Budget 2020 and the government's support package: What it means for UK tech
Rishi Sunak’s first Budget was remarkable for several reasons. The first was its sheer scale, including an estimated £30bn of coronavirus-related stimulus. The second was the speed at which the package was overtaken by events.
Less than a week after the Budget was delivered, the government announced a £350bn package of grants and loan guarantees designed to help see businesses through the crisis. Next came a scheme for the government to pay the wages of furloughed employees, followed by similar arrangements for the self-employed: spending commitments that are expected to top £75bn.
But alongside the headline announcements and the unprecedented support package that followed it, the Budget (and subsequent announcements) also contained a number of provisions directly relevant to the UK’s tech sector. Here’s a roundup of what you may have missed…
IR35 changes pushed back by one year
With independent contractors forming such a significant part of the UK’s tech sector workforce, the proposed changes to the off-payroll working legislation (IR35) has been a cause of considerable concern.
IR35 is meant to address the perceived problem of ‘disguised employment’, whereby workers operate notionally as independent contractors and bill for their services via an intermediary (usually a limited company), resulting in a lower tax and NI liability. However, Many tech firms routinely use contract labour to help de-risk their business models as a flexible way to plug temporary skills gaps.
Originally, changes to IR35 impacting large and medium-sized private sector organisations were due to come into force on 6 April 2020. These changes shift the responsibility for determining a worker’s employment status from the contractor to the hirer. It’s a big burden for many firms - and reports suggested that many employers and contractors were simply not prepared for it.
Welcome news came shortly after the Budget, when it was announced that these IR35 changes have been pushed back until April 2021. Be warned though: the Business Secretary, Steve Barclay made it clear that this decision was “a deferral, not a cancellation, and the government remains committed to reintroducing this policy”.
Changes to Entrepreneurs’ Relief
For company founders disposing of shares, this relief reduces the level of capital gains tax payable from 20% to 10%. The relief was designed to encourage a certain element of risk taking, not least, by making it more attractive for investors to back innovative tech initiatives.
However, the measure had its critics, with many arguing that it did very little to foster genuine entrepreneurship - and a view that it was merely making rich people slightly richer. There was some suggestion that the relief might be scrapped altogether. Instead, the government has gone down the route of significantly curtailing it, reducing the amount claimable during the individual claimant’s lifetime from £10m to £1m.
As for the willingness of investors to back new tech ventures, only time will tell whether this change will have a negative impact.
The support package: meeting the needs of tech?
Key measures include grant funding, SSP relief, an interruption loan scheme for small businesses, along with a new lending facility designed to help larger firms bridge coronavirus cash flow disruption.
But especially when it comes to loan facilities, many firms are in a difficult position. To get access to funds, businesses need to show that they would be viable, were it not for the outbreak. The problem is that viability is almost always assessed on the basis of profitability. But of course, for those ventures that are still at an early stage, the focus is generally on growth rather than profitability. A tech firm may well have been meeting its goals before the outbreak in terms of new users and product roll-out. However, because it wasn’t yet profitable, it may find itself ineligible for certain types of support.
Where investors are on board, cash is usually released in tranches once specified criteria are met. With staff off sick, on-site visits to customers on hold, and product development projects off schedule, many firms will already be behind with their growth plans, leaving them unable to unlock the next stage of investment.
So if a tech firm finds itself barred from borrowing, and with no more investment cash forthcoming, where does this leave it?
This is where a national fund aimed specifically at early stage companies could prove invaluable. France and Germany already have something similar, and its establishment would help reduce the risk of the UK tech sector getting left behind.
For this, tech leaders have mooted the idea of a ‘Runway Fund’: i.e. discounted loan notes of up to £500,000 to fund operations during the coming months. Rather than being a handout, this would be an investment, with the loan notes converting into equity as part of the next round of funding.
More than £10bn was invested in UK tech last year, and the sector employs around 3 million people. To maximise the chances of the sector bouncing back, it remains to be seen what level of further support the government will be willing or able to commit.