The channel is set to benefit from a £420m government cash boost aimed at small and medium-sized businesses (SMEs) putting tax and payroll systems online.

The Chancellor, Gordon Brown, announced the cash injection in his first budget since the general election last year.

Firms will get £40m in the first year and £110m in the subsequent two years, increasing SME IT expenditure and boosting channel sales.

"The Carter report recognised the strong long-term case for small firms bringing their payroll systems online, and the equally strong case for cash help to enable them to do so," said Brown in his budget speech.

Electronic filing of tax payments should become mandatory by 2004 for large companies and 2007 for small firms, according to the Carter report into payroll services which was published before the budget.

It recommended cash incentives for SMEs to move to "e-filing" early. Firms will qualify for payments of up to £250 to be paid through intermediaries.

That £420m cash injection is set to filter down to distributors and resellers, and give a boost to the channel, which has been hit hard by the economic downturn and tightening of end-user IT budgets.

Gary Fowle, general manager of PC Systems at broadline distributor C2000, said the money is a sign that the government is prepared to do more than just talk about initiatives to help businesses get online.

"We've heard lots of initiatives about getting small and medium sized businesses online but grants and tax breaks is a fantastic boost and good news for the channel, which has had a tough six to 12 months," he said.

The money will be a huge boost to the IT channel, said Eddie Pacey, credit control manager at Ideal Hardware.

"It is good news for any reseller, distributor or vendor," he said. "That type of money does not grow on trees.

"[That technology] is a facet of every distributor's business and it should benefit everyone down the line. That kind of money is fantastic as the sector has had a tough time over the last couple of years."