Despite the Confederation of British Industry (CBI) announcing a “welcome lift in business confidence” at the start of 2020, the Government can’t afford to neglect the needs of SME businesses, the backbone of the UK economy.  

We hear from Richard Godmon, tax partner at accountancy firm Menzies LLP.

With many UK businesses trading internationally, certainty surrounding future trading arrangements with the EU and the rest of the world is urgently required. However, if this can’t be delivered in the short-term, then the Chancellor must step up to the plate and provide support in the form of clear fiscal incentives and allowances, to help businesses to improve their cash position and facilitate investment.

R&D relief

Among the Budget announcements, tax specialists at the firm are urging the Chancellor to confirm that the rate of R&D relief that large companies can claim under the Research and Development Expenditure Credit (RDEC) scheme will be increased by one % (from 12 to 13 %). The Chancellor should also take the opportunity to extend the scope of the scheme to include costs for investment in cloud computing and big data analytics.

Annual Investment Allowance

Further certainty is needed surrounding the Annual Investment Allowance, which is currently set at £1 million but is expected to revert to £200,000 from 1 January 2021.

Investment requires confidence, and this can’t happen in a climate of uncertainty. Businesses need to know what is happening to the AIA so they can understand the cost of new plant and machinery and invest in their growth plans. The Chancellor could address this by either increasing the allowance or extending the current limit until at least the end of 2022.

Alternatively, if a blanket increase in the AIA limit is considered too costly, the Chancellor could select specific areas of capital expenditure, which might qualify for enhanced tax relief (say, of up to 110 % of cost) – for example, investments in robotics, AI systems, data integration, 3D printers and other value-driving tech.


Entrepreneurs’ Relief

This Budget may see the end of Entrepreneurs’ Relief (ER), which is intended to encourage business investment by providing a favourable rate of Capital Gains Tax (CGT) to business owners on the disposal of all or part of their business. The relief, which saves business owners an estimated £2.2bn per year, may be under threat following publication of a report suggesting that it may not be boosting entrepreneurialism as intended.

This Budget may see the end of Entrepreneurs’ Relief (ER), which is intended to encourage business investment by providing a favourable rate of Capital Gains Tax (CGT) to business owners on the disposal of all or part of their business.

While it would be a big step for the Government to completely remove the idea of rewarding owners and investors for risking their capital, we may see reform of the relief, designed to reduce the tax cost. This might involve reducing the £10m lifetime allowance, or limiting access to new businesses, or those who reinvest their sale proceeds within a limited window.

We hope that any restrictions to ER will be offset by measures to enhance incentives for start-ups and growth businesses. This would continue to communicate the message that Britain is open for business, helping organisations to plan their long-term investment strategy.

Digital Services Tax

The Government is also expected to deliver a final decision regarding the controversial UK Digital Services Tax, and there is still time to soften its impact or even defer it altogether. If it goes ahead, the tax could impact UK competitiveness significantly.

It’s important to bear in mind that the Digital Services Tax would operate solely within the UK, rather than being EU-wide. As such, the UK could find itself isolated and at odds with trading partners should other countries choose not to introduce a similar tax. This could leave the UK at a considerable disadvantage when it comes to attracting international orders and so could have a negative ripple effect on UK-based SMEs. Hopefully we will see this tax deferred for a year pending the outcome of the OECD work on taxation of the digital economy, which it is hoped will reach an agreement by the end of 2020.

Housing and Property

Finally, with Brexit uncertainty still negatively impacting property sales, the Government could do more to get the housing market, traditionally a key driver of economic growth, moving and improve housing supply.

After seven years of punitive tax changes, buy-to-let property investors are hoping for a period of relative stability and maybe even a fiscal ‘escape hatch’ too.

A temporary reduction in the rate of Capital Gains Tax (CGT) payable on gains from the sale of B2L properties, made unprofitable by recent tax changes, could help to release stock onto the market. The new 30-day payment rules for CGT also means the Treasury’s coffers would feel the financial benefit immediately.

Further housing changes could see the Stamp Duty Land Tax (SDLT) threshold raised to £500,000 for all buyers, the introduction of a 3 % SDLT surcharge for non-UK resident buyers of UK property, and the expected tightening of tax reliefs on the sale of individuals’ main residences.