FINANCE - Budge IT
While resellers raised a glass in deference to the Chancellor's decision to freeze duty on alcohol, last week's budget will have far more reaching implications for the industry. Gordon Brown's focus on promoting computer literacy, usage and investment could keep champagne corks popping well in to the millennium.
When Gordon Brown rose to speak to the House of Commons, it was aecision to freeze duty on alcohol, last week's budget will have far more reaching implications for the industry. Gordon Brown's focus on promoting computer literacy, usage and investment could keep champagne corks popping well in to the millennium. pretty safe bet he would put up tobacco duty. But few expected his repeated emphasis on the importance of IT in the UK economy.
The Chancellor revealed a number of measures - including the government's focus on encouraging IT spend, venture capital incentives for small hi-tech firms, and tax breaks for serial entrepreneurs - which will have a knock-on benefit for resellers and all players in the IT sector.
The targeted tax cuts and public investment were intended, Brown said, 'To equip all our companies and all our people for the newest and most decisive economic challenge of the 21st century - mastering information technologies, from the PC to the internet, from email to e-commerce'.
Resellers immediately applauded the importance placed on increasing IT usage. 'The best parts of the Budget for us were the focus on IT generally and on SMEs,' says Andrew Robins, business development manager at London reseller and service company PNC. 'Chancellor Brown is really pushing the nation towards IT and we are happy about that. These are steps in the right direction.'
Professional advisers also noted the Chancellor's IT focus. 'The Budget is good news for resellers because of all the proposed support for IT,' says Geoff Edwards, company tax expert at accountancy firm Grant Thornton.
'The Chancellor said everybody should be able to use a computer.'
On the government spending side of the IT drive, Brown announced additional government funding of #500 million to launch a computers-for-all initiative.
'Our target is a national network of 1,000 computer learning centres - one for every community in Britain,' he said in his Commons address. 'They will be in schools, colleges, libraries, in internet cafes and on the high street ... We will pioneer a system under which local partnerships will be able to loan computers and software in the new century, the way local libraries have loaned books in the last century.'
Alongside this public spending, another key part of Brown's national IT strategy is the facility for employers to loan computers to staff for personal use without this being deemed a taxable benefit.
'In the past, there would have been a tax charge for the employee of 20 per cent of the cost of the PC unless you could demonstrate that it was for business use,' says Iain Stewart, corporate tax partner with KPMG.
'Now you don't have to do that, so I can see PCs being part of employees' packages and that will boost demand for computers.'
Edwards agrees: 'This means employers can go out and buy PCs and lend them to staff. They can be used at home for private use and not incur a benefit-in-kind. That's good news for resellers because it creates a larger market for their products.'
This change could be particularly attractive for employers offering flexible benefits packages to their staff. With these pay schemes, employees effectively choose from a shopping list of potential benefits, which often include health insurance, pensions contributions and gym membership. Having a PC at home could now become another option.
'This could be a bit more tax efficient for employees (who want PCs at home) without the employer necessarily increasing its employment costs,' says David Bellringer, a tax partner at Arthur Andersen. 'You can get a pretty good set of computer kit with #2,000.'
Brown's encouragement of wider use of IT wasn't just confined to the corporate sector. He also offered support for teachers buying computers for use at home.
'Brown spent a lot of time talking about a number of measures to improve the general spend on IT in the UK and a lot of that will benefit the resale sector,' believes Lars Andersen, director of Cavendish Corporate Finance.
'It seems the government has realised the importance of supporting the technology sector. The amount of stated and implicit support from the government for the sector is a very positive aspect.'
While the implications for resellers are obvious, software developers may also feel some longer term knock-on effects as users become more sophisticated in their understanding and expectations of the uses of IT.
'The impact on my company will come from the fact that there will be more sophisticated users of the software, as well as there being greater and wider use of IT,' says Jeff Smith, sales and marketing director at ACT Medisys, supplier of healthcare information systems. 'This will affect how we develop software. People will be more confident with IT and place greater demands on suppliers, which is fine. For years we have said we can provide products in advance of what people were demanding. It would be nice to get to the stage where people are really exploiting the potential that IT offers. It will be good for everybody.'
