Coadec’s Budget 2016 summary

Today the Chancellor, George Osborne, delivered his 8th Budget. It was fairly light on tech announcements, but there is a section dedicated to the ‘Digital Economy’ (see section 5.9), and more importantly there are significant changes to business taxes with a focus on helping small business.

Digital announcements

Driverless cars: As widely trailed, the Budget confirmed plans to ‘establish the UK as a global centre for excellence in connected and autonomous vehicles’, with driverless cars to be trialled on UK roads by 2017, and a review of the regulatory barriers.

‘A tax cut for the digital age’: The Chancellor announced two new income tax allowances worth £1,000 each, for personal income from trading or property. In the Chancellor’s words, this is designed to ‘help the new world of micro-entrepreneurs who sell services online or rent out their homes through the internet’. In other words, it’s a boon for the sharing economy, as it will reduce the friction for people who want to sell on eBay or rent their property on Airbnb. These new reliefs notably come in addition to the increase in the ‘Rent a Room scheme’ threshold announced at last Summer’s Budget which also potentially helps Airbnb landlords.

Update: I had wondered how the new property allowance would interact with the existing Rent a Room scheme. Now we know (thanks Debbie Wosskow). While the Rent a Room scheme only applies to rooms in one’s main residence, the new property allowance can be used for much broader income. Eg if you Airbnb an entire property, or if you use services like JustPark or Vrumi which wouldn’t have otherwise been covered.

Broadband investment fund: As trailed at November’s Autumn Statement, this Budget confirms there will be a new Broadband Investment Fund, in partnership with private sector investors, to support the growth of alternative broadband networks by providing greater access to finance. There isn’t any more detail on this yet, so watch this space. Separately, the Budget also announced an extra £4.5 million for broadband in the South West.

5G strategy: Again, thin on the detail, but the Budget promises that in 2017 it will produce a 5G strategy ‘based on an assessment by the National Infrastructure Commission of how the UK can become a world leader in 5G’.

Institute of Coding: The £20 million Institute of Coding had already been announced during the Chancellor’s cyber security speech last November, but today we have a little more detail. Notably that Kathryn Parsons, co-founder of Decoded, is to chair the ‘panel of leading experts’ that will shape the competition.

More to come on fintech: In good news for fintech and the likes of Mondo et al, the government is to work with the ‘New Bank Start-up Unit’ to promote the authorisation of more new banks. The Budget also promises further measures to support Fintech in the coming months, following the recent Fintech benchmarking exercise (which shockingly placed the UK number 1 in the world).

Address register: Authoritative registers have been getting a lot of attention in digital government circles recently (here’s a good explanation of why). Today’s Budget announces ‘up to £5 million to develop options for an authoritative address register that is open and freely available — making wider use of more precise address data and ensuring it is frequently updated will unlock opportunities for innovation’.

Measuring the digital economy better: The Chancellor announced that he was accepting in full the recommendations of Professor Charlie Bean’s review of the UK’s economic statistics. Notably this review highlighted the difficulties of capturing activity in the digital economy, including the sharing economy, in traditional statistical measures (eg of GDP and productivity) and called for changes to better measure digital activity. Interestingly, the report notes that if the digital economy were properly measured, it could add between one third and two thirds of a percentage point to GDP.

Review of lifelong learning: One interesting announcement tucked away in the Budget was a new review of lifelong learning, explicitly recognising that ‘The digital revolution is transforming the world of work. As working lives lengthen and jobs change, adults will need more opportunities to retrain and up-skill.’ The Budget announces that there will be a review of the gaps in existing offerings in order to promote retraining and prepare people for the labour market of the future. This seems to be an explicit recognition (perhaps for the first time by the government) of the changing nature of work, and perhaps even a nod towards the risks of automation. This is something that Labour are starting to think about, with deputy leader Tom Watson writing about automation recently.

Business/tax announcements

Corporation tax cut: The headline rate of corporation tax is cut (again). By 2017 the corporation tax rate will fall to 17% (from 20% today).

