2021 Budget: Technology, Media and Telecoms (TMT)

2021 Budget: TMT

The Spring Budget 2021 announced a wide array of changes to current tax laws. Many of which will have a particular impact on the Technology, Media and Telecoms (TMT) sector.

Non-tax measures that should benefit the sector include an overhaul of the visa system to enable highly skilled individuals to come to the UK more easily, and a review of the pensions regulations to assess pension schemes’ ability to invest in a broader range of assets including in high-growth companies.

Corporation tax rates

The rate of corporation tax will increase from April 2023 to 25% on profits over £250,000.

Although the rate for small profits under £50,000 will remain at 19% and there will be relief for businesses with profits under £250,000 so that they pay less than the main rate.

In line with the increase in the main rate, the Diverted Profits Tax rate will rise to 31% from April 2023 so that it remains an effective deterrent against diverting profits out of the UK.

FTI COMMENT:

Despite the increase in corporation tax in 2023, the UK’s competitiveness is expected to be maintained globally and in the G7. However, this will depend on whether other countries seek to increase or lower their own rates in response.

Super-deduction

The Government is seeking to stimulate business investment by introducing a “super-deduction” for qualifying expenditure on plant and machinery from 1 April 2021 to 31 March 2023. The temporary tax reliefs will be available to companies in the form of enhanced capital allowances:

  • A super-deduction in the form of an enhanced first-year allowance of 130% on assets that ordinarily qualify for 18% main rate writing down allowances
  • A first-year allowance of 50% on assets that ordinarily qualify for 6% special rate writing down allowances

Multiple conditions and exclusions apply, including:

  • The expenditure is incurred from 1 April 2021 to 31 March 2023
  • Expenditure is excluded if incurred under a contract made before 3 March 2021
  • A reduced super deduction applies in a period straddling but ending on or after 1 April 2023
  • A clawback of all or some of the relief (in the form of a balancing charge) can arise, depending on the date of the disposal
  • Any tax advantage obtained as the result of “relevant arrangements” can be counteracted by the making of adjustments

FTI COMMENT:

An additional tax saving of up to £25 per £100 invested will be welcomed by businesses in the current environment, but like all first-year allowances, these enhanced allowances are only available in the period of investment. For many this may simply create additional tax losses to carry forward and, as the use of losses is restricted against profits in excess of £5 million on a group basis, some modelling may be required to see whether the overall result will be beneficial.

Other factors to consider will be the interaction with the annual investment allowance, which remains at £1 million until 1 January 2022, and any additional compliance requirements arising in consequence of the balancing charge on a future disposal.

The Government has used the existing FYA regime (which is now otherwise limited in its scope) as the framework to deliver the super deduction for expenditure on plant and machinery. The FYA regime includes a number of general exclusions which don’t apply to AIAs, for example. In particular, there is an exclusion for plant and machinery provided for leasing, which means that expenditure incurred by property investors on assets in properties that are let out is excluded from benefitting from the new allowance. It is unclear at this stage whether the Government may be minded to reconsider, given that an exception from the leasing exclusion applied to certain plant and machinery in buildings under the ECA scheme until it was withdrawn last year.

Loss carry back relief

The trading loss carry back rule will be temporarily extended from the existing one year to three years. Companies will be able to obtain relief for up to £2 million of losses in each relevant accounting period ending between 1 April 2020 and 31 March 2021 and between 1 April 2021 and 31 March 2022 subject to a group level limit of £2 million.

The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. After carry back to the preceding year, a maximum of £2 million of unused losses will be available for carry back against total profits in the earlier 2 years. This £2 million limit applies separately to the unused losses of each 12-month period within the duration of the extension.

The £2 million cap will be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses in excess of a de minimis of £200,000 to apportion the cap between its companies.

FTI COMMENT:

This measure is likely to benefit companies making taxable profits in periods prior to the pandemic. It is disappointing the 50% corporate loss restriction will not be relaxed temporarily and so denies companies the ability to fully offset losses made during the pandemic period against profits in the following period.

R&D tax reliefs Consultation

The Government is to carry out a review of R&D tax reliefs, with a consultation published alongside the Budget. This review will consider all elements of the two R&D tax relief schemes, with the stated objective of ensuring the UK remains a competitive location for innovative research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.

FTI COMMENT:

It has been well-known for some time that HMRC are keeping the R&D tax credit schemes under review and so this broad consultation does not come as a surprise, particularly given the recent consultation on qualifying expenditure. This consultation poses 17 questions and so will provide a comprehensive review of the schemes. It will cover:

  • Definitions, eligibility and scope of the reliefs, to ensure they are up to date and competitive and that they reflect how R&D activity is conducted now
  • How well the reliefs are operating for businesses and HMRC and whether this could be improved
  • Targeting of the reliefs to ensure that for every pound of taxpayer support the value of the beneficial R&D activity is maximised for the UK economy.

Given the breadth of the consultation it is certain that changes will be implemented in future years. There are some interesting points coming under consideration including:

  • Merging the SME and R&D Expenditure Credit (RDEC) schemes
  • Widening the definition of R&D
  • Reviewing rates of relief as the SME is much more generous than the RDEC
  • Separating claims from the ordinary Corporation Tax self-assessment system which may result in more standardised documentation being required
  • Differential rates for different areas of research
  • Quality of supporting information
  • Results based fee structures with those who advise on R&D tax credit claims
  • The case for continued inclusion of sub-contract R&D for SMEs where this is undertaken overseas
  • Limiting the eligibility of Qualifying Indirect Activities
  • The inclusion of capital expenditure. This was another area, in addition to data costs, that FTI Consulting initiated the lobbying for in 2016.

