Taxes threaten UK's ebusiness supremacy

The UK may lose its position as the technology hub for ebusiness as a result of recent tax changes. Industry players are still rating the UK as coming second only after Silicon Valley when considering a base for setting up an e-commerce site, but admit that recent developments are beginning to threaten its position.

Last week, while Prime Minister Tony Blair outlined his £1bn plans to get the country online, his government came under fire from hi-tech industries who threatened to leave the UK to remain competitive with Europe and the US.

Vodafone AirTouch threatened to move its headquarters out of the UK following tax rows with the Government. Chief executive Chris Gent said that anywhere in Europe would be more competitive than the UK.

Speaking at the British Gas technology centre, Blair said that the industry development we see is not so much a new economy but rather a transition of an old one. "There is no new economy," he said. However, industry players are concerned and are hoping that those words do not become prophetic.

One concern is the shortage of available ebusiness skills. IDC research suggests the UK will be short of 330,000 skilled IT professionals in 2003, compared with 155,000 this year.

Many of these skills are found in the contractors, who last April saw fiscal benefits disappear when IR35 came into force. As a result, contractors have started to accept contracts in the remaining tax havens elsewhere and are no longer part of the UK skill pool. Some have emigrated entirely, while others are commuting between countries.

Relaxing immigration
To counterbalance this effect, Home Office minister Barbara Roche has suggested looser immigration laws to encourage more overseas technology immigrants.

The 'Innovator' work visa allows internet entrepreneurs to apply with minimal capital, provided they do not need state benefits and employ at least two people. Previously, they needed at least £1m in funding.

What the minister doesn't suggest is why a contractor, given the choice between equal contracts in different countries, would pick the one where he pays more tax.

Also, this measurement is aimed at entrepreneurs who want to set up dotcoms, but doesn't cater for the much-needed engineers with networking skills to form a technical backbone for the new economy.

Reform, not remove
Conservative leader William Hague has formally committed his party to a reform of the IR35 legislation if it wins the next election, to avoid further 'brain drain' caused by contractors leaving this country.

However, his pledge falls short of earlier promises from his party to scrap IR35 altogether, made in November last year, by shadow Chancellor Francis Maude.

Professional Contractors' Group spokeswoman, Susie Hughes, gave the announcement a cautious welcome, saying she hoped "this was a real commitment".

Andrew Davis, managing director at Digital Island, said that while the UK was an important country for ebusiness, his company would draw resources from other countries for global projects. "The synergy of many companies working together in a small area stimulates ebusiness," he said.

"In this, the UK comes second only to Silicon Valley. "However, in our global projects we get most of our resources from places like Hawaii."

Richard Fiddis, chief operating officer at credit checking company Experian, joined the debate by saying that IR35 increased the scarcity of skills. "Before introducing the tax law, it should have been thought through for issues of the real world," he said.

Finding funding and a new e-envoy
Fiddis added that it had been difficult for startup ebusiness companies to find funding after the dotcom turmoil at the beginning of this year.

"Venture capitalists have not been willing in the UK," he said, "especially after the crash."

In the meantime, the Government has lost its e-envoy, Alex Allan, for personal reasons. Two successors have been touted to date, Ann Steward, director of e-government for the Cabinet Office, and Margaret Smith, director of business technology and delivery for Legal & General.

Although sometimes subject to criticism, Allan was an important part of the Government's efforts to promote ebusiness in the UK, and the industry wants a replacement found quickly.

"The new e-envoy must be top-calibre - a fighter," said John Higgins, director general of the Computing Services and Software Association. "They must drive forward the current plans aggressively and act as a champion for the new economy."