The Spring Statement, what does it mean for the tech sector and what does it tell us about where the Chancellor may go next?
On Wednesday 23 March the Chancellor set out his Spring Statement. Against a backdrop of rising inflation pushed up by heighten energy costs, supply chain disruptions and the war in Ukraine. The Statement was principally focused on alleviating a growing cost of living crisis with a combination of policy interventions including a £500 million increase to the Household Support Fund, reducing National Insurance Contributions for low earners and small businesses and a 5p reduction in fuel duty which will last for 12 months.
However, while the Spring Statement rightly focused on the growing cost of living crisis, changes to the R&D tax credit and consultations on new business incentives point to a potentially significant Autumn Budget.
Below we set out the economic context provided by the Spring Statement, key policy announcements that will be relevant to techUK members and a look ahead to possible announcements in the autumn budget.
Economic Outlook:
The Spring Statement was accompanied by an Economic and Fiscal Outlook provided by the OBR, the forecast points to a difficult economic situation for the UK.
The OBR expects UK real GDP to grow by 3.8% in 2022. GDP is then forecast to slow, growing by 1.8% in 2023, 2.1% in 2024, 1.8% in 2025 and 1.7% in 2026.
Inflation continues to be a major concern as a result of higher global energy, metals and food prices. The OBR forecasts inflation to remain elevated through 2022 and 2023, peaking at 8.7% in Q4 2022. On an annual basis, inflation is forecast to be 7.4% in 2022, before decreasing to 4.0% in 2023 and 1.5% in 2024. Inflation is then forecast to be 1.9% in 2025 and 2.0% in 2026.
The Chancellor reconfirmed his commitment to his fiscal rules. Underlying debt is expected to fall steadily from 83.5% of GDP in 2022-23 to 79.8% in 2026-27. Borrowing as a percentage of GDP is predicted to be 5.4% this year, 3.9% next year, then 1.9%, 1.3%, 1.2% and 1.1% in the following years.
This outlook raises significant questions about the UK's underlying growth. Both productivity increases and increasing investment by business will be needed to lift growth forecasts and help boost wages to counter a predicted decline in living standards.
Key initiatives for tech sector:
The Spring Statement announced a number of important initiatives for the tech sector, these included:
R&D tax credit reform, cloud and data costs: the UK’s R&D tax credit will be reformed to include cloud computing and data costs from April 2023, something techUK and our members have long called for. In the Spring Statement the Government confirmed that it had listened to stakeholders and that all cloud computing costs associated with R&D, including storage, will qualify for relief. The Treasury has also taken onboard stakeholder feedback and will, legislate so that expenditure on overseas R&D activities can still qualify where there are material factors such as geography, environment, population or other conditions that are not present in the UK necessary for the research.
The definition of R&D for tax reliefs will also be further expanded clarifying that pure mathematics is a qualifying cost, this will support leading UK sector such as AI and quantum research. These expansions are good news and reflect techUK’s feedback to the Treasury on how to ensure the R&D tax credit is effectively supports the UK tech industry.
Compute review: the government will launch a review into the Future of Compute, building on a range of compute work across government and in particular the Government Office for Science report on Large Scale Computing. In the past decade, computational technologies have become a vital general-purpose technology for productivity and innovation, making it essential that the UK reviews its compute needs over the next decade. Led by an external expert, the review will provide recommendations to form the basis of a long-term plan for the government’s approach to key computer infrastructure.
AI Centres for Doctoral training: The government will partner with industry and academia to create 1000 new AI PhDs. This will be backed by £117 million of funding to create the PhDs through Centres for Doctoral Training (CDTs), with the investment further leveraging industry and university funding.
No change to Enterprise Management Incentive (EMI): Following a review of the EMI scheme the government has concluded that “the current EMI scheme remains effective and appropriately targeted”. However, it will expand the scope of the review to consider whether the other discretionary tax-advantaged share scheme, the Company Share Option Plan, should be reformed to support companies as they grow beyond the scope of EMI.
Employment allowance: the Spring Statement included an increase in Employment Allowance from April 2022, meaning eligible employers will be able to reduce their employer NICs bills by up to £5,000 per year. As result, businesses will be able to employ four full-time employees on the NLW without paying employer NICs.
