In the recent budget there were a raft of announcements that could impact SMEs.
William Garvey MD of Leyton UK, walks through the implications of the budget and how they may impact on small businesses.
Philip Hammond’s ‘budget for grafters’ was much more detailed than initially anticipated. Amongst the many measures destined to stimulate the economy and encourage growth were some initiatives that relate directly to innovation funding for SME’s.
A welcome measure for innovating SMEs was the long-term support for research and development in support of the Modern Industrial Strategy. This ranges from nuclear fusion, AI to quantum computing. The Industrial Strategy has the objective of making the UK the most innovative nation by 2030 and help reach the government’s ambition of increasing the UK R&D investment to 2.4% of its GDP by 2027 through a £1.6b increased investment.
UK digital services tax
The introduction of a UK digital services tax was a headline grabbing measure in the budget. This however is aimed at the tech giants and not designed to discourage start-ups. It is targeted at profitable companies with > £500M worldwide revenue.
This applies to revenues generated from the provision of business activities such as search engines, social media platforms and online marketplaces. These companies will be taxed at a rate of 2% on the money they make from UK users. This will be effective from 1st April 2020. This is unlikely to impact innovative start-ups and therefore will have no negative impact on innovation and R&D claims.
R&D tax relief
As away of preventing potential abuse of the payable credit, the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year, for accounting periods beginning on or after 1 April 2020,
For SMEs involved in innovation, this will lead to a restricted amount of the R&D claims they can receive in a single year. For genuinely innovative R&D companies in need of a cash injection, this is unwelcome and may deter some businesses from claiming. This restriction is likely to apply where an SME has a large proportion of outsourced labour costs.
Clearly the government needs to safeguard against fraudulent claims, it is not clear if a cap is the best approach as it could impact on fair claims. The R&D tax credit system is complex for SMEs as it currently stands, so adding to the complexity wouldn’t be a good idea. The government will however consult on this change.
Annual Investment Allowance
Another headline announcement was the Annual Investment Allowance being increased from £200,000 to £1m for two years (for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020). This may affect the level of R&D allowances claimed by SMEs.
Carried forward loss reform
Carries forward loss reform is another measure that will be expanded to include a similar measure, reducing the amount of carried forward losses that can be used in a profit-making year. This is capped at 50% of the chargeable gain from 1 April 2020. A similar concept of deductions allowance is also introduced at £5m to help SMEs to maintain the current Capital Loss relief entitlement. There will be further work required to understand how this may interact with existing loss relief reform.
Capital allowances special rate
From April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8% to 6% to align with average accounts depreciation. Another big change to make note of was the introduction of IR35 to the private sector.
The responsibility for operating the off-payroll working rules will move from individuals to the organisation, agency or other third party engaging the worker. To give people and businesses time to prepare, this change will not be introduced until April 2020.
Small organisations however will be exempt. HMRC will provide support and guidance organisations ahead of its implementation.