HMRC has published ‘Qualitative research to understand digital tech businesses’ about research undertaken to understand how digital technology businesses deal with tax.
The government estimates that around 1.56 million jobs exist in the UK digital economy and their combined turnover stands at £161 billion. In 2016 research was undertaken with 50 UK digital tech businesses across a range of growth stages, sizes and sectors to determine how they think and operate in relation to their tax requirements and their overall attitudes towards tax compliance.
The research shows:
- There is a high use of contractors and freelancers in this sector.
- Attracting and keeping staff is very important for digital tech businesses. Remuneration is often structured around the need to retain staff, rather than being specifically set up in a tax-efficient manner. More established businesses are able to offer share options such as Enterprise Mananagement Incentives (EMI) .
- Schemes and incentives such as Research & Development Tax Relief , the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) enable businesses to manage the length of their development phases, attract investment and grow. Those operating in new markets felt without the reliefs, they would not have got the investment needed to develop their product or service.
- Those who had claimed R&D relief found it too complex for them to handle themselves with most having to outsource to their accountant or an R&D consultant.
- Many relied on accountants to handle their tax affairs, especially in the early start-up stages where developing their product, service or establishing a customer base was the priority.
- There were examples of tax errors made (e.g. PAYE underpayments) due to poor communication between founders and accountants.
- Many had little proactive interaction with HMRC as their accountants were the first port of call for tax advice.
- Some tax obligations, e.g. VAT and PAYE, are felt to be designed with larger businesses in mind. Where businesses began overseas operations quite quickly their tax affairs quickly became complex which was a problem for those with no previous business experience, or who had not yet scaled their recordkeeping systems.
- Navigating the VAT MOSS system was seen as particularly complex by some smaller digital tech firms with EU customers.
- Corporation Tax is less of an issue as many are not yet making a profit.
- Record keeping is typically done in-house by the owners to save costs or internal admin staff with widespread use of accounting software. Cloud based software and apps are popular.
- Smaller, less established businesses, are less aware and more critical of tax avoidance schemes than their counterparts in medium sized concerns.
Links to our guides:
EMI: Enterprise Management Incentives
SEIS: Seed Enterprise Investment Scheme (subscribers)
EIS: Enterprise Investment Scheme (Subscriber guide)
R & D: SME Tax Credit scheme
Place of supply: Mini One Stop Shop (MOSS)
External link:
‘Qualitative research to understand digital tech businesses’