What the budget means for the IT sector

Opinion

What the budget means for the IT sector

I agree with Jos Creese that this emergency budget did not acknowledge the importance of IT to the public sector, writes Niki Dixon is Head of Technology at Grant Thornton. However, I would go further; this budget did not acknowledge the importance of IT to the UK economy. Although some measures will help technology businesses, overall the coalition government has overlooked a sector that could play a vital part in increasing efficiency and driving growth. Or at least overlooked it for the time being.

Dropping the landline levy was sensible but how exactly will the government incentivise private investment in broadband? A detailed plan needs to be pinned down that either takes the 'carrot' approach by providing incentives such as tax breaks, or the 'stick' approach by imposing penalties on ISPs for non-compliance. There are tough choices to be made here.

The rise in capital gains tax (CGT) would appear to diminish the attractiveness of investing in the technology sector. Equity investment has been a vital source of funds for technology businesses. Recent years have seen a reduction in the size of business that can secure the core investor tax breaks such as the Enterprise Investment Scheme. As a result many investors will be exposed to the full CGT rate with little recognition of the fact that these remain high-risk investments. On the positive side, at least the highest rate of CGT is 28% and not the 40% that had been feared.

The uplift to the lifetime limit for Entrepreneurs' Relief was helpful (up from £2 million to £5 million) but it would have been even more welcome to see a relaxation of the ownership rules for claiming the relief. The need to hold a 5% qualifying stake means this relief remains the preserve of a small minority of shareholders.

The scrapping of proposals for a video games relief was a huge blow for the sector that has been lobbying for a tax break for the majority of the last parliament. Tax breaks in other countries already have an adverse impact on attracting investment in the sector.

The reduction in corporation tax rates is of course welcome but it may come at the expense of a reduced rate on income from intellectual property, the so-called "Patent Box" company. Once again this leaves the UK at a disadvantage when compared to other countries such as the Netherlands. In contrast the simplification of the requirements for small and medium-sized enterprises claiming research & development (R&D) tax credits is a welcome move. R&D tax credits are worth in excess of £500m to British business and in the proposed consultation we hope the government seizes the opportunity to revitalise what has been an important stimulus to investment.

Niki Dixon is Head of Technology at Grant Thornton

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This was first published in June 2010

 

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