Enthusiasm for the chancellor's pre-budget promises was tempered
last week by disappointment that he took no steps to encourage
broadband roll-out. Nick Huber reports
The proposal to give users the right to resolve software licensing
disputes by referring to a beefed-up Office of Fair Trading (OFT)
was the only surprise for the IT sector in last week's pre-budget
report.
Presenting his plans last week chancellor Gordon Brown said the
Government would give legislative backing to allow consumer
associations to bring "super complaints" to the OFT.
That aside, the report stuck with tried and tested measures to
boost productivity within IT sector: tax relief for research and
development was extended alongside more generous tax breaks for
intangible assets.
The proposals drew a qualified welcome from IT and industry groups
which had urged the chancellor to take more radical action to boost
the snail's pace broadband roll-out and clarify rules for
e-government funding.
Tax experts said that many companies do not know how to take
advantage of the tax reforms and called on IT managers to work more
closely with finance chiefs to maximise potential benefits.
Roger Marshall, IT director of the Corporation of London, welcomed
Brown's move to give more power to the OFT. Having a more
interventionist OFT could help users to resolve software-licensing
issues, he said.
"When the Elite Group [the IT directors' organisation within the
British Computer Society] was discussing strategies to deal with
Microsoft's licence changes earlier this year, we were told that we
could go to the OFT.
"However, a complaint needed large volumes of specific evidence,
which would have been hard to compile and, inevitably, open to
legal challenge," he said.
"Allowing the OFT to be more proactive could help. It would be
getting the UK in line with best practice globally."
Graham Fisher, senior analyst at Bloor Research, agreed that the
chancellor's proposals could have an impact on software companies
which may be acting in an anti-competitive manner. But, he warned,
"It opens the doors for any sort of complaint. There will always be
dissatisfied customers, but where there is a genuine case, this is
an excellent opportunity to redress the balance."
The other main IT-related measures in the budget were the extension
of tax credits for research and development and tax relief on
intangible assets, including software and intellectual
property.
The existing tax credit to encourage research and development among
small and medium-sized companies is to be extended to large
companies, subject to a further consultation with industry.
The 2000 Budget introduced a tax credit for research and
development for small businesses and the chancellor committed
himself in the March 2001 Budget to extend this to all
companies.
But the activity that qualifies is tightly defined and will exclude
much of a company's IT-related research and development, according
to tax experts. To qualify for the tax credit a company's research
should have an element of novelty, such as creating a new software
language or operating system, said Richard Baldwin, tax partner for
Deloitte & Touche.
"Many companies are not aware that this tax credit exists," he
added. "But the relief will give quite a boost to medium-sized
companies, which will be encouraged to spend more money on research
and development."
In order to capitalise on the tax credits companies should be more
pro-active and approach the Revenue to discuss whether they
qualify, Baldwin added. Here IT managers can play a key role in
justifying a research project's value to the Revenue.
"What projects are you working on and does it involve an element of
extending knowledge and a new approach? If it does, talk to your
finance department, get your accountants on board and see if a case
can be made. [But] very often IT departments don't get involved in
this."
There was also tax relief for intangible assets, such as
intellectual property. Intangibles, on average, account for more
than 20% of the market capitalisation of UK high-tech companies,
according to a study by City law firm Taylor Johnson Garrett.
The new rules should make it more tax efficient to buy and sell
high-tech companies whose main asset is their intellectual
property, groups such as the Computer Services & Software
Association (CSSA), have claimed.
The CSSA broadly welcomed measures in the pre-budget report but
expressed disappointment that the Government had not tackled the
issue of broadband rollout for high-speed Internet access.
"The statement makes no mention of government support for broadband
infrastructure development. We now await the UK Online annual
report, due this week, for any indication of government commitment
to this issue," a CSSA spokesman said.
The chancellor also unveiled a raft of pilot training schemes,
worth more than £40m, to promote workforce training. They are
designed to ensure that adults who struggled at school can improve
their basic skills.
Although the Government has not revealed what subjects the training
schemes will cover it is likely that they will pay substantial
attention to IT skills, given the demand from industry.
The schemes will offer a combination of financial support for
employers whose staff take time off; free learning provision for
employees; and incentives to take up training.
"These are generally positive but, as in most such statements, the
devil is in the detail. Much of the benefit to companies is subject
to consultative processes before the budget proper. The further
delay in, and low level of, funding support for workforce training
and development incentives is disappointing," said the CSSA.
There was also a further move to make share options more attractive
to employees by extending tax relief. There will a 10% rate for
capital gains tax on the sale of shares held for more than two
years. This will come into force from next April.
The move has been welcomed by industry bodies, which argue that
share options help companies to attract and retain staff, while
fostering further investment in the UK economy.
Richard Holway, of analyst firm Ovum Holway, said, "We can't think
there is one reader [in business and the IT sector] who will not be
positively affected by this. However big or small your shareholding
is in the company that you work for, for your staff, for your
private investments etc. "The UK now has the best investment
climate - well, for this kind of investment anyway - in the world,
and that includes the US." However, Holway urged Brown to simplify
the shareholding process further.
The pre-budget report stuck to an evolutionary approach to
stimulating the IT sector. Tax credits and relief will be
cautiously extended and training will be revamped. One hurdle these
measures face is uncertainty about how companies can claim the new
tax allowances.
Users IT and industry bodies have also expressed disappointment
that the chancellor did not use the report to speed up the roll-out
of broadband access to the Internet. But given the depth of
problems facing the UK IT sector government support will only have
a limited effect.
Budget highlights
- Consumer associations will be able to bring "super complaints"
to the Office of Fair Trading. The move to tackle
anti-competitiveness could boost IT users in licensing disputes
with software suppliers
- Research and development tax credit extended for larger
companies. Designed to boost innovation and narrow the productivity
gap between the UK and its main competitors
- Further tax relief on the sale of "substantial" company share
options". A 10% rate for capital gains tax on the sale of shares
after two years will come into force from next April
- £40m for pilot training schemes to improve basic skills in the
workforce - IT skills are likely to play a prominent
role.
Broadband concerns
A straw poll conducted by CW360.com
revealed that the biggest disappointment for many was the
chancellor's failure to highlight the issue of broadband adoption,
although this was tempered by the news of tax cuts and cash
incentives for IT firms.
David Harrington, director general of the Communication Managers'
Association, highlighted the chancellor's failure to act on
broadband and the damage this is causing to e-commerce. "I am
intensely disappointed at a great opportunity being missed at such
a critical time," he said.
Ronan Miles, chairman of the Oracle User Group in the UK, agreed.
"I'm disappointed that Brown didn't do anything about Broadband
Britain. Having said that there's some good news about tax credit
for research and development. However," he added, "whether that
works its way into IT remains to be seen."