Budget 2011 Technology Sector Review
George Osborne set out what he described as a ‘Plan for Growth’ for the UK economy.
Kingston Smith's technology team have analysed the Budget to see what this means for the technology sector.
Improvements to R&D tax credit
The highlight for many technology & telecoms companies will be the improvement to the R&D tax credit scheme. Small & medium sized companies were previously allowed an additional 75% tax deduction in relation to research and development expenditure so that they would receive £175 of relief for every £100 spend on qualifying activities.
From 1 April 2011 this additional deduction will increase to 100% and from 1 April 2012 to 125% so that companies will receive a £225 deduction for every £100 they spend on R&D.
Companies which are loss making are able to surrender this relief in exchange for payment from HMRC. Importantly two caps which restricted the amount that companies could receive are also to be lifted.
Firstly the requirement that the company spends at least £10,000 on R&D in order to make a claim has been removed.
Secondly the payment from HMRC is no longer capped at an amount equal to the total of the PAYE & National insurance contributions paid by the company.
These changes are subject to EU approval.
‘This is great news for innovative businesses. Investing in R&D is vital to the UK technology sector and any governmental measures which encourage and fund this investment are extremely welcome.
Only 6,500 companies currently claim under the scheme each year, a figure which we think is far lower than it ought to be, and all tech businesses should consider whether they qualify.’
Further falls in corporation tax (if you are a large company)
One of the most eye-catching announcements for companies was the further fall in the rate of corporation tax.
The main rate of corporation tax will now fall to 26% from 1 April 2011 and to 25% from 1 April 2012.
However for smaller companies there was no new announcement on corporation tax. It was announced in June 2010 that the small company rate would fall from 21% to 20% and this remains unchanged.
‘The SME sector will be disappointed that new reductions in corporation tax are limited to large companies however improvements in the R&D scheme targeted at smaller companies will significantly reduce the corporation tax burden for many technology companies.’
Carbon price enough to encourage Cleantech?
During the last few year’s Cleantech has been a rapidly growing sector however few of these companies have achieved critical mass. Many have called for a carbon price floor in order to encourage investment away from existing fossil-fuel technologies to new innovative processes which reduce carbon emissions. The big question is whether £16 is enough?
The Chancellor announced that the price would initially be set at around £16 from April 2013 rising to £30 by 2020. This is a substantially lower level than that previously suggested by the Committee on Climate Change, the independent body set up to advise the government, however with the economy still on its knees significantly increasing the energy costs of large existing businesses was not an option.
‘Clean technology is a sector with tremendous potential and it will be disappointing for many that the carbon price floor has been set at a level which is unlikely to provide significant stimulus to investment.’
Entrepreneurs’ relief extended
Legislation will be included in Finance Bill 2011 to increase the lifetime limit on gains qualifying for entrepreneurs' relief from £5 million to £10 million with effect from 6 April 2011. Subject to satisfying certain conditions gains on disposals of entrepreneurial businesses by individuals and certain trustees qualify for entrepreneurs’ relief. Qualifying gains are taxed at a rate of 10 per cent.
Technology businesses can increase in value very rapidly and in recent years successful UK technology businesses have regularly been sold to larger, often foreign competitors. For those fortunate enough to be in a position to sell for a high valuation this extension to the existing regime will be very popular, potentially worth £400,000 to a vendor.
‘A reduction in capital gains tax for entrepreneurs is welcome however in practice this will benefit relatively few individuals.’
Additional relief for investors in technology businesses
Many technology businesses will need to seek external financing as they grow, often issuing shares to new investors. These shares will often be issued under the Enterprise Investment Scheme (EIS) which entitles the investor to income tax relief on the funds invested.
Legislation will be introduced in Finance Bill 2011 to increase the rate of income tax relief given
under EIS from 20 per cent to 30 per cent with effect from 6 April 2011 and the annual investment limit increases from £500,000 to £1 million.
These changes are subject to EU approval.
‘This will give further encouragement to angel investors who are a key source of finance for growing technology companies. However businesses seeking funding will still need to make sure that they have a robust business plan in place in order to convince investors that they are represent a sound investment.’
IR35 here to stay
For IT contractors in particular IR35 has been a continual bugbear since its introduction in 2000. The legislation seeks to tax individuals who provide their services to a client through a limited company as if they were employees of the client.
There had been suggestions that IR35 would be repealed however the government has confirmed that it will be retained while at the same time announcing that there will be improvements in the way in which it is administered.
‘Many genuine contractors find themselves potentially caught by IR35 and it will be interesting to see whether the new guidance issued by HMRC and to tax inspectors results in a more consistent application of the rules.’