Budget 2020: an eye on innovation

Understandably, dealing with the economic impact of Covid–19 dominated Chancellor Rishi Sunak’s first Budget. But the UK government hasn’t taken its eye off the future. A number of measures – increased R&D investment and tax credits, and the abolition of the "reading tax" - were announced that suggest innovation is still high on the government’s agenda. Unfortunately, it also looks as if the Digital Services Tax is here to stay, at least in the short term.

Increased investment in R&D

The government plans to increase public R&D investment to £22 billion per year by 2024-25 (up from the previously promised £18 billion per year). This investment is aimed to benefit “people,ideas and industries that will cement the UK’s world-leading position in science and technologies ranging from nuclear fusion to electric vehicles and life sciences”. 

Of particular interest to tech businesses was the announcement that there would be funding of at least £800m for a new blue skies funding agency in the UK similar to the successful US Defense Advanced Research Projects Agency (DARPA).  DARPA, although focused on emerging technologies for military use, is notable for the key role it played in the development of Silicon Valley and the modern technology industry. Digital tech businesses are encouraged to watch this space, should they be able to receive funding.

Increase in R&D tax credits 

As the government recognises that its ambitious plans for increased R&D activity in the UK will require investment from the private sector, Finance Bill 2020 will introduce legislation increasing the rate of R&D credits from 12% to 13% for R&D expenditure incurred on or after 1 April 2020. R&D credits allow companies to claim an enhanced corporation tax deduction or payable credit on their R&D costs. 

Additional tax relief for expenditure on data and cloud computing?

The government will also consult on whether expenditure on data and cloud computing should qualify for R&D tax credits.

Zero VAT rate for e-publications (aka abolishing the "reading tax")

Currently, VAT is levied on electronic publications at the standard rate of 20% (although an Upper Tribunal decision has suggested that e-newspapers should be zero-rated). In contrast, physical books, newspapers, magazines etc. are subject to VAT at the zero rate. As set out in earlier blogs, this distinction lacks a convincing policy rationale and discourages innovation. 

The UK government will legislate to apply the zero rate of VAT to e-publications from 1 December 2020, thereby aligning the treatment of e-books, e-newspapers, e-magazines etc.  with their physical counterparts. The change is aimed to “benefit all who read digitally, including children from poorer backgrounds” (according to a 2019 National Literacy Trust Report, nearly 1 in 4 pupils on free school meals read fiction digitally, compared to 1 in 6 of their peers who are not eligible for free school meals). The expectation here, of course, is that the publishing industry, including e-booksellers, will pass the benefit on to consumers.

The Professional Publishers Association was "delighted that the Chancellor has acted and brought an end to this unfair andillogical tax".  However, the Booksellers Association was "disappointed" with the announcement, warning that the move risked benefiting Amazon and its Kindle edition with a tax break at the expense of the UK high street.

Digital Services Tax 

From 1 April 2020, the UK government will introduce a new 2% tax on the revenues of social media services, search engines and online marketplaces that derive value from UK users. The legislation will be included in Finance Bill 2020. Based on the technical note and the indication of a change in predicted DST revenues due to technical changes, the legislation is expected to look somewhat different from the draft published in July 2019 (which was  covered by Zoe Andrews). 

It is worth noting that France has delayed collection of its DST under US pressure, and the US may seek to take retaliatory trade action against the UK for pressing ahead with the DST now. Yet the UK government plans to dis-apply the DST only once “an appropriate international solution is in place”. The way in which this intention is reflected in the revised draft legislation will be crucial. If it were to use this wording, there would be significant wiggle room on timing: for a solution to be in place, something more would seem to be required than an agreement in principle. But how much more is rather unclear.