Will tech businesses thrive under the new Government?

Eight days after the election and the shape of the new Government is finally clear. What is not yet clear however is how the Conservative – Liberal Democrat government will attempt to put their differing manifesto commitments into practice and how this will affect businesses in the technology sector.

George Osborne is expected to unveil an emergency Budget within the next 50 days which will answer some of these questions. In the meantime, Kingston Smith’s Technology Team speculates on five of the changes we can expect to see in the next few months and years.

1. Capital gains tax to rise

Early reports indicate that the Conservatives and Liberal Democrats have agreed to raise the rate of capital gains tax (CGT) on non-business assets to around 40%.

This will have an impact on the large number of technology businesses that have issued share options to their employees as part of their employee benefits packages. Employees who were previously expecting to pay tax at a rate of 18% on the eventual exercise of their options and sale of their shares may now be looking at a 40% rate.

There has been no mention of an increase in the rate of CGT on business assets, for example, the existing shares that many of our clients hold in their businesses.

There will be tensions in the new Government over the extent to which the fiscal deficit will be plugged by spending cuts and tax increases. It is still possible that the rate of CGT on business assets will be increased to, say, 25%, perhaps accompanied by an improvement in the Entrepreneurs Relief rules.

2. Research and development tax credits here to stay for SMEs

Since its introduction in 2000 the R&D tax credit scheme has been extremely popular with technology businesses, which rely on either the repayable tax credit or the enhanced deduction to help finance their investment in new products and processes.

The Conservatives have a stated commitment to focusing R&D tax credits on high-tech companies, small businesses and new start-ups, with the Dyson Review, commissioned by the Conservatives, recommending increasing the rate to 200% ‘when finances allow’.

Given that all three parties have a stated commitment to supporting high-tech businesses, it looks like the R&D tax credit is here to stay and the tantalising prospect of an increase in the rate of relief for SMEs remains. The large company scheme makes up the majority of the R&D scheme cost to the Treasury, so there is a strong possibility that the benefits available to large companies will be reduced to pay for improvements to the small company scheme.

3. Patent Box regime likely to be introduced

In his December 2009 Pre-Budget Report, Alistair Darling proposed a new Patent Box regime which would limit corporation tax on income derived from patents to 10%.

The intention of the scheme was to encourage businesses to develop new technologies in the UK and to stem the flow of those businesses moving to countries with more favourable tax regimes.

The Dyson Review, which was sponsored by the Conservatives, was supportive of the Patent Box regime so it is likely that this Labour initiative will see the light of day, possibly earlier than the original launch date of 2013.

A similar Patent Box regime is already in place in the Benelux countries. There the rate is closer to 5% and the scope of the legislation is wider, incorporating other forms of intellectual property, so the final shape of the rules may well differ to the Chancellor’s original announcement.

4. High speed broadband to remain stuck in the blocks

Although the three main political parties made manifesto commitments to support the roll out of superfast broadband across the country, cost remains an issue.

With the Government looking to slash the fiscal deficit, the burden of making the necessary investment looks set to fall on the private sector. Without significant public support, this will be inevitably driven by economics and the likelihood is that high-speed broadband will only be extended to areas where it is profitable.

5. Changes to the Enterprise Investment Scheme (EIS) to encourage investors likely

Raising funds is an ongoing concern for many technology businesses either to see them through a development phase or to enable them to grow the business and move up to the next level.

EIS relief enables investors to take advantage of 20% income tax relief under certain circumstances and is extremely helpful in encouraging angel investors to put money into technology businesses.

The Dyson review recommended increasing this income tax relief to 30%. While this obviously comes at a cost to the public purse, the benefits that would flow to the Exchequer from the resulting increase in employment and corporation tax revenues means that it may well be attractive to the new Government.

If you would like to discuss any of the issues raised above please contact Mark Twum-Ampofo at mtwum-ampofo@kingstonsmith.co.uk.

Tech businesses online poll

The size of the fiscal deficit means that the new Government faces an unappetising choice of spending cuts or increased taxes or, in all probability both. We give you the opportunity to register your vote on the subject and find out what the priorities are for other tech businesses.

To reduce the budget deficit, which action do you think the new Government should take?

Click here to cast your vote and to check the online poll results.