Budget reaps some poor pickings for IT business

For both users of technology and suppliers, last week’s Budget was an elaborate ‘now you see it, now you don’t’ tease.

Since its election victory last May, the government has set up the Action 2000 campaign to tackle the millennium bug (see box), along with four working parties to look at finance, management and growth issues for high-tech businesses.

These groups were briefed to consider how taxation and financial policies could help these companies.

A couple of proposals leaked out of the Treasury working party on helping technology start-up companies before the Budget. One idea was to allow companies to sell their tax losses to shareholders, and another to introduce tax cuts on share options to help lure managers to new firms.

Proponents argued that allowing companies to sell their tax losses early in their lives, when research costs are highest but sales low, would put small high-tech companies on a similar footing to research wings within large companies, which can offset losses against profits in other divisions.

But, in the words of a Financial Times headline, these concessions to the high-tech sector were among the ‘dogs that didn’t bark’ during the chancellor’s tightly scripted 62-minute speech.

What Brown did announce was a #50m ‘university challenge’ venture capital fund to help turn scientific discoveries into commercial products and a 50% increase to #150,000 in the amount an individual can claim income tax relief on investments in company shares.

The unified Enterprise Investment Scheme coupled with the downward taper in capital gains tax rates for longer term investments would, the chancellor added, ‘do more to increase the quantity and quality of long-term investment.’

The substance of the government’s working-party approach to policy formulation landed on many desks as Brown sat down. Among the press releases and consultative documents was ‘Innovating for the Future: Investing in R&D’.

But observers looking for radical proposals and suggestions were disappointed.

Instead, the report summarised the current investment, accounting and taxation climate and posed a selection of questions.

The document makes it clear that changes in the tax regime may be considered, for example to change existing allowances or introduce a tax credit to encourage R&D, or change the rules governing the deduction of income tax from royalty payments.

Accountants with an interest in technology investment issues are invited to help the government decide whether the current accounting treatment of R&D discourages spending on innovation.

The report also asks whether the treatment of intangible assets in FRS10 is the best way to show technical ‘know-how’ in company reports and whether the current accounting treatment encourages managers to invest in innovative research.

Last year’s proposals from the Scots ICA on ‘Innovating Research and Development Accounting’ were one of the few constructive suggestions referred to in the report.

The institute called on the Accounting Standards Board last year to develop a new standard that would encourage companies to capitalise their R&D costs and allow them to amortise them over the period the business expects to benefit from the work done. FRS10 currently allows either capitalisation/amortisation or writing off R&D against revenue.

‘The ASB kept R&D out of FRS10, which means that if costs are written off against revenue, the annual accounts do not reflect what assets have been created,’ said Arthur Andersen technical partner Isobel Sharp, who chaired the Scots ICA working party.

She welcomed the government’s consultative document, but one of her reasons was because it would boost sales of the Scots ICA research paper.


Pre-Budget speculation focused on a change in tax regulations to allow consultancy and year 2000 remedial software work to be written off against tax.

The new regulations will be outlined in the April issue of Tax Bulletin.

The forthcoming changes to the treatment of millennium bug fixes will allow immediate write-offs of software and consultancy work against revenue and from 1 July, capital allowances for hardware will be raised to 50% from 25%.

Janet Adam, tax partner for BDO Stoy Hayward in Manchester, points out that with corporation tax rates reducing to 20%, and 30% from April 1999, the government is not being as generous as has been claimed.

‘If you spend #10,000 and claim revenue deductions on millennium costs and you are only getting 20% relief, it’s still going to cost you #8,000 in hard cash,’ she said.

Although the chancellor did announce an extra #100m would be allocated for computer and technology training, ‘not least to help prepare for the millennium’, Adam was ‘very surprised’ the chancellor made no formal year 2000 announcement.

‘Growing companies are going to have to invest a considerable amount.

They deserve some millennium strategy,’ she said.

Dennis Keeling, chief executive of the accountancy software developers’ trade association BASDA, also found grounds for disappointment last week.

‘Impact analysis by leading consultants has shown that the costs of economic and monetary union will be four times greater than the year 2000,’ warned Keeling.

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