Government must not backtrack on promise of pro-innovation tax system

Post-Brexit promises are coming to nothing

Ever since Brexit, the UK government has been promising fiscal changes to make Britain more attractive to tech entrepreneurs and innovative companies.

While the high level of public debt caused by pandemic-related spending and the war in Ukraine has undoubtedly slowed things down, bold tax decisions now could accelerate the way to a brighter economic future.

Instead, things are moving in the wrong direction. A key case in point are changes affecting R&D tax credits, due to take effect in April, which will disadvantage small and medium-sized enterprises (SMEs).

Whilst everyone would support the Chancellor in his aim to prevent abuse of the R&D tax relief scheme, the changes that are being made are damaging to all SMEs investing in innovation, and wanting to claim tax credits to offset some of this investment. By contrast, larger companies are being rewarded with a slight uplift in the tax credits under the R&D Expenditure Credit (RDEC) scheme. It's good for them, but why the difference?

With the Spring Statement on 15th March, it's not too late for the Chancellor to recognise the problem and block the changes before they take effect. Instead, he could focus on tightening the rules of qualification for SMEs that want to bring a claim for R&D tax credits, rather than reducing the value of the scheme for all.

Tax is moving in the wrong direction

For entrepreneurial investors, some changes to Capital Gains Tax (CGT) are also due to take effect in April that they may need to bear in mind. The annual exemption is being halved to £6,000, and will reduce by half again at the start of the 2023/24 tax year, and dividend exemption rates are reducing too.

While these changes are unlikely to have a major impact on the activities of serial entrepreneurs who invest large sums in early-stage businesses on a regular basis, they can't be described as pro-innovation. Should the Chancellor decide to go a step further by increasing the headline rate of CGT, this could have a damaging effect on the sector and the UK economy.

The headline rate of Corporation Tax is rising from 19 to 25% in April, too, affecting companies with profits of £250,000 and over. This is another example of post-Brexit promises to create a tax system that will boost UK competitiveness coming to nothing. Instead, things are moving in the wrong direction.

For tech companies, higher corporate tax liabilities will inevitably slow growth and damage the UK's position in fast-developing areas such as digital tech, AI and machine learning, robotics, med tech and clean energy.

The only good news on the horizon currently are changes affecting the Enterprise Investment Scheme (EIS), in particular its effect on investment in smaller companies. The scope of the scheme that applies to investors in start-ups and early-stage companies - the Seed Enterprise Investment Scheme (SEIS) - is being widened, which should help to draw in more investment. This is something to be welcomed at least, but the scheme is complex for entrepreneurs to use in its current form and simplification is needed to increase the flow of investment into the sector.

Finally, the Chancellor has recently set out his vision for Britain with an economic plan. But to show that the Government is really committed to making this happen, decisive action is needed to protect current tax breaks and incentivise innovation in thriving tech industries - sooner, rather than later.

Stephen Hemmings is a tax partner and tech sector specialist at accountancy firm, Menzies LLP