What has the budget ever done for IT?

Feature

What has the budget ever done for IT?

As the chancellor Gordon Brown prepares to deliver his latest budget speech, Mark Vernon looks back at what this Government has given the IT industry, and to the future to see what might be coming

Gordon Brown's budget speech on 17 April will be his sixth. But it will be his first in an economic downturn. His rhetoric will be characteristically pro-business and pro-competition. But if budget-watchers within the IT sector have learnt anything since 1997 it is that with Brown the devil is in the detail.

He will undoubtedly follow his evolutionary approach to stimulating the computer industry, notably in the shape of tax relief for research and development and training incentives. Perhaps there will be some surprises to boost IT investment and pull us out of the slump, as well as steadying policy in relation to macroeconomics.

But with criticism of the complexity of Brown's interventions rising to a peak last year, might he also opt for some simplifying measures? No-one will know for sure until the chancellor stands up at the dispatch box, but we can perhaps get a pretty good glimpse into his mind by looking at what he has done in the past.

The hallmarks of Brown's approach to IT were stamped at the start. In 1997, he announced he was helping "leading-edge businesses gain funds to develop new technologies", which is code for introducing tax relief for IT companies. He also went for measures to improve investment in R&D and promised to cut corporation tax and abolish advanced corporation tax. At the macroeconomic level he sought to improve the UK's international standing by encouraging global competition "through innovation and investment", words the IT sector likes to hear since it chimes well with their business models.

By 1999 there was more flesh on the bones. The Government announced its National Computing Strategy, worth £1.7bn, to build skills and training centres in the shape of 1,000 IT learning centres in schools, libraries and business locations. Brown introduced specific tax credit measures to stimulate high tech start-ups, and with an eye to Silicon Valley, a review of share option schemes to create incentives for staff. And there were some nice touches for small businesses such as allowing shops to lend computers tax free to employees based at home.

However, it was also in 1999 that people started to wise up to his rhetoric. For example, 1,000 centres were promised in the National Computing Strategy, but only 30 appeared fast.

The budget in 2000 might be regarded as the most important IT budget to date. In fact it was soon called the e-budget. Brown's calculated tone was significant. He said, "The budget is built on the realities of the new economy" and he wanted to "see Britain as the best place for e-commerce, and up with the US as soon as possible".

Devil in the detail
And there was detail too with three significant announcements. First, was a three-year period in which small- and medium-sized enterprises (SMEs) could write off IT equipment in one tax year. The measure is in its last year this year, a fact not forgotten by the Computing Services and Software Association (CSSA), which is lobbying for its extension. Second, the maximum number of people who could benefit from tax-friendly stock options of up to £100,000 was extended from 10 to 15. The idea was to encourage start-ups not able to pay high salaries to their high flyers. And third, new visa arrangements were announced for non-European Union highly skilled workers in an attempt to help IT companies suffering from skills shortages.

But though they sounded good on the day, commentators soon questioned what practical use they might have. For example, the equipment tax write-off in one year is great for profit-making companies but makes no difference for loss-making start-ups and so could be seen as subsidising their profitable competitors. Also technology should only be bought when needed, not as a tax dodge.

So the question was raised whether Brown was artificially accelerating the deployment of IT by businesses and encouraging firms to go for cash purchases when other means of acquisition might make more sense. Plus, it was pointed out, the real value for technology companies is in intellectual property. Tax relief on that would be a real step forward, although some commentators believe that intellectual property should not be a government matter but left to accounting standards bodies to adjudicate. One wonders whether they think the same today, post-Enron?

A gap in what Brown announced was also quickly spotted. He failed to give a decision on employers' national insurance contributions on share options. As it stood some businesses might have had to pay thousands of pounds in extra labour costs because of a tax liability of 12.5% on any gains. The Government did later indicate that staff rather than employers could pay the amount.

But the shadow on the e-budget was cast by IR35 which took effect on 6 April that year. Though it is interesting to ask what impact it has had in the two years since. At the time, the Professional Contractors Group (PCG), which represents 14,000 self-employed IT and engineering consultants, said 66,000 small businesses would close. Whether or not that has happened is not clear. What is clear is that there was a lot of bad publicity for a government promoting e-economy. IR35 is still being chased through the courts, the last decision in the Government's favour being made by the Court of Appeal last year. The PCG pledges to fight on.

