A taxing time for dotcoms

UK Prime Minister Tony Blair's government has come under fire again this month from beleaguered dotcom businesses complaining about high levels of taxation compared with the rest of Europe and the US.

Chris Gent, chief executive at Vodafone Airtouch, the world's biggest provider of mobile phones and the UK's most highly valued corporation, is threatening to move the company's headquarters out of the country - the result of another tax spat between the government and hi-tech industries. It gives a new meaning to the phrase mobile phone company.

"Pretty much anywhere in Europe would be more competitive than the UK," he said, adding that he was hopeful the government would review its tax policies.

But this appears unlikely. "We're not budging," said a Treasury spokesperson. The Confederation of British Industry is trying to broker a compromise, but Gent's stand has made this difficult without someone losing face.

Tax shelters
The issue has come to a head over changes, announced in last March's Budget, aimed at firms minimising corporate tax bills by using offshore subsidiaries known as 'mixer' companies.

These are used to funnel profits made in low corporate tax territories - such as the Isle of Man, which has a 10 per cent corporate tax rate - into the UK, where the rate is 30 per cent.

But the Inland Revenue sees it differently. "We'd want the balance of 20 per cent. We will want to claw back what we think is ours," said a spokesperson.

The changes in question are aimed at destroying this particular tax shelter, and Vodafone says the measure will cost it £500m in its first year of implementation.

Share options
Meanwhile, the row over another Budget move - that of charging National Insurance contributions on the proceeds of share options - is still fermenting among angry UK dotcoms.

Jim Rose, chief executive at UK web auction firm QXL, has joined those condemning the move, although he said he would not transfer the firm abroad as a result. The company's annual results saw £11.6m set aside to meet the share options charge - a figure that is rather more than QXL's sales of £6.89m.

US firms Oracle and Cisco, both of which have substantial UK operations, have also talked about the possibility of leaving the country because of the charge, although Ian Smith, Oracle's UK boss, played down the issue.

"We have been in discussions with a number of other IT companies, including Cisco and Sun Microsystems, and the government," he said. "But I don't think at any time we've really threatened them, and I think the government's been listening."

The government has made one concession, however, suggesting that liability for National Insurance contributions could be transferred from employer to employee.

This would mean that companies such as QXL would have a healthier balance sheet because they would not need to set aside millions to cover share option taxes. But staff would see nearly half the value of their share options taken from them by the state.

IR35
And then there is the much-maligned IR35 issue. This change, announced in last year's Budget, was designed to stop many freelance workers paying less tax by remunerating themselves largely in lightly-taxed dividends.

If IR35 is to form the template for Labour's taxation policy, however, the proposed concession on share options is likely to be the only one the government makes. The Treasury moved just once on IR35, making five per cent of income tax-exempt to cover the costs of running a company. But that was it, and the tax change is now law.

The government's tax policy is effectively a reflection of mixed feelings among the UK public. In the US, where middle class voters without children receive very little for their taxes, slashing public spending is popular. But here, most people use and support the existence of such institutions as the National Health Service (NHS).

Labour, however, seems to fear the public's reaction to explicit rises in taxation, or to egalitarian socialist policies regarding the redistribution of wealth by which the rich are supposed to become poorer and the poor richer. This is despite the fact that government statistics show current taxation policies to be achieving this aim - if only modestly.

One uncharitable conclusion would be that Labour has taken every opportunity to raise taxes in ways that tabloid newspapers have not taken the time to explain to their readers, such as the three complex cases mentioned here.

But all the changes - bashing offshore funnelling, taxing share options in the same way as any other income and doing much the same with contractors and their dividends - are aimed at hitting the rich and powerful, who have access to things like share options, offshore subsidiaries and shell companies, in favour of the poor, who simply do not have access to such creative accounting.

And if IR35 is anything to go by, the government isn't scared of being an irritant to technology firms to boost popular services like the NHS.

Losing the head office taxes of a company currently valued north of £200bn might make it think again, however. Chris Gent or the Iron Chancellor: who will blink first?