“The budget announcements may feel like a bit of a party for the TMT sector now, but in 2023 the hangover could hit.”
In the latest edition of my ‘Future of TMT’ virtual events, I was joined by a panel of KPMG experts to discuss our thoughts on the chancellor’s budget announcements for 2021. We reflected on how they might affect the technology, media and telecommunications sector in the upcoming months and years.
Consumer spend and an investment-led recovery could benefit the TMT sector
I was thrilled that Yael Selfin, our Chief Economist for KPMG in the UK, could join us for this chat. One of the items that she referenced was the chancellor’s target of protecting the economy in the short-term.
Part of this is the decision to extend a lot of the schemes that are currently in place, such as the Job Retention Scheme (JRS), which is due to run up until at least September 2021. As a result of this, Yael offered the opinion that consumers will be more encouraged to spend increased amounts of money in the upcoming months. She also suggested that we didn’t hear a lot about investments in UK technology within the budget itself, which is a little disappointing. However, Jenny Sugiarto, who is a director in our competition economics team, pointed out that there are still a lot of broader things happening in other parts of the government around the technology, media and telecoms space. There are also other policies being put in place which could support the TMT sector’s long-term growth objectives.
One of these policies is the proposal for enhanced regulation for digital services, which has been in play since the end of last year. This will target large, online platforms - for example providers of cloud services, operating systems and social networking platforms. It will provide obligations and codes of conduct for these firms which will enable inter-operability, data sharing and third-party access. This could open these markets up and level-up the amount of competition in this space.
Other investments from the wider government include the 5G diversification strategy. Jenny pointed out that this could support the development of UK telco capabilities and it could also encourage the roll out of open round solutions in the 5G space. This will be a £250 million investment, so definitely one to take advantage of in the telecommunications space.
Kash Javed, Head of international tax for KPMG in the UK, highlighted that the ‘Patent Box scheme’ rate will remain at 10%, which could be a great opportunity for innovative companies to pick up going forwards. It will allow large corporates and big companies to benefit from low rates on any income and profits that they place within the scheme, for example those that are driven off underlying technologies brought in by a patent. This will be a really valuable incentive for international groups looking to locate activity here in the UK and will also help existing groups who are able to enter the regime.
We also discussed the implementation of new capital allowance measures around qualifying plans and machinery investments. The new capital allowances will offer four measures, one of which is to offer companies 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023. From Yael’s perspective, she believes that these measures could bring forwards a lot of the related investment that companies were already planning to carry out. This could benefit the economy in the short-term.
Though, one thing to consider is that this may not be accessible for all TMT sector companies, which was highlighted by Kash. Technology and media companies aren’t as likely to invest heavily in planting machinery that would qualify under this benefit. This would mean that these businesses could end up being ‘losers’ in the long term, as they will be hit with the ‘hangover’ that is the higher corporate tax rates coming along in the future, but they might not necessarily have been able to benefit from the short term measures that the chancellor introduced.
As touched on above, higher corporate tax rates are on the horizon - which will be unwelcome news to many of the larger corporations in the TMT sector. The rates are expected to rise to 25% and will come into effect in 2023 - which Kash identified as being a little later than most expected. He added that this is likely due to the chancellor needing to focus on supporting the economy in the short term as a result of the COVID-19 pandemic and the implementation of Brexit.
Although this increase in corporate tax rates may not be the best news, the positive news is that organisations will have time to prepare themselves. This announcement also provides inflation expectation management and gives clarity on what can be expected in the future.
Overall, there’s a lot to unpack from the budget announcements and more longer-term policies are expected over the coming weeks. It seems that there are a lot of benefits for the TMT sector, but organisations should stay alert to ensure they’re resilient and prepared for policies to come into effect in the future.
You may also be interested in reading our other content around the budget announcements. If you would like to join our next ‘Future of TMT’ virtual event, you can email to Sarah Noel who will ensure that you receive an invitation.