Spring Budget 2017: The key takeaways for tech entrepreneurs
The Spring Budget may have been pretty dull this year, but what impact, if any, will it have on the UK tech community?
We knew this would be the dullest budget in recent history – the Chancellor even leaked that in advance. The only real surprise was that ‘Spreadsheet Phil’ opted to make so many jokes throughout his speech.
It makes sense that in a year when he plans to deliver two budgets, that the first one would be a little uneventful. Better to announce the big changes in the Autumn giving business more time to get its tax affairs in order.
The headline grabber was undoubtedly the (now ditched) changes to the way we tax the self-employed. Under the status quo, self-employed people get what the IFS estimate to be a £1,240 tax advantage. It used to be the case that while the self-employed faced a lower rate of national insurance they also got a lot less out of the state pension. But recent reforms mean that’s no longer true.
Mr Hammond announced that the Class 4 National Insurance Contribution (NIC) rate would rise by 2p to 11p. By the way, that’s still 1p lower than the Class 1 rate that employees pay.
Most readers will probably be asking “what does this mean for Uber, Deliveroo and Amazon?” In truth, very little. The average Deliveroo driver probably wouldn’t have noticed the changes as Hammond will still be going ahead with abolishing the Class 2 rates that they currently pay.
Class 2 rates have a lower tax-free threshold, so the total move ends up relatively neutral for those eking out a living in the gig economy. Those with profits less than £15,570 will be better off, while the biggest losers (those who have profits of £45,000 or more) will be £589 worse off.
Even if Mr Hammond had equalised the Class 4 and Class 1 rates, you would still be better off classifying yourself as self-employed. That’s because you wouldn’t be liable for employer-side NICs which ultimately are a tax on wages not employers.
It’s slightly worrying that Hammond has already U-turned on this reform. If he can’t pass a moderate tax rise strongly endorsed by the IFS and other policy wonks, then how will he be able to make the necessary reforms when Britain finally exits the European Union?
More worrying is Mr Hammond’s attempt to end company directors misclassifying their income from working as investment income. As it stands, individuals who incorporate are able to dodge taxes by paying themselves in capital gains and dividends. This creates a big incentive for individuals to incorporate.
The Office for Budget Responsibility estimates that the government will lose an extra £3.5bn by 2021 because of increased incorporation. The Chancellor responded by cutting the £5,000 tax-free dividend allowance to £2,000.
This is a pain for business for two reasons. First, the government only brought in that tax-free dividend allowance last year after also raising the dividend tax rate. Entrepreneurs hate political uncertainty, it impedes their ability to plan for tomorrow. Fiddling like this is a bad idea.
Second, company directors face lower tax rates because their incomes are a mix of labour and investment. Investment is incredibly responsive to tax changes, so we should try to tax it as little as possible. Indeed, many economists believe that the optimal tax rate on new investment is zero.
But there’s a way to square the circle. It’s possible to stop management consultants dodging taxes by incorporating without deterring tech firms from investing in new machinery. If the UK followed Estonia’s lead and allowed for full immediate business expensing of investment, we’d essentially give all business investment the tax-free ISA treatment, allowing us to equalise other rates to stop bogus incorporation.
Of course the reason we raise revenue is to fund spending. And it was on the spending front that tech seemed to win.
Mr Hammond announced £270m in research and development funding to put Britain at the forefront of hi-tech disruptive technologies like robotics, biotech and driverless cars. That’s welcome, but it’s small relative to the amount the private sector is spending.
One suspects it’s regulation rather than funding that will determine whether Britain is at the forefront of the development of driverless cars. We’ve already seen it in the US when Uber’s self-driving trial was disrupted in California, other states leapt at the chance to accommodate them.
It was probably the Vehicle Technology and Aviation Bill that mattered more, it was the first bill in Parliament to take seriously the insurance implications of driverless cars.
There was also £16m announced to fund a 5G hub to trial the new faster network. The government clearly was embarrassed when China and the US were able to rollout 4G much faster. Mr Hammond emphasised that more needs to be done to improve coverage on roads and rail lines. He’s right – trying to work on the train can be a nightmare with patchy signal. But I fear he may have inadvertently undermined the business case for shorter train journeys on HS2.
The Chancellor also put £200m into expanding access to fibre-optic broadband. Part of the plan involves funding a voucher scheme to encourage businesses to sign-up to full-fibre networks. The problem is that all the evidence says voucher schemes like these don’t work. The previous voucher scheme the government ran, offering in essence £100m worth of free cash, had incredibly poor take up. They only ended up spending £7.5m.
However, the government is not simply relying on subsidies to increase roll out. They’re also opening up existing public sector ducts to enable quicker rollouts. That’s important because digging up roads is the most expensive part of installing new broadband.
In the grand scheme of things, the new measures announced in the Spring Budget were tiny. This is the way the Spring Budget ends, not with a bang but a whimper.