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Posted on March 12, 2020 by staff

What did the Budget mean for the UK tech sector?

Rishi Sunak has delivered his first Budget barely a month after becoming Chancellor with a big focus on reducing the impact of coronavirus.

But what do the Government’s fiscal plans mean for the UK tech sector?

£800m ‘blue skies’ funding agency

The US Advanced Research Projects Agency is a cutting-edge technology and research fund in the United States credited with the foundation of Silicon Valley and helping cement adoption of the internet.

The headline-grabbing announcement of Wednesday’s Budget was for a UK version of DARPA, which would fund extreme ideas with a high likelihood of failure which traditional investors would shy away from.

The idea is that this moonshot agency will help the UK become a trendsetter in game-changing technologies and compete with the US and China.

“We are the country of Newton, Hodgkin and Turing,” said Sunak. “Ours is a history filled with ideas, invention and discovery and it is truly a national history: the first steam railway ran between Stockton and Darlington, the first television was invented by a Scot. A Welshman invented the hydrogen fuel cell, and Jocelyn Bell Burnell, born in Northern Ireland, discovered the first radio pulsars.

“To compete and succeed over the next decade and beyond, we need to recapture that spirit.”

Dr Graeme Malcolm, co-Chair of the UK Quantum Programme and co-founder of Glasgow-based M Squared, a global leader in quantum and photonics technology, said: “The Chancellor was right to highlight the UK’s history of ideas and discovery and it is necessary to inspire and support those working on the manufacturing and new technology that will transform our futures.

“The UK is in a unique position to lead in the development of quantum, medical research and artificial intelligence. The exchange of ideas, resources and capabilities will be essential in realising frontier science and taking it into the real world to avert an environmental disaster and empower research and industry to unlock positive change.”

£22bn R&D investment

Investment in research and development will increase to a record £22bn per year by 2024-2025.

Scott Henderson, CEO ABGI UK, said the move was “most welcome”, adding: “As Rishi Sunak has acknowledged, achieving the Government’s ambitions on R&D will now require significant investment from the private sector. He has put in place solid support in today’s Budget to make this happen.”

From 1st April, companies claiming R&D tax credits under the large company (RDEC) scheme will see an increase in the rate of relief from 12-13% while there will be a consultation on whether expenditure on data and cloud computing should qualify for R&D tax credits.

James Tetley, National Head of R&D at professional services firm RSM, said an opportunity has been missed for SMEs.

“HMRC has announced that it will consult on the extension of the scope of R&D relief, to include expenditure on data and cloud computing – again a welcome announcement following lobbying from businesses and the adviser community,” he said.

“The big opportunity missed was that there was no increase to the SME scheme which we would have liked to have seen. Instead, the focus was on large companies.”

Entrepreneurs Relief changes

A reduction of the lifetime limit on Entrepreneurs Relief claims from £10m to £1m would leave “80% of small business owners unaffected”, according to Sunak.

Acting on the advice of the Federation of Small Businesses, the Chancellor said this would save the economy £6 billion over five years and help fund the R&D expenditure credit increase as well as increase the structures and building allowance from 2% to 3% and increase employment allowance by a third to £4,000.

Philip Salter, founder of The Entrepreneurs Network, said: “Cutting the lifetime limit for Entrepreneurs’ Relief from £10m to £1m – rather than scrapping it entirely as many feared – will ensure that ambitious start-ups are still able to attract talent through employee stock options.

“While the Chancellor may be right that Entrepreneurs’ Relief doesn’t incentivise all business owners, in our regular discussions with the foreign-born founders of Britain’s fastest growing companies, Entrepreneurs’ Relief is widely understood and cited as part of a package of incentives that helped them decide to start their business in the UK, or move it here. Cutting the lifetime limit has reduced this incentive.”

Mark McCusker, CEO of Texthelp, added: “What makes ER effective is that it provides the motivation – for both investors and founders – to stay on with a company and support its growth. However I would question how likely it is to be such a powerful motivator.

“This reduction in the limit will undoubtedly make life more difficult for business owners, particularly with attracting senior talent – something that is crucial for founders to take their business to the next level.

“Let’s not forget these are the people driving the economy forward, providing jobs, paying corporation tax and VAT – we should be supporting them as much as possible.”

VAT scrapped on digital publications from December

The 20% tax on e-books and online newspapers, magazines and journals will be abolished from 1st December.

Physical books and periodicals are already exempt, but the move will not apply to audiobooks.

Mathew Oliver, partner in corporate tax practice at international law firm Osborne Clarke, said: “This levels the playing field from a VAT perspective between e-books and hard copy books. However book retailers may question whether there really is a level playing field given the physical costs of selling from stores and the heavy business rates burden suffered by bricks and mortar retailers.

“Although this latter cost has been helped this year by extending Business Rates relief to a 100% discount for 2020/21, this discount is aimed at SMEs and not larger retailers.”

A full strategic review of UK FinTech

The Government also announced a major independent review of UK FinTech chaired by Ron Kalifa OBE.

Charlotte Crosswell, CEO of Innovate Finance, welcomed the move. “We are confident that this timely and important 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. 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.

“We are at a crucial moment in FinTech’s development. UK companies are now entering a phase of maturity that requires action to ensure that entrepreneurs can not only establish and scale their businesses in their home market, but also export their products and services internationally.

“It’s paramount we look at the opportunities FinTech offers.”

Apprenticeship levy

The Government said it will “ensure that sufficient funding is made available in 2020-21 to support an increase in the number of new high-quality apprenticeships in small- and medium-sized businesses”.

Adrian Overall, CEO of CloudStratex, said there was no specific provision for digital skills in the Budget.

“Digital skills are required in at least 82% of online advertised job openings across the UK, according to the Department for Digital, Culture, Media & Sport (DCMS), but there is unfortunately a mass deficit of suitable talent.

“The UK’s technology industry is facing a skills crisis and bridging the gap has become a business-critical issue. Given the ever-increasing rate of innovation, companies will quickly get left behind if they are unable to leverage next generation technologies effectively and compete on an equal footing with their rivals based in the UK and abroad.”

Rollout of superfast broadband

Sunak pledged £5bn towards the rollout of gigabit broadband in the most remote 20 per cent areas of the UK.

Yiannis Faf, co-founder of WhatWeWant, said: “Increasing investment is one thing, but we now need a clear plan and schedule for the roll out of gigabit-cable broadband. This is a long-term project, and only by offering a clear implementation strategy will tech businesses and entrepreneurs have the confidence to plan for the future.

“Given the plethora of economic benefits such an initiative will provide to the wider economy, the Government can’t afford to keep putting digital infrastructure on the back-burner. We are globally renowned for our bustling tech scene so let’s ensure the necessary support is being provided.”