Tech firms face mixed Budget

The UK is “open for business” was the overarching message in last month’s Budget, but how will this actually effect innovative and technology-driven businesses in Scotland?

Some welcomed the introduction of the Digital Services Tax, which will apply at a rate of 2 per cent on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users. However, it will only apply to tech giants with global revenues from inscope business activities in excess of £500 million, and so will have limited impact on Scottish tech businesses, for the time being. This is clearly a short-term measure while the Chancellor works with others towards an international solution to tackle the perceived weakness in global tax systems for taxing digital multinationals. Whether the eventual solution will affect a wider range of Scottish businesses than the incoming UK digital services tax remains to be seen. Innovation tax reliefs, such as R&D and the patent box, were not the subject of much tinkering this time round, which could be seen as good thing. However, the reintroduction of a PAYE cap to R&D tax relief for small and medium-sized enterprises (SME) could have a negative impact on early stage loss making companies which claim R&D cash credits, particularly where development is undertaken overseas and recharged, or where the business utilises off-payroll workers rather than employees.

New off-payroll worker measures, known as IR35, will place a further compliance burden on the end user of contractor resources, as well as more risk with the end user expected to deduct PAYE and NIC from payments to some contractors, which could prove a forthcoming burden on smaller companies. However, the government announced it will introduce tax relief for the cost of goodwill in the acquisition of businesses with “eligible intellectual property” from April 2019, which is good news for tech firms. Also, the increase of the capital allowances Annual Investment Allowance to £1m will help those that are planning significant capital expenditure in equipment in order to scale.

In a positive move for tech founders and early employee shareholders, Entrepreneur’s Relief will be extended to individuals who have had their shareholding diluted below 5 per cent. This will ensure that employees and founders will now benefit from a 10 per cent tax rate on any capital gain derived up to the point that they are diluted below the 5 per cent threshold.

Overall, this was a mixed budget for Scottish tech businesses. The PAYE cap on the SME R&D tax relief could hurt young tech firms, limiting a valuable source of early stage funding. However, the Digital Services Tax’s limited scope will be welcome, as will the extension to the entrepreneurs’ relief regime. l Ross Stupart, partner at RSM