Budget 2018: Investing in a rapidly evolving digital landscape

Advances in technology and changing business models are transforming the global economy across all industry sectors. The measures announced by the Chancellor in Monday's Budget Speech showcase how the UK Government is seeking to embrace innovation and new and emerging technologies, to ensure the UK's position as a leader in our evolving digital landscape.
In this bulletin we set out some of the key highlights from the Budget from a technology and digital perspective.

A vision for an economy driven by research and innovation

The Budget is stated to set out "a vision for an economy driven by research and innovation". In particular:

• The Chancellor announced a further £1.6 billion investment for R&D funding; with £1.1 billion providing additional funding to support the Industrial Strategy Grand Challenges and secure the "UK's position as a world leader in new and emerging technologies such as artificial intelligence, nuclear fusion and quantum computing".
• The Government is also seeking to ensure businesses and consumers continue to benefit from these new technologies, including by asking Jason Furman, US President Barak Obama's chief economic adviser, to lead a review of competition in the digital economy.
• These efforts are further supported by the Government's Modern Industrial Strategy; a key component of which is the National Productivity Investment Fund (NPIF), established in 2016 to provide additional capital investment in areas critical to productivity – namely digital infrastructure, R&D, housing and transport. The Budget extends the NPIF by an extra year to 2023-2024 and increases the fund to £37 billion.
• The Budget sets out next steps for the rollout of full fibre broadband nationwide, which will see funding for fibre and 5G increase incrementally from £25 million in 2017-2018 up to £290 million in 2023 – 2024 through the NPIF.
• The Government also proposes investments totalling £150 million in global artificial intelligence and future talent fellowships.

Key highlights from a technology and digital perspective

We set out below further detail of the key highlights from the Budget from a technology and digital perspective:

Digital infrastructure

• Full fibre networks: The Government set out its strategy to meet the goal of a nationwide full fibre network by 2033 in the Future Telecoms Infrastructure Review published in July 2018. The Budget sets out the Government's intention to take additional steps to accelerate the rollout, including:
  • a £200 million allocation from the NPIF to pilot innovative approaches to deploying full fibre internet in rural locations; and
  • publishing consultations to mandate gigabit-capable connections to new build homes and speed up the delivery of upgraded connections to tenants, making it quicker and easier for communications providers to roll out full fibre networks.
• Transport digitalisation:
  • £90 million will be allocated from the NPIF to the Transforming Cities Fund to create 'Future Mobility Zones'. These zones facilitate the trialling of new transport modes, services, digital payments and ticketing; and
  • the proportion of the NPIF budget dedicated to next generation vehicles will increase from £75 million in the 2017-18 budget to £145 million in 2018-19.

New technologies and innovation: The Budget includes significant additional investment in new cutting-edge science and technologies that are expected to transform the economy, create highly skilled jobs and boost living standards across the UK. This includes:

• £1.6 billion investment for R&D funding to strengthen the UK's globally recognised expertise in science and innovation. This reinforces the UK's commitment to a strong environment for internal scientific collaboration.
• as part of this investment in R&D, an additional £1.1 billion for the Industrial Strategy Challenge Fund which supports technologies of the future. This includes £121 million to support the transformation of manufacturing through digitally-enabled technologies, such as the internet of things and virtual reality.
• £235 million to support the development and commercialisation of quantum technologies, £35 million of which will be used to support a new national quantum computing centre. Quantum technology has the potential to transform computing and communications and the Government also recently invested an additional £80 million in Quantum Technology Hubs (to address the challenge of exploiting quantum science to develop emerging quantum technologies).

AI and data-driven innovation: The Budget also highlights significant monetary and capacity resource investment in artificial intelligence and data-driven innovation in addition to the existing deal between the Government and the AI sector of (up to) £950 million, this includes:

• a review of how the Government can use AI, automation and data to drive public sector productivity and to create wider benefits, conducted by the Office for AI and Government Digital Service;
• an audit of data science capability across the public sector to realise the maximum benefits from data;
• the Centre for Data Ethics and Innovation conducting research on the use of data in shaping individual's online experiences and potential for bias in decisions made using algorithms; and
• £50 million to be invested in new Turing AI Fellowships to attract, retain and develop world-leading researchers in AI in the UK and £100 million to be invested in a similar international fellowship scheme.

Blockchain and catapults: An additional £115 million is allocated to the initial £1 billion of funding for the 'Digital Catapult', this supports entrepreneurs and businesses to access and adopt new cutting-edge technologies through projects such as DLT Field Labs which will be used to test the potential of distributed ledger technologies across a range of areas.

Digital services tax: the sting in the tail?

The digitalisation of business practices has led to an on-going international debate around developing modern tools for taxing the digital economy. The Government seems to feel that the pace of progress is too slow, and the Budget proposes its own solution to the challenge of taxing significant digital economy players.

From April 2020, the proposed digital services tax (DST) anticipates a 2% tax on the revenues of large, established social media platforms, search engines and online marketplaces (where in-scope activities generate more than £500 million per year). These are business models which the Government considers derive significant value from the participation of their users without requiring a physical presence in the UK. The DST applies to the revenues of these in-scope business models where they are linked to UK users, which means that the location of the user is significant and not the location of the business.

The DST is intended to be narrowly targeted and will be disapplied if an alternative satisfactory multilateral reform of the international corporate tax framework is achieved.

For further information regarding the DST and the Budget more generally, please refer to the firm's tax briefing here.

Conclusion

The Government's continued support of the fast-moving technology industry will no doubt be welcomed by the sector, to allow businesses to keep pace and continue to compete on a global scale (particularly in light of any EU funding concerns following Brexit).

The true impact of the much publicised new digital services tax remains to be seen and we eagerly await a consultation document on the design of the tax, as well as draft legislation in the Finance Bill 2019/20, which are expected in the coming weeks.

As the Chancellor set out early in his Budget Speech, it is also worth bearing in mind that if the "economic or fiscal outlook changes materially in-year" (for which, read a 'no-deal Brexit'), a new Budget would be forthcoming in the shape of upgrading the Spring Statement 2019 to a "full fiscal event". So watch this space.

For further insight on the new and emerging technologies that are disrupting today and that will shape tomorrow, please access our Disruptive Technology & Innovation Hub here.