Usually, the Budget is the most important date in the political calendar for businesses. But, with the risk of a Brexit no deal increasing, it may be relegated to a sideshow this year as firms await white smoke from Brussels. Yet while it might not be at the forefront of many minds, for the tech sector it could have profound consequences for the perception of the UK as an ambitious, tech-friendly voice.
Central to this will be whether the government presses ahead with plans, floated by the Chancellor at the Conservative Party Conference, for a new tax targeted at digital companies.
While it remains unclear how the tax would actually work, one thing we do know is that it intends to target revenues rather than profits. Taxing revenues means less money to be invested in things like research and development, new facilities and job creation. It creates a risk that costs could be passed onto consumers directly, increasing prices for those using services such as online shopping. For smaller or growing UK tech companies, the new tax could even make the path to profit more difficult and mean losing out to international competitors.
Many in the tech industry fear that such a tax would send a message to the rest of the world that the UK is building barriers for growing its digital economy at a time when investment is already at risk due to Brexit.
Recent experience has shown that the UK is not immune to going it alone against expert advice, but the great irony of the proposals is that the way to ensure the tax system works effectively is action at international level. Work is already underway at OECD level, with progress expected by June next year. Importantly the OECD approach is likely to deal with the challenges created for all companies, not just tech firms. As the global economy digitises, it is increasingly hard to distinguish between the digital and non-digital companies, which is why both the OECD and the EU’s Expert Group on Digital Taxation have concluded that trying to target digital businesses alone would not work.
It is clear that a significant effort has been made to tie the proposed digital tax to the problems facing the high street (including it being dubbed an ‘Amazon Tax’). Yet the reality is that they are two entirely separate things – a tax on investment by tech companies won’t help resolve the burden faced by other businesses as a result of business rates. That will require proper, and welcome, reform of the rates system.
Of course, the reason behind the idea of a digital tax is a simple one. Brexit is a real risk to government revenues. Money has to be found from somewhere, and who will oppose a tax on tech companies? But the Chancellor could take a different approach. Instead of creating a new tax that risks harming investment, he could instead look to grow the pie by incentivising investment in the digital economy. TechUK’s Budget Proposal sets out a number of ways the Chancellor could reassure digital businesses that tech remains at the heart of growth plans. These include measures to support new R&D facilities being built in the UK and reforming the apprenticeship levy to help companies train the next generation of workers, both in-house and throughout their supply chains. Such an approach could provide a green light for investment at a time when dashboards are flashing red due to concerns over Brexit.
The Chancellor should also ensure that businesses are given the support they need to cope with Brexit planning. For SMEs, the cost of preparing for a no deal Brexit is almost insurmountable. Smaller tech companies are facing significant legal costs, such as those needed to amend contracts to ensure that personal data can continue to flow across the UK-EU border. Other steps, such as being able to stockpile vital parts, or deal with short term cash flow challenges as a result of new customs processes are also critical risks to business. They will ultimately require Treasury support to be overcome. Other EU countries, such as the Netherlands, have already started to take such steps; its time the UK follows suit.
This Budget may be overshadowed by Brexit but it is clear that the choice facing the Chancellor on Monday 29 October is one that will determine how the UK is seen in the run up to Brexit and beyond. The choice is clear, real investment to grow a forward looking economy, or short term decisions that risk stopping investment in its tracks.
Giles Derrington is TechUK’s Brexit policy lead