Budget forecast: Taxes, investment and the IT impact


With the Coalition's first Budget due tomorrow, companies will be anxious to see what the Government does to solidify the UK's economy and avoid dropping back into recession.

Tax hikes will be at the forefront of many concerns as Chancellor of the Exchequer George Osborne hopes to raise funds to eat away at the UK's deficit.

But how badly will firms be hit? What positive announcements will be made? And how will the UK's IT sector be affected?

What to expect

What is certain is that capital gains taxes will go up and the tech industry will be hit along with other sectors. PriceWaterhouseCoopers (PwC) believes that changes could lead to an effective tax rate on capital gains, such as profits achieved through selling stocks or bonds, of up to 50 per cent.

PwC has predicted that differential tax rates on capital gains will be introduced depending on whether an asset has been owned over the short term (less than two years) or long term (over two years). The organisation said that if a short-term rate were to be introduced then this could come into effect from tomorrow.

VAT will most likely go up to 20 per cent at least, to be effective from April 2011, according to PwC, which explained that such an increase would bring with it a substantial benefit for the Exchequer of 1 billion per month.

In terms of direct relevance to the tech industry, PwC has suggested R&D relief for larger companies could be withdrawn, while tighter regulation more specifically targeted at purely hi-tech businesses may be announced.

Business concerns

The tax rises will undoubtedly be the focus of much scrutiny and Barry Murphy, tax partner at PwC, said that tech start-ups could be more negatively affected by this than other areas, pointing out that these smaller firms significantly contribute to the UK sector.

The Confederation of British Industry (CBI) has voiced its own anxieties about capital gains tax changes, pointing to concerns for start-ups as well.

CBI wants "a broad definition of business assets to prevent disincentives to investment or start-ups, and the tax should be structured to minimise the impact on long-term investment".

"The UK's future economic prospects depend on the ability of firms across the country to create new jobs and win orders. Increasing taxes makes this more difficult," said John Cridland, CBI deputy director general, in a statement.

"Any changes to capital gains tax must recognise the importance of incentives for wealth creators and the value of business investment," Cridland added.

Of course, stifling investment in the UK's technology industry could lead to the country falling behind global competitors. Furthermore, taking away R&D relief for larger companies would surely hinder progress in the sector to some extent, as would tighter regulation.

Murphy told IT PRO that such a removal of R&D relief would be damaging to those firms taking advantage of it now and for any company planning a decision around the potential for relief.

Possible positives

Although much of the Budget will be focused on cutting back in order to reduce the deficit, it is a given that business success will be key for UK economic progression.

So what possible announcements tomorrow have the potential to boost investment?

According to the Government, the capital gains tax rise will be offset by "generous relief for entrepreneurial investment in businesses", so tech start-ups in the UK may not be too disheartened.

Furthermore, the Coalition has promised to support a private sector recovery and sustainable growth, saying it wants to get the message out that "Britain is open for business". It will also be announcing further measures to aid private sector employment and entrepreneurship.

If the Government can follow through with some concrete policies in this area, then the tech sector will undoubtedly benefit.

"Restoring some kind of ability for entrepreneurs in the tech sector to be able to say 'OK I can get on with planning my activity, grow a company and the taxation coming out of it makes it attractive to do so', I think that would be great for the tech sector," Murphy added.

Murphy also hopes to hear more about a "patent box regime", which would establish a system to tax income earned from patents "more lightly than the general rate of tax".

"For any tech or engineering company that runs on patents, that is certainly high on their watch list. If there was a reiteration of the commitment to bringing that in ... I think that would be potentially one of the main positives for a lot of the tech industry," he added.

There could even be a positive side to any R&D relief removal. Murphy said the technology sector would almost certainly adapt "as it always does" and it would not have to rely on relief in the future.

The Coalition evidently places significant value on the technology segment. But the sector will need proof of that from tomorrow's Budget to give the industry a confidence boost during these difficult times.

Tom Brewster

Tom Brewster is currently an associate editor at Forbes and an award-winning journalist who covers cyber security, surveillance, and privacy. Starting his career at ITPro as a staff writer and working up to a senior staff writer role, Tom has been covering the tech industry for more than ten years and is considered one of the leading journalists in his specialism.

He is a proud alum of the University of Sheffield where he secured an undergraduate degree in English Literature before undertaking a certification from General Assembly in web development.