Kate's Comment

Thoughts on British ICT, energy & environment, cloud computing and security from Memset's MD

Emergency budget: An IT entrepreneur’s perspective

Today we heard the emergency budget from the new coalition government. Here are the points most pertinent to me as an IT entrepreneur running a high-growth technology company, covering corporation tax, depreciation & annual investment allowance (AIA), loans for SMEs, Entrepreneur’s relief and VAT:

1) Corporation tax. I greatly welcome the reduction in corporation taxes; 22% to 20% for the profits under £300k, 28% down by 1% per year to 24% in 4 years. The stated intent was to boost the attractiveness of business in the UK. Also, speaking for myself, less tax will enable us to invest more in Memset, growing the business faster and creating more jobs. However, these reductions in corporation tax will largely be offset by changes to capital allowances.

2) Depreciation & capital allowances (AIA). The limit on deprecation for tax purposes has been changed from 20% to 18% (5 years to 5.5 years). Given that IT equipment depreciates at more like >33% in real terms this is a bit of blow since capital-intensive IT companies will end have to pay more tax up front, which will further reduce our growth rates.

Therefore, while a little esoteric, this is certainly bad news for British managed hosting and cloud computing providers like Memset. It will also makes it harder for us to compete on the world stage, especially when the weak pound and the fact that all computer hardware is imported is taken into account. Our international competitors are allowed to depreciate their equipment at realistic rates and pay less for it. Unfortunately, IT seen as a service sector by government, and they do not appreciate that we are an industry with plant machinery that has a very limited shelf life.

Also, the Annual Investment Allowance (AIA) on investment in equipment has been slashed from £100k to just £25k which will especially hurt small IT and manufacturing companies. It was only increased from £50k to £100k in April, however, so in reality it is only a halving of what was already a pretty small allowance. From my perspective as an Infrastructure as a Service (IaaS) provider, this will probably discourage people from owning their own hardware so not necessarily bad news for us!

3) Loans for small businesses. The Enterprise Finance Guarantee scheme (EFG), which guarantees small business loans to mitigate the risk to banks, is being extended from £200m to £700m. However, the EFG as it stands is broken. It was supposed to help banks lend to entrepreneurs without requiring large personal guarantees, but the banks are not honouring that and still will not share any of the risk. The EFG needs fixing before it gets extended, but there may be a silver lining in the form of a vague promise to lean on banks to lend more to smaller companies.

The newly announced “Growth Capital Fund”, also supposedly intended to fill the growth capital gap, seems far too small a measure to be generally useful at only £25m.

4) Entrepreneur’s relief. As you would expect, I am pleased that the £2m entrepreneur relief being extended to £5m gains over a lifetime. Entrepreneur’s relief is a Capital Gains Tax (CGT) concession, limiting it to 10% when selling a company, up to a certain value over a lifetime, which replaced the old CGT taper relief scheme. Since CGT is being raised from 18% to 28% this is especially pertinent.

Although I’m not looking for an exit any time soon, this scheme is important to encourage new entrepreneurs and investors. To attract bright, talented people away from more normal, safe careers the allowance needed to be in that higher range – the old taper relief scheme was one of my motivators for starting Memset. It is worth noting that entrepreneur’s relief only applies where you own more than 5% of the business.

5) VAT. On a more personal note, I also welcome the VAT increase to 20%. Taxation at the point of spending is one of the fairest taxing methods since people can choose. Most essentials (food, rent, kid’s clothes) are already VAT free, and it is only 5% on gas and electricity. Essentially it is a tax on buying luxuries, and if you want to be a saver you don’t have to pay it.

Also, as we saw with the VAT reduction, a change of 2.5% in the headline price of consumer goods has little impact on consumer spending. It will not affect most businesses significantly either since we can pass is straight through. As for the admin burden of a change, having done it twice recently means we are well-practiced so it should not be an issue.

6) Government carbon commitment. Finally, snuck into the document is a commitment to cut government’s CO2 emissions by 10% between May 2010 and May 2011. I think this is great news; it is about time our government started leading by example. Also, I believe this could be a great opportunity for the IT sector as we enable many carbon-saving technologies (eg. teleworking for car transport avoidance).

Overall, I am pleased with this budget. It was tough enough to hopefully get us out of our enormous national debt, does not dramatically cut back on the public services from which we all (as opposed to just those supported by the state) benefit. It also supports businesses small and large, giving us a real chance to be the engine that will lift us out of financial troubles.

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