Incentives for investment in green technologies and insulation: the government will reverse a Court of Justice of the European Union ruling that restricted the application of VAT relief on the installation of Energy Saving Materials (ESMs). The government will also increase the relief by introducing a time-limited zero rate for the installation of ESMs. The changes will take effect from April 2022.
The Government will bring forward the introduction of targeted business rate exemptions for eligible plant and machinery used in onsite renewable energy generation and storage. This will include a 100% relief for eligible low-carbon heat networks with their own rates bill, to support the decarbonisation of non-domestic buildings. These changes will take effect in April 2022 and last until 31 March 2035.
The Chancellor’s Tax plan:
Alongside the Spring Statement the Chancellor published a new Tax Plan, the plan focuses on how the Government will reduce taxes over the course of the Parliament as well as providing incentives to boost business investment around three key pillars of Capital, People and Ideas. Themes the Chancellor laid out as important to his vision for the economy in his Mais Lecture at the Bayes Business School, City University.
The plan introduces key items for reform that the Treasury will consult on with business ahead of the Autumn budget, these include:
- A replacement for the super-deduction, the Super-deduction was a welcome incentive introduced in the 2021 March Budget that allows companies to cut their tax bill by up to 25p for every £1 they invest. The scheme will run out in April 2023 and the Treasury is aiming to work with business to identify a replacement. In our policy paper Seizing the opportunity for tech led growth in 2022 we have called for the Government to extend the Super-deduction or replace it with a similar, permeant 100% tax deduction for capital expenditure.
- A review of the apprenticeship levy: the Treasury will review whether the current tax system – including the operation of the Apprenticeship Levy – is doing enough to incentivise businesses to invest in training. For techUK and our members reforming the apprenticeship levy and providing SME’s with tax incentives to boost digital skills training is vital to addressing skills shortages in the tech sector.
- Continued reform of R&D tax credits: the Treasury has done good work to ensure the UK’s R&D tax credit from 2023 will capture R&D activities that are part and parcel of a modern high-tech business such as data costs and cloud computing. Ahead of the November budget the Treasury will again engage with businesses to identify further grounds for reform.
techUK’s view and looking ahead to a potentially significant Autumn budget:
Rightly the Spring statement focused on taking action to address cost of living concerns, however it also contained some welcome announcements on R&D tax credits and future plans to reform the tax system to incentivise business investment. These commitments in the Chancellor’s tax plan are particularly welcome and point to a potentially significant Budget in the Autumn.
Where the Government has already made reforms to boost business investment such as to the R&D tax credit the Treasury has shown a willingness to go far, bringing in all cloud costs and circumstances where R&D needs to be conducted outside the UK. If the Treasury can show similar ambition when it comes to replacing the Super-deduction, reforming the apprenticeship levy, and further reviewing the R&D tax credits then the coming Autumn budget could be a hugely significant turning point for business investment into the UK. Helping to boost growth, productivity and wages.
Responding to the Spring Statement, techUK CEO Julian David said:
"Rightly the majority of the Spring Statement focused on addressing cost of living concerns resulting from the war in Ukraine and rising inflation. Along with this vital action the Chancellor also outlined a welcome package of consultations and policy programmes aimed at boosting businesses investment.
In our recent Digital Economy Monitor Survey UK tech companies said increasing support to invest in R&D would be their top ask of Government, with 76% saying R&D is important to their business operations in the UK. The proposals unveiled today to further expand R&D tax credits and consult on ways to maintain the tax deduction for capital expenditure have the potential to unlock more investment into UK innovation. However, to get this right the Government must ensure that the software and intangible assets that power modern business investment are kept in scope. Otherwise, the Government risks missing an opportunity to unleash the potential of tech led growth. "
Julian David
Julian David is the CEO of techUK, the leading technology trade association that aims to realise the positive outcomes of what digital technology can achieve through innovation and collaboration, and serves on its board of directors.
Neil Ross
As Associate Director for Policy Neil leads techUK's domestic policy development in the UK. In this role he regularly engages with UK and Devolved Government Ministers, senior civil servants and members of the UK’s Parliaments with the aim of supporting government and industry to work together to make the UK the best place to start, scale and develop technology companies. Neil also acts as a spokersperson for techUK on UK policy in the media and at Parliamentary Committees.
Pablo Derpich
Pablo Derpich is the Policy Manager for Economy and Innovation at techUK.
