Tax policy alienates industry giants

Tony Blair claims that the UK will lead the world in ebusiness. Tell that to Oracle and Cisco, which are both hinting they may curb investment in the UK because of the government's tax policy on employee share options.

Oracle told Computing; that it will seriously reconsider future investment in the UK if the supposedly harsh national insurance tax imposed on share options granted by IT firms is not altered.

"If Oracle was thinking about moving or expanding its European headquarters, I think it would be thinking twice or three times before we chose the UK," said Vance Kearney, the company's UK vice president of human resources.

"For a variety of tax reasons, the company will always seek the most benign place to site expansion, and this is one more tax tipping the scales," he said.

The fuss is over an apparently obscure measure in the 1999 Budget, when Gordon Brown imposed employers' national insurance contributions - an extra 12.2 per cent on the rise in value in share options of non-approved schemes.

This means a company that granted its staff a modest £10,000 in options without using a Treasury-approved scheme, and then saw its shares increase in value from £1 to £100, would have to show that it can meet the national insurance bill for the £990,000 rise in the value of the shares. This could be a serious problem for highly-valued, but low-revenue dotcoms.

Investment bank PricewaterhouseCoopers said last month that the tax meant several UK IT firms were technically insolvent.

Last minute lobbying
Highly public start-up Lastminute.com also joined the throng of IT firms lobbying for a change in the law. It emerged this week that the company may face a tax bill of up to £3.5 million as a result of the legislation.

Employers may shift the burden onto employees, asking them to sign a voluntary agreement to pay all or part of their employers' national insurance costs. Legislation to allow this will be included in the Child Support, Pensions and Social Security Bill, currently working through the Commons.

As reported in Computing on 30 March, Chancellor Gordon Brown's Budget announcement that he would consult on this tax, rather than dump it, went down very badly with the IT industry.

The issue came to a head when Cisco publicly criticised the government's stance on the taxation of share options. The Prime Minister is known to be a big fan of the networking giant, which employs 1000 staff in the UK, and has plans to expand this to about 5000. But Chris Dedicoat, Cisco's UK managing director, said last week that the company was having second thoughts.

"The tax is a big threat," he said. "The UK is a great place for us. It attracts highly qualified people, and there are lots of benefits of doing business here. But if the tax remains the same, we will have to look at where we develop our products, and where we have our European support operation."

Cisco played down Dedicoat's outburst last week, first saying that immediate expansion plans would not be affected, and then refusing to comment at all.

Other US companies with major UK subsidiaries were less reticent. "This extra cost fails to recognise the key role that stock options play in rewarding employees in many IT companies," said Christina Smedley, director of communications for bookseller Amazon's UK operation. "It is a powerful disincentive to high-tech employers locating their operations in the UK."

Microsoft UK said it was unaffected by the tax, because it only hits share option schemes that do not fit into categories approved by the Treasury, and Microsoft has a UK-specific scheme. However, a spokeswoman said it might tip the balance for other companies considering where to place a site.

Max Thowless-Reeves, of analysts Richard Holway, agreed. "It would never be a reason to up sticks. But it might be considered by those who were looking to invest in the UK," he said.

A taxing problem
Minister Patricia Hewitt promised 'speedy consultation' to resolve the issue, but opposition leader William Hague told the Commons: "Either the Prime Minister is unaware of what is happening to the high technology sector, or he does not care."

Blair was quick to stress how seriously he took the IT industry's views. "If firms such as Cisco have legitimate concerns, of course we have to deal with them, but we also have to deal with tax avoidance," he said.

Hague recalled the IR35 tax reform, which will hurt contractors turning themselves into one-man companies to lower their taxes. The Professional Contractors' Group is applying for a judicial review, claiming it contravenes European competition law. Regardless of the government's moves on share options, IR35 looks to be a lost cause for contractors.

"We made our decision last summer," said the Chancellor. "Everyone should pay a fair rate of tax, and there should be no tax avoidance." A case of no taxation or no representation?