Autumn Statement: UK gov’t tax reform, new regulations hit tech sector

Chancellor Jeremy Hunt has unveiled a slew of measures affecting the UK tech industry in his Autumn Statement, whilst also introducing new tax reforms explicitly aimed at forcing Big Tech companies to pay more tax.

With the chancellor conceding that the UK is already in a recession, the Autumn Statement, issued Thursday, included the announcement of £55 billion in tax rises and cuts to public spending. The corporation tax rate will increase to 25% from April 2023, while the rate for smaller businesses—companies with less than £50,000 profit—will continue to pay a 19% tax rate.

Successive Conservative prime ministers have long touted their ambitions to make the UK a world leader in science and technology and in his speech yesterday, Hunt vowed to bolster the UK’s science and technology sectors, saying: “I want to combine our technology and science brilliance with our formidable financial services to turn Britain into the world’s next Silicon Valley.”

Taxing Big Tech

Big Tech—the moniker given to the biggest, most dominant technology companies—has long faced criticism for exploiting tax loopholes, with efforts to crack down on their tax avoidance efforts spanning back to 2012.

The Organisation for Economic Co-operation and Development (OECD) estimates that domestic tax base erosion and profit shifting (BEPS) costs countries US$100 billion-$240 billion (£84 billion-£202 billion) in lost revenue annually, which is the equivalent to 4%-10% of the global corporate income tax revenue.

The UK government first set out plans to impose a digital services tax on the UK revenues of online companies in March 2020. The digital services tax would have placed a 2% levy on the British revenues of search engines, social media services and online marketplaces. However, the UK ultimately agreed to phase out the plan by 2023 in favour of the OECD’s two-pillar global tax reform plan that 136 countries and jurisdictions had agreed to join.

In his Autumn Statement, Hunt said that from 31^st December 2023, the government will introduce the OECD’s historic global tax reforms to make sure multinational corporations—including Big Tech companies —pay the right tax in the countries they operate. The Treasury has estimated this will generate over £2.3 billion a year.

Commenting on the announcement, Alex Tatham, global head of clients and marketing at global IT services company NSC, said that the decision to implement the new tax reforms targeting Big Tech was “an appropriate thing”, as many UK-based retailers have been asking for the system to made fairer for a long time.

“[Big Tech companies] base themselves out of low tax countries to effectively avoid quite a lot of tax,” he said. “And when retailers have to pay all the taxes they do, whether it's business rates or corporation tax, while the large tech companies that we're all shopping with massively these days are offshoring their business, it’s just about trying to make the system equal.”

Tatham added that while the government has been cautious about levying taxes against energy companies in case it deters future investment, these new reforms aimed at Big Tech won’t bring with them the same concerns.

“[Tech companies] are not going to say, ‘Oh, we're pulling out of the UK as a result [of these tax reforms]’, as their sales in Luxembourg don't quite meet the level of spending they see in the UK,” he said. “I don't think this is going to affect the way that these large tech companies operate at all.”

It’s not just through tax reforms that the government is looking to rein in Big Tech. Hunt also announced the government would bring forward legislative plans for the delayed Digital Markets bill to enshrine the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) into law.

The DMU will aim to stop technology companies from unfairly promoting their own services and provide individuals with more decision-making power over how their data is used and handled by tech firms, such as opting out of targeted personalised adverts.

Increased R&D spend and reformed tax breaks for startups

Another announcement that affects the UK’s technology sector is government’s pledge to increase spending on R&D to £20 billion a year by the middle of the decade.

Elsewhere, the Seed Enterprise Investment Scheme (SEIS) which provides tax breaks for investments in early-stage startups, will also be expanded, with the Treasury stating it is “increasing the generosity and availability of the Seed Enterprise Investment Scheme and Company Share Option Plan”.

However, while Hunt said cutting public R&D spending would be a “profound mistake”, he revealed that due to “significant error and fraud” in the small and midsize enterprise (SME) tax relief scheme due to its “generosity”, the government will press ahead with reform to R&D tax reliefs, with a view to making sure public money is spent more effectively.

As a result, the R&D tax relief for small businesses will be decreased from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. Meanwhile, the Research and Development Expenditure Credit rate will increase from 13% to 20%.

Penny Simmons, legal director at multinational law firm Pinsent Masons, said the changes will cost SMEs £4.5 billion in lost tax benefits over the first five years of the changes and will punish the UK’s most innovative start-ups , which often have limited access to alternative funding

“It's hugely disappointing to see the government cutting R&D tax credits for small businesses, which contribute so much to economic growth,” she said. “The proposed increase to the Research & Development Expenditure Credit will predominantly help larger businesses who already have far greater access to alternative financing for R&D projects.”