Good time for technology start-ups

Ian Mitchell

Following last week's budget, there has never been a better time to join a start-up technology company. The Chancellor has improved...

Ian Mitchell

Following last week's budget, there has never been a better time to join a start-up technology company. The Chancellor has improved the taxation regime surrounding fledgling IT companies, their employees and the people who invest in them.

The one disappointment was the deferral of a decision about national insurance (NI) on share options, with Gordon Brown deciding to consult further before proceeding. The issue is important, as for some successful start-ups it threatens to impose large additional costs that are hard to predict, while penalising them for their success.

First, the good news. Several changes to the taper rules will mean that more investors - including employees - in fast-growing technology companies will see their capital gains tax (CGT) liability fall to just 10% of the gain if the shares are held for four years. Also, changes to the Venture Capital Trust and Enterprise Investment Scheme improve their attractiveness and will increase the already growing levels of venture capital available to technology start-ups.

The dark cloud on the horizon is the treatment of NI on share options. At the moment, the Revenue is treating the grant of share options in start-ups as part of the remuneration package and therefore as subject to employer's NI. This becomes due when the options are exercised and is calculated on the gain made.

But because it's impossible for the company to know what the share price may be when the options are exercised, forecasting becomes even more difficult. The system also penalises companies for performing well and pleasing the stock market - surely something the Government cannot have intended.

Online auctioneer QXL is a prime example of a company that has suffered from this phenomenon - making the recent falls in its share price feel like a double-edged sword. The company has decided to provide for the NI charge on the granting of options and is said to have handed more than £12m to the Revenue.

It is rumoured that one way out is to pass the burden from the employer to the employee. When you take into account the reduction in CGT payable on sale of the shares, this would still leave most employees better off than they were before the budget. But employees who join start-ups and devote themselves to making them succeed deserve their rewards, and it would be preferable to scrap the NI element altogether.

The US has a far more favourable tax regime on options. It seems that, despite moves in the right direction, the UK still has some way to go before it can provide entrepreneurs with the regime they need to compete on equal terms.

Ian Mitchell is an ITanalyst with stockbroker Beeson Gregory. His opinions should not be construed as investment advice.

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