Business rates cut: Small business rate relief is being doubled permanently from 50% to 100%. The changes are complicated, so in full:

Businesses with a property with a rateable value of £12,000 and below will receive 100% relief. Businesses with a property with a rateable value between £12,000 and £15,000 will receive tapered relief. 600,000 small businesses, occupiers of a third of all properties, will pay no business rates at all — a saving worth up to £5,900 in 2017–18. An additional 50,000 will benefit from tapered relief

There is also an increase in the threshold for the standard business rates multiplier to a rateable value of £51,000, taking 250,000 smaller properties out of the higher rate.

Class 2 NICs for self-employed abolished: From April 2018, Class 2 NICs will be abolished. The Treasury say that this represents an annual tax cut for 3.4 million self-employed people of £134 on average. The Budget also promises to reform Class 4 NICs so that self-employed individuals continue to build entitlement to the State Pension and other contributory benefits.

Capital gains tax cut: The Budget announced that from April 2016 the higher rate of Capital Gains Tax (CGT) will be reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10% (excluding gains on residential property and carried interest).

Entrepreneurs’ relief extended to long-term investors: In good news for angel investors, the Budget extends Entrepreneurs’ Relief to investors who hold shares in unlisted companies for over three years. They will benefit from the lower 10% rate of Capital Gains Tax, and a £10 million lifetime allowance.

Changes to tax on multinationals: There were several measures in the Budget aiming to ‘ensure a level playing field, with large multinationals paying their fair share of tax’, including changes to interest relief, royalty payments, ‘hybrid mismatch arrangements’, and VAT evasion by overseas sellers.

Devolution revolution (update: section added 17/03/16)

The Chancellor continues to promise a ‘devolution revolution’, and this Budget announced more powers and funding for cities and mayors. This included a ‘City deal’ for Cardiff, and the opening of negotiations with Swansea and Edinburgh. It announced new mayoral devolution deals with the West of England, East Anglia and Greater Lincolnshire and additional mayoral devolution deals with Greater Manchester and Liverpool City Region.

The Budget also included significant new powers for London, increasing the share of London’s business rates retained by the Greater London Authority and transferring responsibility for funding TfL’s capital projects. Collectively these will give the Mayor of London control over almost £1 billion more of locally raised taxes.

This matters for startups because the city is the right unit of analysis for thinking about tech clusters. More power and funding for city leaders, including in London, will open up the potential for forward thinking mayors to do more to help their local ecosystems.

What’s missing?

Digital Strategy: After the rush at the start of the year to ask for views on what should be in the government’s Digital Strategy, we had thought this may come out at the same time as the Budget (and so help inform the Budget decisions). It didn’t, so we’re still waiting to see when it arrives and what comes out of the process. For reference, here was our submission, with 16 ideas.

Open banking: Last year the Treasury commissioned a report on open banking, the idea that banks should open up APIs to allow users to share their data with third parties (eg an expenses app). This report came out in February, but the Government has yet to formally respond. [Disclosure: I served on the Open Bank Working Group that wrote this report]

Innovation Plans: Alongside the new Digital Strategy (coming out of DCMS), the Department for Business is also working on an Innovation Plan(s). Again, we’re not sure when this will come out or what it will contain — but it was at least mentioned in the Chancellor’s Budget speech, so we have something to look forward to.

Overall thoughts

The changes to business tax will probably have the largest impact, and look like they would be good for the UK’s digital startups. Business rates are a big expense for small businesses, so reducing the cost can only be a good thing. Similarly lower taxes on capital gains, and the extension of Entrepreneurs’ Relief to long-term investors should help further boost investment in early stage businesses (alongside the already generous EIS and SEIS reliefs).

The tech announcements feel slightly piecemeal and small, with several measures already announced or trailed (like the Institute of Coding, and Broadband Investment Fund). That said, the package of measures are all to be welcomed, especially the continued ambition on fintech and autonomous vehicles.

Perhaps the most interesting long-term feature of the Budget from a tech standpoint is the growing recognition in government of the changing nature of work, as seen in the new sharing economy tax allowances, the help for the self-employed, the review of lifetime learning and retraining, and the new more flexible ‘lifetime ISA’. All of these point to an understanding that the labour market is changing in a more flexible direction.

We think startups should welcome this Budget.