Government won’t stop at Google

The UK is ‘open for business’ was the overarching message in last month’s UK Budget, but how will this actually effect technology driven businesses in the UK.

The introduction of the Digital Services Tax, or better known in some quarters as the Google tax, was a popular move for some. The tax 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. But, it will only apply to groups that derive global revenues from in-scope business activities in excess of £500m and will be subject to a £25m per annum allowance. Due to the scope, in the short to medium term, the new tax will have limited impact on most technology businesses in the UK.

The interesting point about this is that it is clearly a short-term measure whilst the Chancellor works with others towards an international solution to tackle the perceived weakness in global tax systems for taxing multinational digital businesses. The sentiment is clearly that the international approach to taxing such businesses needs to modernise. The way digital businesses are taxed internationally is likely to change significantly over the next few years. This is the UK Government putting down a marker in the international tax system as well as sending a political signal in relation to large multinationals who have structured themselves to reduce their UK tax liabilities. 

From a middle market perspective, the eventual solution will affect them too. Whilst the initial measure appears to address what many have perceived as an unfair system by targeting the largest tech multinational institutions, make no mistake, smaller firms should start to feel the pinch too, potentially as soon as 2020.

So, what else did the Budget reveal?

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 to medium size 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. 

An impact on resource in the not-too-distant future could come from new off payroll worker measures known as IR35 which 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. 

However, in what appears to partially reverse a change in 2015, the government 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 businesses. 

Also, the increase of the capital allowances Annual Investment Allowance to £1m will help those that are planning significant capex in equipment in order to scale. 

In a move that will be welcome for some technology company founders and early employee shareholders, extending the availability of Entrepreneur’s Relief to individuals who have had their shareholding diluted below 5 per cent will be very welcome. Previously, if shares were diluted below the 5 per cent threshold, then entrepreneurs would miss out on the 10 per cent Entrepreneurs Relief. The extension in this year’s UK Budget will ensure that employees or founders benefit from 10 per cent tax rate on any capital gain derived up to the point that they are diluted below 5 per cent. 

Overall, this was a mixed budget for technology businesses. The PAYE cap on the SME R&D tax relief could hurt young tech businesses, limiting a valuable source of early stage funding. The Digital Services Tax targeting the upper-echelons of tech is welcome, as is the extension to the entrepreneurs’ relief regime. But, don’t be naïve to think that the Google tax won’t start to be re-directed at the mid to smaller sized firms within the next 18 months.