Don’t get left behind as business forges ahead

Companies must embrace change as the digital age surges relentlessly forward argues Mike Kane

In last week’s Budget, the chancellor announced the following package: £500 million support for 5G mobile networks, fibre broadband and artificial intelligence; £2.3 billion for additional research and development (R&D) activities; and digital economy royalties relating to UK sales paid to a low tax jurisdiction to be subject to an income tax clampdown. It was supported by announcements in education: Funding for 8,000 computer science teachers in England; and a package there worth up to £177m to promote further maths studies at schools and sixth form colleges.

The rate of change in the way business is being conducted and the nature of business and new products is staggering. The obvious example is in retail, where there is a seismic shift from high street shops to online shopping; even the out of town retail shopping experience could be shortlived. In many respects, tax authorities across the world are struggling to apply a tax system built and developed for a traditional economy to a new and rapidly evolving economy in the digital age – one where commerce transcends national boundaries and, to a degree, has a choice over the jurisdiction in which it wishes to be taxed. The Chancellor clearly knows there is a problem with this – but has he gone far enough and will our tax system cope with the scale and rate of change?

One has to question the appropriateness of traditional business taxes – such as corporation tax in respect of the big online retailers – and whether a move to a new form of or higher sales-based tax rate might be more applicable in some circumstances. The approach might be, if you wish to sell to the consumer base in our country, you will pay a point of sale sales tax on every sale. This clearly changes the whole dynamics of the tax system and moves away from taxation on profits, which in itself will have consequences. What about, then, the scale of some of the internet retailers and whether they are already too dominant in the market? How will traditional competition law be adapted to cope with them? Also from the employ- ment perspective (both with regard to employment law and taxes), the gig economy and companies such as Uber are driving change. Our courts have to grapple with whether these businesses are simply platforms through which independent contractors can do business or whether the workers are employees. It’s a complex discussion and the courts are struggling with the outcome, as evidenced by conflicting judgements from the court systems worldwide. It would be better to have a clear legislative framework to govern this, as well as a taxation framework which properly addresses the issues while being sufficiently flexible to accommodate change.

There is further recognition in the budget of the importance of the digital economy and it is critical we develop not only a tax regime to suit, but the other infrastructure and talent pool to keep the UK competitive. R&D tax breaks have their critics, but a number of our technology clients, for example, have relied extensively on these through the years, and the R&D tax credits are a vital lifeline for some of these early stage businesses.

In many cases, the traditional model of paying for the acquisition of a business based on multiples of profits is out of the window and buyers are paying for technology and the developers behind them in an increasing number of “acquihire” deals which sees a large part of the consideration for the deals coming in the form of stock options/enhanced employment rights. The sales proceeds from the transactions often originate overseas and are introduced to the UK economy, creating a strong argument to support investment in R&D.

Developer literacy and maths play fundamental roles in this cycle and it is insightful that with the limited room to manoeuvre available to the Chancellor, he has singled out these critical skills. There will almost certainly be a seismic change in the traditional pathways to commerce as skills in the digital age ramp up. Mike Kane, Partner and Head of Business Law, Turcan Connell