Deterring abuse: The SME R&D Cap

For accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a business can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and NICs liability. The legislation is intended to prevent abuse of R&D relief. The draft legislation for the SME R&D cap has been refined and will be published in the forthcoming Finance Bill.

FTI COMMENT:

FTI Consulting have been deeply involved in representing the sector to HM Treasury and HMRC and we are pleased to see a reversion to the starting date of accounting periods beginning on or after April 2021. The measures to try and ensure the cap does not impact genuine commercial business are expected to be largely effective although there remains no doubt that some genuine companies will find themselves adversely affected.

Consultation on the scope of qualifying expenditure: Publication of responses

The Government has published the summary of responses of the recent consultation on the scope of qualifying expenditures for R&D tax credits. The Government agrees there is a strong case for the inclusion of data and cloud computing costs and will now consider bringing them into the scope of the relief.

FTI COMMENT:

We have long lobbied for the inclusion of data and cloud computing costs in R&D claims and are pleased that the Government now recognises the importance of these costs. We hope to see these costs being included in the scope of relief sooner rather than later. Going forward, we welcome further review and consultation on the qualifying costs included in R&D claims.

Repeal of Interest and Royalties Directive

Following the UK’s withdrawal from the European Union and the end of the transition period on 31 December 2020, the Government have resolved to repeal the UK’s implementation of the Interest and Royalties Directive with effect for payments made from 1 June 2021 (although there are provisions to prevent the payments due after 1 June 2021 being brought forward to benefit from the rules). From 1 June 2021, payments of interest and royalties to EU associated enterprises which would have previously been exempt will now be subject to UK income tax at a rate of 20% (unless a double taxation agreement applies).

FTI COMMENT:

Interest and royalty payments from UK companies to major EU territories (including Germany, France, the Netherlands and Spain) are likely to qualify for relief under the relevant double taxation agreement such that the repeal of the Interest and Royalties Directive is unlikely to have a significant economic impact. However, there are a number of instances where either interest or royalties are not reduced to 0% under the relevant double taxation treaty (e.g., interest / royalties paid to Italy, royalties paid to Luxembourg, interest / royalties paid to Portugal). Companies making interest payments under the directive may need to make new treaty claims to obtain reduced withholding rates.

Reporting rules for digital platforms

The Government will introduce legislation that enables regulations to be made implementing the OECD’s rules on reporting by digital platform operators. The provisions will require UK digital platform operators that facilitate the provision of services by UK and/or other taxpayers to report information regarding the income of sellers to both HMRC and the sellers. These provisions are not intended to apply to digital platforms which facilitate the sale of goods.

The provisions will be subject to consultation in Summer 2021 and are not expected to come into force before 1 January 2023 with the first reports not due until 1 January 2024.

FTI COMMENT:

The introduction of these provisions is not unexpected given the report published by the OECD and the recent trends in the international tax landscape. However, we welcome the impending consultation along with the 2-year time frame prior to implementation.

COVID-19 support measures

The Government is extending the Coronavirus Job Retention Scheme (CJRS) until the end of September 2021. Employees will continue to receive 80% of their current salary for hours not worked. There will be no employer contributions beyond National Insurance Contributions (NICs) and pensions required in April, May and June. From July, the Government will introduce an employer contribution towards the cost of unworked hours of 10% in July and 20% in August and September.

The Government will continue to provide eligible retail, hospitality and leisure properties in England 100% business rates relief from 1 April 2021 to 30 June 2021. This will be followed by 66% business rates relief for the period from 1 July 2021 to 31 March 2022, capped at £2 million per business for properties that were required to be closed on 5 January 2021, or £105,000 per business for other eligible properties. Repayments of business rates relief by businesses will be made deductible for corporation tax purposes.

The Government will provide ‘Restart Grants’ in England of up to £6,000 per premises for non-essential retail businesses and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses. From 6 April 2021 the Recovery Loan Scheme will provide lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million. The scheme will be open to all businesses, including those who have already received support under the existing COVID-19 guaranteed loan schemes.

FTI COMMENT:

The package of COVID-19 measures will provide a degree of flexibility to businesses in how and when they restart their business operations as the economy reopens over the coming months. These measures are welcomed.

Coronavirus Job Retention Scheme

The Government is extending the Coronavirus Job Retention Scheme (CJRS) until the end of September 2021. Employees will continue to receive 80% of their current salary for hours not worked. There will be no employer contributions beyond National Insurance Contributions (NICs) and pensions required in April, May and June. From July, the Government will introduce an employer contribution towards the cost of unworked hours of 10% in July and 20% in August and September.

FTI COMMENT:

The package of COVID-19 measures will provide a degree of flexibility to businesses in how and when they restart their business operations as the economy reopens over the coming months. These measures are welcomed.


About FTI Consulting

FTI Consulting is an independent global business advisory firm dedicated to helping organisations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centres throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities. The views expressed in any of the articles or other content hosted on this site are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.

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