The budget of 2001 gained a more positive reception, improving on many of the announcements in 2000 as far as the IT industry was concerned. Again, tax interventions and training programmes were the major themes. Perhaps the most innovative announcement was tax relief on "goodwill", the accounting category that includes non-patented intellectual property rights. This put the UK in line with the US and is good for an acquisitive market - such as one trying to pull out of a downturn.

Another good move was extending the 10% rate of capital gains tax to all staff with long-held shares, as well as venture capitalists. Similarly, the management share ownership scheme was opened to all, not just some members of staff, although the gloss was taken off that announcement since "unapproved" share schemes were not helped, leaving individuals with options exceeding £30,000 being taxed at a higher level than direct investors. The R&D tax credit was also extended to all companies not just SMEs, although it only applied to new research. This means that companies must prove R&D "novelty" which severely limits its applicability. In fact, the second key lobby area for the CSSA this year is to get the restraint lifted. And on the training front, IT was named as one of the three industries in which staff were to be trained in an effort to meet skills shortages.

Brown also noted that he was paying off £34bn of national debt, compared to £9bn the previous year, which was possible because of £23bn raised from the auction of third-generation mobile phone licences. Telecoms might well have wondered how much of a boost the pro-technology budget it really was when Brown's auction, as opposed to beauty contest, effectively landed them with huge debt.

Criticisms about the increasing complexity of the tax code were widely voiced too, especially in relation to incentives, reliefs and benefits. The trouble is that though they target small firms they can be costly to manage and hard even to know about for SMEs. IR35 was unchanged in the 2001 budget.

So what will Brown have in store for the budget in 2002? The details of the budget that the Treasury has unexpectedly published ahead of time match the now familiar Brown extensions of measures on tax relief for R&D and tax breaks for intangible assets, used to try and boost IT sector productivity. But beyond that, the pre-budget statement in December 2001 gives us some more tangible clues. For example, according to the statement, consumers associations will be given rights to resolve software licensing disputes at the Office of Fair Trading (OFT). Plus the OFT can act more proactively, that is the onus is not just on complainants to produce evidence which can be difficult to compile. This is good for anti-competitive deterrence.

Alternatively, pilot training schemes to the tune of £40m to promote IT basic skills in the workforce were also announced. Consultation has been taking place particularly in relation to the financial help employers can expect when staff are off and the incentives offered to take up training. The CSSA is making this its third main lobbying point, to get the Government's rhetoric on life-long learning to match the actual shape and extent of its programmes. Watch the budget for details.

Boosting productivity
We also already know that the measure to allow shares held for more than two years to be sold at the 10% rate of capital gains tax will come into force in April. There will be nothing new in a re-announcement, though Brown may well dwell on it as a way of helping companies attract and retain staff. We might also note that after the 2001 budget much was made of the fact that Brown said nothing to help the uptake of broadband. He has been somewhat let off the hook following BT's recent price restructuring, but the poor penetration of broadband was certainly, in part, the Government's fault, so he might say something to speed it up.

Finally, this year more than any other since 1997, what Brown does in relation to the macroeconomic climate will be watched by all businesses, not least the IT industry. The Government can do little about keeping inflation low and nothing about keeping interest rates low too but productivity boosts are generally welcomed. Thus it is no great surprise that Brown has already announced new R&D tax credits for larger firms, in line with the CBI-TUC productivity proposals. Having said that, in an economic downturn these measures which in effect allow companies to recoup some of the money they spend on innovation without having to wait for market returns are less popular since companies simply are not so keen to spend.

Business leaders will also be concerned about tax rises. This is the first budget since Labour came to power when the need for tax rises has been widely touted before a budget. Business has already said that it should not be asked to foot the bill to keep voters happy. As a proactive measure, the CBI has floated the idea of zero corporation tax for the lowest levels of profit. If Brown did that it would be particularly welcomed in a downturn.

That year IT got
1997 and 1998 - Tax relief for IT companies

1999 - incentive schemes
  • Tax credits to stimulate high-tech start-ups

  • Review of share option schemes

  • Home-based staff of small firms get PCs on tax-free loan


2000 - The e-budget
  • SMEs write off IT equipment in one year

  • Tax-friendly stock options up to £100,000 for 15 people in a firm instead of 10

  • Visa rules changed to allow highly skilled non-EU workers to join UK companies


2001 - credit where it's due
  • Tax relief on "goodwill" - the accounting category that includes non-patented intellectual property rights

  • Extension of 10% rate of capital gains tax to all staff with long-held shares

  • R&D tax credit extended to all firms.

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This was first published in April 2002

 

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