E-Budget not all good news for ebusiness

The shine seems to be coming off Gordon Brown's Budget, at least as far as IT is concerned. From the chancellor's words on Tuesday, you would assume that the industry was paramount in his mind.

"This Budget is built on the realities of the new economy," he said, near the start of his speech. "We will meet and master a new tide of unprecedented technological change by continuing to remove the old barriers to business investment and by continuing to expand employment opportunities for hard-working families."

He didn't call it the e-Budget, but he might well have done. The speech contained a series of measures designed to help small technology businesses, including changes to capital gains tax to encourage investors, a tax write-off on computer and internet-related measures, and improvements to share ownership and share option schemes.

It also introduced new rules on work permits for IT staff from outside the European Union - those inside can already work here without visas.

Under fire
It was what was missing that has drawn fire: namely, a decision on employers' national insurance contributions (NICs) on share options. A press release issued with the Budget said the government is considering implementation, and asked for comments on the matter rather than bringing in immediate change, as hoped for by organisations such as the CSSA.

"It's a pity the Chancellor didn't take the chance to remove this stone in the shoe of the knowledge economy," said John Higgins, director general of the CSSA. "We'll have to hobble on, compared to international competitors who are racing away from us."

Employers must pay NICs on most kinds of income given to staff at 12.2 per cent, on top of the similar tax charged on staff themselves. This includes the proceeds of share options. For example, if a staffer has £1000 of share options and these rise in value to £101,000, the employer owes the taxman NICs of £12,200 or 12.2 per cent of the gain.

To make life harder, the Accounting Standards Board requires that companies should be able to account for this sum after a year. "At this moment, there are a number of UK technology companies that are technically insolvent because of this charge having to be booked," said Ian McDade, partner of accountants PricewaterhouseCoopers (PwC).

Budget bugbear
In a press meeting this morning, to be reported in next week's Computing, ecommerce minister Patricia Hewitt said there will be a process of "speedy consultation" to find a solution to this problem. However, until it is resolved, the complex issue of employer NICs on share options looks to be IT's biggest Budget bugbear.

And when added up, the Chancellor's positive measures are not as dramatic as they look. Will Hutton, head of the Industrial Society, dismissed them as "comparatively trivial" with an estimated cost of £5m to £10m, when speaking on BBC2's Newsnight.

"These are really not big revenue costs for the government, so they are not significant in terms of benefits for companies," agreed Ian McDade of PwC, adding that some of the deals may not even be widely used, such as writing off computer equipment against tax in one year rather than four, as is usual on capital equipment.

And of course there is the issue of staffing. Brown highlighted that the Department for Education and Employment (DfEE) will add certain categories of IT staff to its existing fast-track schemes for work visa processing. Work permits will be extended from four years to five, and the DfEE will build a website for vacancies. There will not be a quota, unlike the HB1 visa programme in the US.

The IR35 question
However, this all happens as the IR35 contractors' tax changes are about to be implemented, a year after it was introduced in another of those discreet Budget press releases. (This year, perhaps to lose the stigma of the IR coding, the Inland Revenue's Budget press releases used the code 'Rev'.)

In an email to vnunet.com, Peter Austin, who is building a website called castingvote.com, said this produced an anomaly - small businesses can write off hardware and technology costs against tax, but at the same time the skills needed to program the equipment will cost more. "Will it remain the case that anyone running a whelk stall can count a website as a business expense, while contractors doing web programming cannot?" he asked.

PwC's McDade highlighted another area in which the government is focusing on equipment. Tax relief is available on equipment when a company is bought, but not on intellectual property - a drawback when most of the value of technology firms is in goodwill based on the intelligence of their staff and the quality of their products. "This puts UK companies on the acquisition trail at a big disadvantage," he said.

For the IT industry, in this year's Budget - as in 1999's - the devil has again been in the detail.