A mixed bag for businesses

The Budget delivered a mixed bag of news for businesses. The big news was that the government will take steps to make sure digital multinationals pay their fair share of tax. The message is clear: if you’re going to operate in the UK, you’ll have to play by the rules. 

A positioning statement published alongside the Budget sets out the direction of travel for how digital businesses are taxed. It signals that the UK is keen to set the global agenda on this issue. But while it’s a bold political move, it will also cause a few raised eyebrows in the corporate world.

In recent years the international taxation system has gone through a significant upheaval. Many global businesses have already restructured their operations. There will be frustration that with further tax changes on the horizon, they might now need to do it again. 

The approach proposed by the government is to introduce a turnover based tax which would be applied to revenue generated from users of on-line advertising platforms.

It will be interesting not least to see how these proposals might influence the business models adopted by such businesses, which are highly sophisticated and fast moving.

In another unpopular move, the chancellor also revealed plans to bring the UK in line with other major economies by freezing the corporate indexation allowance from 1 January 2018. Companies must get ready to pay more corporation tax on the assets they sell. Real estate investors will be the biggest losers, and must now prepare for significantly increased costs.

Good news

In a piece of good news, the government has committed to increase the R&D tax relief to 12 per cent for large businesses (broadly those with more than 500 employees). This will have a significant impact for bigger businesses, and it shows the government’s continued support for innovation in the UK. 

Yet the government has missed an opportunity to also increase the R&D tax relief for SMEs. These businesses account for a clear majority of R&D claims – 21,865 out of 26,255 in 2015/16. Yet they only command £1.3bn of government support. In comparison, large companies made just 4,390 claims but commanded £1.6bn of support. 

Extending support for SMEs would be a quick win for the government, but it’s understandable that after years of support for smaller businesses, they are now turning their attention to larger companies.