And so David Cameron continues to make the right noises about making the UK a centre for hi-tech digital, technology and creative businesses – a hub or a ‘UK Silicon Valley’ for the Googles and Facebooks of the future.
Cameron unveiled his Blueprint for Technology today in East London with a commitment to push through with improvements to UK tax competitiveness, a review of intellectual property laws, freedom of movement of skilled workers, access to funding etc – I won’t summarise all the details as you can read the report in full by clicking here.
Let me kick off my saying that I wholeheartedly agree with Cameron’s focus on investing in intellectual property rich hi-tech digital, technology and creative businesses but I firmly believe that having a business-friendly tax regime and regulatory structure is absolutely key. Given this, I do not believe that the tax measures outlined today go nearly far enough. Okay, we’ll have reduced corporation tax for large companies to 27% and 20% for small companies from next April and there’s a pledge to review the taxation of intellectual property this Autumn but we need more. Far more.
Here are a few suggestions (aka a blueprint for tax) for hi-tech digital, tech and creative UK businesses:
- Create Enterprise Zones across the major cities ideally near Universities e.g. Manchester, Birmingham, Cambridge etc which will screen start-ups and fast growth companies for entry to these tax incentivised business parks
- These Enterprise Zones (EZ) would allow companies to take advantage of certain tax exemptions and incentives for the first 3 years of trading and then, although they will be entitled to stay thereafter (to build a supportive community), they will be subject to many of the tax rules applicable to businesses outside the EZ.
- Hi-tech digital, technology and creative businesses only would qualify for admittance to the EZ (this would include cleantech, medtech and gaming businesses).
- Corporation tax rates would be 0% for Year 1, 12.5% for Year 2 and then 20% in Year 3 (or whatever the prevailing small companies corporation tax rate is in Year 3). These rates are similar to in some other countries e.g. tax holidays are available for a certain duration whilst the 12.5% rate mirrors the current Irish corporation tax rate which continues to receive admiring glances from many UK hi-tech companies.
- National Insurance Contribution (NIC) holidays would be available for the 3 year qualifying period. There is a temporary general NIC holiday scheme in place at the moment although there are many conditions to satisfy plus the postcode finder for qualifying areas is poor. Under this scenario, if you’re in a qualifying EZ, you qualify. No further questions asked. This way startups and growing businesses can recruit without being hit with penal employer’s national insurance contributions (13.8% from next April). At the very least, I would suggest a tax break from employer’s NIC for the 3 year period.
- PAYE would be applied to 70% of earnings of employees of companies in the EZ. This would help encourage skilled workers to take the plunge of joining high risk start-ups and help recruit talent from overseas. The Netherlands has a similar tax incentive in operation.
- R&D tax credits would be increased to 200% for SMEs within the EZ (from 175% today) in line with the Dyson Review.
- Number of companies set up in a group would not impact on the tax rate within the 3 years (subject to point 4). Currently, if a company decides to set up a subsidiary company (e.g. to test a spin-off concept) then the taxable profit band at which small companies rate is payable is divided by a factor of 2 i.e. as a standalone company it could have taxable profits up to £300,000 and pay tax today at 21% whereas if it set up a subsid company it could only earn taxable profits up to £150,000. By eliminating this rule, companies would then have the freedom to experiment with new ideas and concepts in new companies without getting bogged down with tax considerations. When the 3 years draws to a close, they should be in a better position to know which companies in the group can be consolidated, which ones can be killed off and which ones should be kept.
- Income of intellectual property companies should be subject to corporation tax rate at a reduced rate of 5% and this rate would continue to apply beyond the 3 years. This rate looks controversially low but we have to face facts that reducing rates of tax to these sorts of levels is essential if we are to encourage – let alone retain – the Google and Facebook companies of the future. Look around locations across Europe and you will see rates that are not dissimilar. Entrepreneurs owe a duty to their investors to maximise returns and likewise tax advisers owe a duty to their clients to explore best possible options for the long term profitability of their clients. Such planning aimed at shifting income overseas could be stopped in its tracks with these sorts of rates. We have proposals for a reduced rate of 10% corporation tax for patent income, however, the Netherlands already offers 5% for a wider range of intangible income. Remember 5% of Google’s annual income from its brand and other intellectual property is an eye-watering figure – plus there would be employee taxes receipts etc to throw into the mix for the UK Exchequer….tempting?
I appreciate that there is plenty to unpack here but radical times call for radical measures. We are standing on the edge of a huge opportunity. We need to be brave and demonstrate decisive action beyond slick speeches and glossy whitepapers.
George, I hope you’re listening in anticipation of your Budget speech on 23 March 2011.
Before then, I welcome your comments, criticisms and further ideas.
- Games developers criticise David Cameron over tax breaks (guardian.co.uk)
- Google May Be Avoiding Paying Taxes, But Who Can Blame Them? (GOOG, AAPL) (businessinsider.com)
- UK fails to attract global entrepreneurs (telegraph.co.uk)
- Intellectual property review and entrepreneur visa to boost UK tech sector (telegraph.co.uk)