MMP 2016 Budget commentary

2016 Budget Commentary 16 March 2016

Was today's Budget an entrepreneur's dream?

Entrepreneurs will have found plenty to be happy about in today's Budget. The reduction of the Corporation Tax rate to 17% is one silver lining, and decreasing business property rates throughout England is another.

It is, however, important that small companies understand some of the less obvious consequences of these changes.

On the face of it, having more free cash available within a business is an advantage. It will give entrepreneurs greater opportunity to invest in their own success and fund developments. Even so, some of that success will now depend on the industry companies operate in.

The reduced Corporation Tax rate will be effective from 2020. It has a knock-on effect on Patent Box, Video Games Tax Relief (VGTR) and SME R&D Tax Relief (R&DTR) schemes – and it's negative. All of those schemes will now offer less generous benefits to companies making a profit.

As an example, companies claiming R&DTR are going to see the incentive decrease from the current 26% net benefit rate to only 22%. In real terms, that's a 15% reduction.

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The net benefit rate for the Research and Development Expenditure Credit (RDEC), in contrast, will rise due to the change in the corporation tax rate. The RDEC scheme primarily benefits much larger businesses. Assuming a company claims this credit and has £1m of eligible expenditure, their benefit will grow from £88k to £91k. Changes in the way losses are carried forward over financial years are also expected to impact RDEC. The full implications of this move are not yet clear.

We hardly believe it is fair for SMEs to be financially disadvantaged while much bigger companies benefit from this change. The MMP Tax team would strongly advise the government to increase the headline net benefit rates for these technology tax incentives.

In more specific news, from 31 March 2017 the Vaccine Research Relief will be cut. Given current concerns over the Zika virus and malaria, we feel this may not have been the best time to make such an announcement.

Privacy of business data is also likely to be affected. The government will be publishing a list of companies which claim the SME R&DTR. It's a move triggered by the announcement of new transparency requirements across the EU . This will apply to every company which receives net benefits of at least €500,000 (appx. £393,000). The list will include the beneficiary's name, the size and location of the company, and the exact amount received.

At MMP, we feel this represents a serious invasion of privacy.

The Budget hasn't been all bad news by any means. Returning to positive announcements, entrepreneurs who sell their business will pay less Capital Gains Tax. It's set to drop from 28% to 20% for higher-rate taxpayers, and from 18% down to 10% for those on a lower tax rate.

Companies working on projects related to aerospace and reducing vehicle emissions will soon find there are more R&D grants to apply for.

Beware if you benefit from Patent Box rules, though – as previously announced, from July 1st this will only benefit IP developed in the UK.

On top of that, long-term investors in unlisted companies will now be eligible for entrepreneurs' relief. This will be provided in the guise of a 10% Capital Gains Tax rate on newly-issued shares purchased on or after 17 March 2016. Those shares must be held for at least three years, and are subject to a separate gains limit of £10m. It's a move designed to encourage equity investment into small businesses.

All in all, today's Budget has been a mixed bag. The cut to Corporation Tax is likely to please the majority. Cuts to other benefits may balance out the scales for small businesses - or eventually leave them worse off. And SMEs claiming larger R&DTR amounts should watch for their appearance on 'the list'.