Sting in the tail of the chancellor's high-tech largesse

Opinion

Sting in the tail of the chancellor's high-tech largesse



Suki Gallager

Opinion

In his latest budget, chancellor Gordon Brown made moves to try to get organisations big and small to make the leap into e-business. I was a little worried, however, when his offer of tax incentives against the purchase of IT equipment met with widespread acclaim.

Brown promised that, for the next three years, any small or medium-sized enterprise (SME) buying computers, or investing in e-commerce and new IT systems will be able to write-off 100% of the cost in the year of purchase.

A very generous offer, it would seem, an SME passport to the Internet age. But if you look a little closer, it all seems much less appealing.

The fundamental objective of any business is to bring in cash. But cash really is a precious commodity - and not usually readily available to small businesses.

For the purpose of this piece, we'll say a company is small if it satisfies at least two of the following conditions, or did so in the previous year: turnover of less than £2.8m, assets of not more than £1.4m, and no more than 50 employees.

Investing in IT is not a cost to a business but an investment in the future of a company. If you look at how far IT has come it's easy to see this. Five years ago we relied on the fax and phone. Now most business users have access to e-mail, extranets and the Internet, and it makes things a damn sight easier. And those businesses that have embraced these technologies are, for the most part, much better off for it.

But IT is an investment unlike most others. Whereas most deliver very visible rewards (or losses!), return on investment is much less tangible with computer equipment and software. And with the speed at which technology moves it becomes a rapidly depreciating asset.

So does it make sense to knowingly cut away the benefit of working capital within the business? After all, that's what the Chancellor is encouraging.

Unfortunately, what the Government gives with one hand it often takes away with the other. Companies that sign up to this incentive expecting a cash handout at the end off the tax year will be sadly disappointed. What they appear to gain through tax breaks, they could lose in terms of capital, stability and a comfortable existence. And all for equipment dropping in value before their eyes.

So why take the burden of depreciation of the asset from your profit and loss account? Why put a business in jeopardy through reliance on its bankers when it is forced to deal with situations that it is impossible to predict, because it has no cashflow? Why spend cash on an IT solution that it is going to take time to implement, before you even start to get a return on investment?

Leasing is the obvious alternative, with equipment paid for on an ongoing basis in installments rather than a lump sum. The added benefit of this is that obsolescence and depreciation are removed from the equation. Kit is upgraded as and when without large extra costs.

If that's not the route businesses decide on, then they should at least be careful. There is no point veering away from a cautious approach to IT spend just because of the so-called promise of "cash-back" at the end. Companies that forget this and jump feet first into large IT projects will inevitably find issues at best - at worst, they could lose their business.

Suki Gallager is managing director of Corporate Computer Lease PLC

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This was first published in August 2000

 

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