The government's interest in promoting the use of IT was also emphasised by Brown's announcement that people and businesses will be able to file their tax returns electronically by April 2001. The government will even offer tax incentives to encourage take-up of electronic filing.
On top of this, Brown also announced the launch of Individual Learning Accounts designed to promote adult learning, training and skills development.
People who open these accounts will be eligible for government funding for training courses, with particularly favourable subsidies for certain courses.
For example, from the year 2000, every adult in the UK will be eligible for an 80 per cent discount on the cost of computer literacy courses.
'If evening classes start focusing on computer literacy, there may be a head of steam that will build up, creating a bigger demand for IT kit at home,' says Bellringer. 'Perhaps retailers would be advised to start talking and planning with local colleges to help them support such ILA courses.' They may be able to sell more computers as a result, he suggests.
Greg Carlow, managing director of reseller Repton, appreciates the Chancellor's IT emphasis, although he is not carried away by the size of the sums offered to boost investment.
'One side of this is the money, the pound notes,' he says. 'When you look at the Budget in cold terms it doesn't look desperately significant.
But there is another aspect - the big intangible in terms of the momentum, the trend, the thing that's seen as cool to do - the fact that computer ownership and usage has been identified as something positive. That all contributes to the bandwagon. The fact that the Chancellor, in a cold black and white environment, picks out our industry's product has to help keep the momentum going.'
Brown's desire to encourage hi-tech businesses was also shown by his plans for a #20 million Venture Capital Challenge Competition to encourage investment in fledgling hi-tech SMEs with growth potential. He also intends to introduce a tax incentive to promote corporate venturing, where larger, well-established firms will be given incentives to team up with and invest in smaller, cutting edge companies.
In addition to these schemes, the Chancellor also announced an Enterprise Management Incentive to provide tax relief for certain forms of equity-based remuneration. The scheme will be targeted towards small, higher risk trading companies, the aim being to improve their ability to attract high calibre management.
David Pinches, group marketing and product director at QSP - a company which provides financial software, professional services and e-commerce systems - says the venture capital and Enterprise Management initiatives are good ideas. 'I spend a lot of time on the West coast of the US, as well as over here, and there is a massive gulf in culture and the way startups can be funded and brought to market. It's as wide as the Atlantic.
Anything that can help bright people here develop products and bring them to market is a good thing.'
Although Patrick Stevens, entrepreneurial business tax expert at Ernst & Young, doesn't think the Chancellor has done that much for entrepreneurs, he does express some interest in the Enterprise Management Incentive scheme.
'It seems that if you are in a good job, and are persuaded to go out into a risky business, you can be given #100,000 worth of equity tax free,' he says. 'That could make a difference to smaller companies. In the IT industry, for example, you are looking for high-powered individuals who can take a company and make it go.'
But as far as Stevens is concerned, the Budget was 'much ado about nothing'.
'I am disappointed that Brown hasn't been braver with the tax system.
If you want to make a difference in entrepreneurial businesses, you have to do something a bit bigger and braver.'
As for those who get a thrill out of starting or investing in growing companies - the so-called serial entrepreneurs - they now have fresh encouragement to keep on investing. Private individuals who make a gain from an investment in a company under the established Enterprise Investment Scheme (EIS) and who then defer that gain by reinvesting in another EIS firm, can now get cumulative tax relief. So-called taper relief will apply so that, in effect, investors will pay less tax by reinvesting.
This is particularly relevant to the reseller market, as Andersen explains.
'We are starting to see a concentration in the resale sector with quite a lot of mergers and acquisitions going on,' he says. 'The taper relief for serial entrepreneurs could be beneficial for company owners. They could sell their resale business to a large reseller and then start again.'
It isn't just those setting up companies who benefit from the Budget.
Brown also launched an employee share ownership scheme under which staff will be able to buy shares in their company out of pre-tax salary, while any gains arising on the shares will be tax free as long as they are held in the scheme for at least three years.
'This scheme must be open to the whole of the workforce,' says Douglas Fairbairn, head of tax at Ernst & Young. 'It's a radical change and could well catch on.'
PNC's Robins adds: 'We operate a share option scheme here. I'm not sure if this announcement will affect us, but it's good to support share ownership. In Silicon Valley everyone owns a share of their company.'
