New economy, old attitudes

The recent spate of IT companies that have reversed their decisions to invest in the UK means that Chancellor Gordon Brown's hopes of making the country the best place to undertake ecommerce by 2002 could be a long time coming.

UK dotcoms and foreign companies claim they are stymied by stiff tax penalties if they choose to reward their employees by giving them higher levels of share ownership.

"The whole thing is a mess. It needs looking at," said Steve Rist, chief executive of online house-selling firm Easier. His reaction to the government's handling of taxation on employee share options is typical of many UK hi-tech startups. They feel that the government has levied a stealth tax against the technology sector that contradicts Prime Minister Tony Blair's rhetoric about turning the UK into a breeding ground for web entrepreneurs.

A bigger cut
The issue centres around the government's demand for a bigger slice of the cake which, in this case, is employer National Insurance contributions on the value of share options - something all firms must pay at a fixed rate of 12.2 per cent.

In 1999, as part of the last Budget, this tax was extended to include the share option incentives given to staff by their bosses. This immediately angered both UK dotcoms and those mainstream, often overseas-based technology companies that use share options as a way of attracting personnel without having to pay them huge salaries.

Any hopes in Whitehall that it had managed to quash dissent by making a series of concessions in May have now proved false, however. US data security software firm Veritas last month cited the government's policy on share option taxation as one of the core reasons for cutting its investment in the UK by 50 per cent to £250m.

"The reason we didn't go ahead was partly because of the taxation decisions by the government," said Philip Bousfield, Veritas' vice president.

And rumours continue to circulate that Cisco has decided to place 3000 jobs in the Republic of Ireland rather than the UK, for the same reason. The company has denied the reports, however.

"It's difficult for us to fill all the places we have at the company. Cisco is looking wherever it can to find the right skill-sets," said Maggie Morrison, Cisco's operations director for Scotland and Ireland.

Yet Cisco still appears a prime candidate to review its investment in the UK due to a policy of providing share options to 40 per cent of its top staff in all of the 75 countries in which it has offices.

A rod for its own back
So it is clear that overseas firms are starting to use the share option taxation issue, along with the euro problem, as a stick to beat the government's industrial policy with.

Andrew Bell, a tax partner at PricewaterhouseCoopers, claims the situation could well result in fewer international firms choosing to base their operations and research facilities in the UK, which is likely to reduce the strength of the industry, and with it, the labour pool.

But the effect on dotcoms is more immediate, according to Helga St-Blaize, co-founder of IT business-to-business site Ace-quote.com, which was acquired by Germany's DCI for DM85m (£27m) in May.

"Recruitment in the current climate is extremely hard for us, given the crash of firms like boo.com. This is yet another factor holding possible new staff back," she said.

In its defence, the government says it has listened to critics, and allowed some tax breaks on share options to go through. It has introduced two 'approved' schemes that allow gains from share options coming under the initiatives, to be paid tax free.

But one is limited to £30,000 worth of shares, a ceiling that is perceived as too low for high-flyers, while the other only permits up to 15 people to be involved. This means that firms hoping to make all of their staff rich a la Microsoft, have to conform to a 'non-approved' (and thus fully-taxed) scheme.

As a result, Rist claims that the 15-person limit is less progressive than it first appears.

"The whole company takes a risk. Why shouldn't the receptionists benefit? And customer service people probably matter more than anyone else, day-to-day," he said.

The Chancellor is unlikely to make any further concessions, however, for fear of losing face. Despite various boosts to IT in the last two Budgets, and the installation of an ecommerce minister, many feel that New Labour is still not doing enough to boost the New Economy - and rather too much to boost its own income through taxation.