MMP looks at how budget changes affect innovative business in the UK

Alexis Marz 11 March 2020

MMP looks at how budget changes announced by Rishi Sunak may affect innovative business in the UK

The 2020 Budget provides a range of measures to boost innovation in the UK. There are several announcements in today’s budget designed to help innovative companies, but their full effects may not be seen for some time.

One eye-popping promise is the plan to “increase public R&D investment to £22 billion per year by 2024-25.” This will push direct support for R&D to 0.8% of national GDP, placing the UK ahead of other innovative nations including the USA, Japan, France and China. The government also wants to grow investment in R&D to 2.4% of GDP by 2027. These are fantastic aspirations, but not new by any means – this figure has been a government target since at least 2000 when the R&D tax incentives were introduced.

- Alexis Marz, co-founder and Director at MMP, said of the latest announcements: “Although the headline figures are very eye-catching, given the lack of detail on these initiatives, it remains to be seen how the average innovative business in the UK is going to benefit from this budget.”

The government is proposing to support innovation through the following:

• R&D tax relief

  • The Research & Development Expenditure Credit (RDEC) rate will increase from 12% to 13% from 1st April 2020. RDEC is an incentive primarily for large business which provides a tax credit or relief based on the amount invested in qualifying R&D. The government will also consult on whether qualifying costs for R&D should include investments in data and cloud computing.
  • In addition, the planned PAYE cap, which limits the tax credit to PAYE paid by the company, will be delayed by a further 12 months, to 1st April 2021. The Chancellor commented that, following feedback received during the consultation (which MMP contributed to), the design of the cap will be revised.

• Entrepreneur’s Relief

  • On a negative note, the Government will modify the Entrepreneurs’ Relief scheme, reducing lifetime relief limit gains by an unprecedent 90% (from £10m to £1m). The scheme is designed to incentivise people to set up and grow companies in the UK, through a reduced rate of Capital Gains Tax (CGT). This means entrepreneurs only pay a 10% tax rate on disposal of qualifying shares, compared to the standard (18%) and higher (28%) CGT rates. Profits over the £1m threshold will now pay tax at the higher rates. This sends a clear negative message disincentivising entrepreneurs from starting and running their own business.

• Taxes

  • The Corporation Tax rate will remain at 19%.
  • The Government plans to go ahead with the Digital Services Tax (DST) first announced in 2019. This scheme will impose a new 2% tax on revenues earned by certain digital businesses (e.g. companies that run search engines, social media platforms and online marketplaces). The tax is now set to come into effect from 1st April 2020.
  • There will also be a review of the Enterprise Management Incentives (EMI) scheme to ensure it provides support for high-growth companies to recruit and retain the best talent.

• Fintech

  • There will be a review of the fintech sector with the goal of identifying ways that industry and government can support growth and competitiveness.

• Blue-skies funding agency

  • The Budget confirmed that at least £800m will be invested in a new blue-skies funding agency, modelled on the United States’ Advanced Research Projects Agency (ARPA). ARPA has been credited with playing a pivotal role in the creation of the internet, GPS, and even self-driving cars.
  • This new funding agency, which reportedly is Dominic Cummings second highest priority after Brexit, will focus on supporting high-risk, high-payoff research in the UK. For now, that’s all the information we have - further details on this agency, and how it will support innovative businesses, are yet to be announced.

• Growth Hubs and other supports

  • To help UK businesses to grow and thrive, the Government will invest £10 million in increasing Growth Hub capacity. A growth hub is a local public/private sector partnership led by the Local Enterprise Partnership (LEP) which brings together public and private sector partners to promote, coordinate and deliver business support. The aim is to provide high-quality, core business advice and guidance across all 38 Growth Hubs.
  • Funding for the British Business Bank’s Start-Up Loans programme has been extended to the end of 2021-22, supporting up to a further 10,000 entrepreneurs across the UK with accessible business finance.
  • The Government has also announced substantial support for innovative businesses seeking access to long-term growth capital. To build on this, the Budget will provide the British Business Bank with the resources to create up to £200 million of additional investment in UK venture capital and growth finance during 2020-21
  • By keeping track of relevant Budget announcements such as these, the MMP Tax team stays in the best position to advise and support you.