital services tax and refocus its energies and efforts on finding a solution at OECD level.”
The chancellor was also criticised for failing to mention one of the most contentious topics at the moment – IR35. Although the Budget Red Book confirmed the government’s plans to continue with the IR35 reforms by extending them to cover the private sector from 6 April, Sunak did not even allude to it in his speech.
The reform itself is controversial, but some found the chancellor’s omission even more so. As previously reported by Computer Weekly, Julia Kermode, CEO of the Freelancer and Contractor Services Association (FCSA), said she was “shocked” there was no mention of the IR35 reforms.
“The omission is insulting, to say the least for our sector, not just to the many thousands of professional contractors who will be affected by the off-payroll reforms, but also to the House of Lords, trade bodies, and the many MPs who have raised their concerns about these reforms to the government,” she said.
Nicole Forbes, deputy general counsel at Globalisation Partners, is also uneasy about the tax reforms, saying the potential impact on companies and contractors is unclear.
“There has been a lot of nervous anticipation around the IR35 changes scheduled for early April from companies and contractors alike,” she said. “One aspect that is not immediately obvious is the impact it will have on internationally headquartered companies that work with contractors in the UK.
“When an international company takes its first steps to expanding in the UK, it will typically hire a small team in the region – primarily sales, technical and sometimes marketing folks. In the firm’s early days, this local team usually comprises contractors. It’s easy for the hiring company, requires no complex understanding of local contract law and is entirely flexible. All that changes under the new rules of IR35.”