The chief executive of not-for-profit organisation Tech Nation has warned that a new tax on tech giants could stifle innovation and entrepreneurialism.

Chancellor Philip Hammond yesterday confirmed plans to introduce a 'digital services tax' on large multinational technology companies.

From April 2020, large social media platforms, search engines and online marketplaces will pay a 2 per cent tax on the revenues they earn which are linked to UK users.

Hammond stressed that the "narrowly-targeted" tax, which is expected to raise £400 million a year, will only be imposed on the UK-generated revenues of specific digital platform business models.

"It will be carefully designed to ensure it is established tech giants – rather than our tech start-ups - that shoulder the burden of this new tax," he said in his speech, adding that only profitable businesses which generate at least £500 million a year in global revenues in the business lines in scope.

Tech Nation CEO Gerard Grech (pictured below) acknowledged that the way Britain levies taxes on companies "must evolve" and said the UK is well-placed to be a leader in this area.

However he warned that the new tax "risks stifling entrepreneurialism and innovation, which recent governments have done much to encourage".

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"We have heard assurances that the new tax, designed to raise more than £400m, will not be a crude digital sales tax and will not impact smaller digital platforms," he said.

"But tech startups and entrepreneurs can be forgiven for feeling that they could still end up in the sights of future Chancellors.

"We do not want to risk being left behind in a global race by moving out of step with other countries in this area."

Philip Salter, founder of The Entrepreneurs Network, said the digital services tax represent "missed opportunities for fundamental reform while research director Sam Dumitriu warned the Chancellor "may live to regret making the tax system even more complex".

"Corporation Tax needs updating, but any reform should focus on fixing the general rules, rather than papering over the cracks in the status quo," he said.

"Singling out 'tech giants' may lead to UK SMEs paying more to advertise through social media and because the tax is levied on revenue not profits could unfairly disadvantage firms who are still raising money through equity finance."

Jay Boyce, partner at accountancy, tax and business advisory firm MHA MacIntyre Hudson, echoed a similar sentiment.

"The digital services tax of 2% is another laudable step, but it may have been a better idea to restrict the use of brought forward losses instead," he said.

"Many of the technology companies Philip Hammond is targeting have significant tax allowable losses and by restricting their use he could increase tax payable in the UK."

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In his Budget, Hammond also outlined plans for £1.6 billion of new technology investments, from nuclear fusion to quantum computing.

The Chancellor also pledged to provide an additional £200 million of funding to the British Business Bank to replace access to the European Investment Fund if needed. The government will also back another 10,000 entrepreneurs by extending Start-Up Loans funding to 2021.

Ritam Gandhi (pictured above), founder of Studio Graphene, a design and development studio specialising in IoT technologies and app development, welcomed the news but warned that the UK "must not become complacent".

"The country has become globally renowned for this thriving tech sector, but we must not become complacent – rather than assuming we will remain a leader in tech innovations and digital disruptions, the government must be willing to intervene and provide a helping hand to those young companies struggling to scale-up," he said.

"Approximately 50 per cent of startups fail within their first three years, so more must be done to help nurture and support young businesses."

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