Pinches is also enthusiastic about the Chancellor's aims to increase employee share ownership. 'It's a well known fact that that when employees have shares in the company they feel more driven to perform for the business,' he says. 'I have worked for both US and UK companies and in America staff share ownership is widespread.'
SMEs in general received favourable attention in the Budget and many IT-related companies are in this bracket. 'In the resale sector the small, innovative companies could benefit the most,' says Andersen, referring to the Enterprise Management scheme.
But Brown also announced the extension of 40 per cent first-year capital allowances for SMEs for another year and this could itself be good for resellers. 'There is an incentive for small businesses to replace their IT in that year,' says Edwards. In other words, some may be tempted to bring forward IT spending to make sure they get maximum tax allowances up-front.
Looking ahead to future Budgets, taxing internet sales must at some point become an issue. 'Somebody has got to grasp the nettle about taxing transactions on the internet,' says Carlow. 'You can buy something in the US over the Net, have it delivered and no taxes are paid. The seller is not putting on State sales tax because it's an export. The customer in the UK receives the goods and there is no tax. You can't have a situation where people are getting away with this en masse because the country won't be able to pay for anything.'
But this is a problem Brown left alone this time. He did, however, flag up another issue set to become increasingly important to the government and to industry - the need to protect the environment and save energy.
His plans to introduce a levy on business use of energy from April 2001 could also benefit resellers of selling environmentally friendly PCs and IT systems.
'Looking ahead, companies are going to be taxed on energy usage,' says KPMG's Stewart. 'So smarter computers that go into sleep mode when they are not being used, and all those that are low energy users, will be attractive.'
Again looking ahead, but this time in terms of likely economic growth, some immediate comment following the Budget suggested Brown may have been a little optimistic in his forecast for the UK economy over the next couple of years. However, resellers and other players in the IT industry probably don't need to worry too much about that. As Andersen points out, the technology spend in the US is a greater proportion of GDP than in the UK. 'Resellers have scope for growth,' he says. 'They can expect a higher growth rate than the economy as a whole.'
Although commentators will need to spend more time picking over the details of the Budget to get a full perspective of the implications for the IT sector, there is an overwhelming feeling that the emphasis on IT is a good thing.
'Brown sent a message that IT is important,' says Ken Olisa, managing director of Interregnum Venture Marketing, a specialist IT venture marketing firm. 'Brown said the country has to be computer literate. The government's focus on lifelong learning, for example, is all about improving the skills base and that's really rather exciting. If we were in the US, no one would care what the government said about this. But here, it is important and this is a big message. The challenge now will be to take advantage of what has been created and the trend that is being signalled.'
Resellers, in addition to the direct impact they will notice from the Budget's tax changes and initiatives, will almost certainly feel the benefit of his encouragement of the hi-tech sector.
Andersen's conclusion on the Budget is upbeat. 'There are a lot of important signals in it,' he says. 'Some will turn into cash for resellers tomorrow and some are indicative of higher growth in the reseller industry that will appear in years to come.'
HOW IT AFFECTS YOU: THE ENTREPRENEUR
1998-99 1999-00 Change pa
Salary 150,000 150,000 0
Income tax (59,009) (59,219) (210)
National insurance (2,256) (2,257) (1)
Share dividends (after tax) 75,000 75,000 0
Tax relief on #15,000 pension 6,000 6,000 0
Tax relief from #10,000 EIS investment 2,000 2,000 0
Tax relief from #10,000 VCT investment 2,000 2,000 0
Mortgage repayments (31,514) (31,514) 0
Domestic fuel bills (945) (945) 0
Net income 141,276 141,065 (211)
Duty
(Wine) (728) (728) 0
(Spirits) (780) (780) 0
Gain/Loss (211)
Car benefit 11,667 12,500
Fuel benefit 1,890 2,270
(Assumptions: Entrepreneur taking #150,000 salary and #100,000 dividends;
company car: #50,000, (4,000cc; 5,000 business miles pa, fuel provided by
company); domestic fuel: #900 + VAT; mortgage: #450,000; interest rate:
7.05 per cent (interest only); drinks: wine - two bottles/wk at #7 per
bottle, spirits - one bottle/wk at #15 per bottle; relief on VCT and EIS
investments given at 20 per cent; net income after mortgage, pension and
fuel bills.)
