As tax professionals, we take a keen interest in the annual Budget process – when the proposed tax rates, rules and spending plans are presented to Parliament by the Government of the day.  But this year, we at Frazier & Deeter were even more interested than usual.  The backdrop to the Budget was unique – Brexit had finally happened, but we also had the economic devastation caused by the pandemic to deal with.

Rather than listing out all the proposals – there are plenty of websites that can do this for you – we have focused on the likely impact of the proposals on two different types of business.  The first is a UK-based tech or life sciences start-up which has high hopes for rapid growth both in the UK and overseas.  The second is a US parented group with a UK subsidiary which acts as the gateway to Europe.  Both of these types of companies are typical of our client base at Frazier & Deeter in the UK.

UK Based Tech/Life Sciences Company

This really is a thriving part of the UK economy and the success is underpinned by a range of Government policies.  The founders of these businesses are hoping to realise long-term gains in a low tax environment; external investors are encouraged to invest through the various venture capital tax reliefs and the companies themselves are supported by R&D tax credits which generously convert early-stage losses into cash payments from the Government.  Certainly many founders and investors will have been relieved to see no major changes to the capital gains regime or the venture capital tax reliefs, in spite of all the pre-Budget rumours to the contrary.

There has been some tinkering with the R&D regime – and we knew this was on the cards – but the proposals around a PAYE and NI cap have been toned down in a very sensible way.  The recent consultation on the inclusion of cloud computing and data costs in R&D claims appears to have Government support although there are still no concrete proposals.  What’s more, the latest consultation on the R&D regime which was announced as part of the Budget measures seems firmly aimed at improving the regime for the future rather than eroding any of the existing benefits.

The enhanced investment allowance – with 130% tax relief for some types of capital spend – caught many of us by surprise.  There could be an opportunity for claiming this enhanced investment allowance for capital items which may have been expensed, rather than leaving them as an expense item in the profit and loss account (although we suspect this wasn’t the Chancellor’s main objective in introducing the new relief).

The increase in the headline corporation tax rate from 19% to 25% is unlikely to be an immediate concern for these businesses – very few of them are making profits.

For those that may be eligible for the Patent Box regime, the headline rate increase will act as an added incentive to ensure they do claim the Patent Box relief when they become profitable.   The difference between the Patent Box an effective tax rate at 10% and the mainstream rate of tax at 25% for profits above £250k is too good to ignore.

Many founders and investors will have enjoyed the Chancellor’s comments about the UK becoming a scientific superpower.  New visa classes and the removal of red-tape for highly skilled and entrepreneurial individuals coming into the UK are bound to add to the UK’s appeal.

The tone of the announcement about EMI share options is also encouraging – the aim seems to be to widen the scope of the benefits of this relief.

Finally, the Chancellor’s vision for increasing investment grade capital will be hugely welcome. The idea has two key elements – firstly pension funds will be encouraged to invest in early-stage high-growth businesses and secondly, a slicker more beneficial IPO process for domestic and overseas businesses will be established. While details are thin on the ground, it is hoped that both of these will deliver greater availability of high-quality capital to the SME and growth marketplace, fuelling innovation and entrepreneurship. Although the origins of our firm are in the US and we love helping our UK clients IPO in the US, we are also strongly in favour of seeing higher levels of IPO activity in the UK.

UK Subsidiary of US Multinational

For our second category of clients, the picture is not quite so rosy.  For many years the UK has been striving to present itself as an attractive low tax proposition for Europe – a great place for the US and other multinationals to base their European headquarters with a plentiful supply of educated workers who can interface effectively between the overseas parent and the European operations.  For many groups, the attractions of the UK as a European headquarters had been significantly diminished by Brexit and the added complexities around VAT for cross-border trade with Europe.  The increased corporation tax rate will further move the dial away from the UK in terms of being the location of choice within Europe.  There will be some comfort in the new measures which allow a three-year carry back of losses rather than just one year (although there may also be some scrutiny on transfer pricing as to why subsidiary companies are loss-making – even in a pandemic).  The creation of freeports could be attractive to certain types of business, but the fear here is that their attractions may be somewhat niche.  Enhanced investment allowances offer some respite, but many inward investment companies do not spend much on plant and equipment.

The Chancellor argues that the UK tax rate is still the lowest in the G7 and fundamentally the 25% rate is not that high.  But nor is it particularly low.  It will be fascinating to see how groups respond.  We need inward investment and we should be doing as much as we can to encourage it.  Perhaps the measures mentioned above regarding IPO activity in the UK will fill the gap and encourage more inflows of money into the UK.

How Frazier & Deeter Can Help You

If you found yourself thinking of your own business while reading this article, reach out to our team. FD has experienced advisors who can help businesses understand the opportunities and threats from this new Budget.