Source: Arthur Andersen.
First printed in The Independent, 10 March 1999.
THE SALES EXECUTIVE
1998-99 1999-00 Change pa
Salary 25,000 25,000 0
Income tax (4,656) (4,558) 98
National insurance (2,234) (2,157) 77
Rent (5,400) (5,400) 0
Domestic fuel bills (420) (420) 0
Net income 12,290 12,465 175
Duty
(Wine) (415) (415) 0
(Petrol) (965) (1,021) (56)
(Cigarettes) (1,238) (1,301) (64)
Gain/Loss 55
(Assumptions: Single woman earning #25,000 pa; domestic fuel: #400 + VAT.
Own car: 10,000 miles pa at 30mpg; unleaded petrol at 65p/litre; drinks
two bottles of wine/wk at #3.99 per bottle; smokes seven packets/wk at
#3.40. Net income after rent and fuel bills.)
Source: Arthur Andersen.
THE RECENT GRADUATE
1998-99 1999-00 Change pa
Salary 17,500 17,500 0
Income tax (2,931) (2,833) 98
National insurance (1,484) (1,407) 77
Rent (5,400) (5,400) 0
Domestic fuel bills (420) (420) 0
Net income 7,265 7,440 175
Duty
(Beer) (1,144) (1,144) 0
(Cigarettes) (1,238) (1,301) (64)
Gain/Loss 111
(Assumptions: Recent graduate earns #17,500 pa; rent: #450 per month;
domestic fuel: #400 + VAT; drinks: 10 pints beer per/wk at #2.20; smokes
seven packets a week at #3.40. Net income after rent and fuel bills.)
Source: Arthur Andersen.
THE YOUNG PROFESSIONAL COUPLE
1998-99 1999-00 Change pa
Salary 100,000 100,000 0
Income tax (31,551) (31,238) 313
National insurance (4,512) (4,514) (2)
Tax relief on #3,000 pensions each 2,400 2,400 0
Mortgage repayments (9,306) (9,306) 0
Domestic fuel bills (840) (840) 0
Net income 56,191 56,502 311
Duty
(Wine) (1,820) (1,820) 0
(Spirits) (180) (180) 0
(Cigarettes) (1,238) (1,301) (64)
Annualised stamp duty cost (3,000) (3,750) (750)
Gain/Loss (503)
Car benefit 4,667 5,000
Fuel benefit 1,280 1,540
(Assumptions: Dual income family with no children. She earns #65,000; he
earns #45,000; company car: #20,000 (2,000cc; 5,000 business miles pa;
fuel provided by employer); mortgage: #135,000; interest rate: 7.05 per
cent (interest only); stamp duty halved as intend to move house in two
years to #300,000 property; domestic fuel: #800+VAT.
Drinks: wine - five bottles/wk at #7 per bottle; spirits one bottle/mth at
#15 per bottle.
She smokes seven packets of cigarettes/wk at #3.40. Effect of pension not
included in income tax figure. Net income after mortgage, pension and fuel
bills.)
Source: Arthur Andersen.
THE DUAL INCOME FAMILY
1998-99 1999-00 Change pa
Salary 50,000 50,000 0
Child benefit 1,043 1,043 0
Income tax (11,981) (11,845) 136
National insurance (3,690) (3,614) 76
Value of MCA 285 197 (88)
Tax relief on #3,500 pension 1,400 1,400 0
Mortgage repayments (5,429) (5,429) 0
Domestic fuel bills (840) (840) 0
Net income 30,788 30,912 124
Duty
(Wine) (780) (780) 0
(Spirits) (180) (180) 0
Gain/Loss 124
Car benefit 4,667 5,000
Fuel benefit 1,280 1,540
(Assumptions: Dual income family, plus two children. He earns #33,000, she
earns #17,000; company car: #20,000 (2,000cc; 5,000 business miles pa;
fuel provided by employer); mortgage #80,000; interest rate: 7.05 per cent
(interest only); domestic fuel: #800+VAT; drinks three bottles/wk at #5
per bottle; spirits one bottle/mth at #15 per bottle. Effect of MCA and
pension relief not included in income tax figure. Net income after
mortgage, pension and fuel bills.)
Source: Arthur Andersen.