U.K. budget promotes high tech: Capital gains tax reduction will help small business growth - Business & Finance - Brief Article

Electronic News, May 6, 2002 by David Manners

It might take a clever wordsmith such as Peter Mandelson to dream up the ambition for the United Kingdom of becoming the world's "digital laboratory", but it takes a pragmatic financial brain such as The Rt. Hon. Gordon Brown, MP, Chancellor of the Exchequer in England to do something sensible about it.

Reducing capital gains tax for entrepreneurs is probably the single best thing any politician can do for small business growth. When President Jimmy Carter did it in the United States back in the 1970s, Silicon Valley embarked on a boom that ended with the dot.com collapse of 2001. In doing so it created "the greatest agglomeration of wealth in the history of the planet," according to a Kleiner Perkins partner.

So it is good to see the 10 percent capital gains tax rate, which applied to the sale of companies and to the sale of shares held by executives in their companies--applying after only two years of ownership of the business or the shares rather than four years as before.

Whereas right-wing parties on both sides of the Atlantic pay lip service to entrepreneurism while in practice serving the interests of Big Business, left-wing parties pay lip service to the interests of workers in Big Business while promoting small business growth. After all, Carter is a Democrat; Brown is Labour.

Within New Labour, of course, there is the same left-wing/right-wing split. While the Prime Minister is happy to cosy up to traditional businessmen such as Bernie Ecclestone and Lakshmi Mittal, the Chancellor is supporting the high-tech entrepreneurs who he believes can bring significant, sustainable long-term wealth agglomeration to the country.

So the Chancellor's reduction of corporation tax for companies with profits less than [sterling pounds]300,000 ($437,129) to 19p (27 cents) is a step in the right direction, while he abolition of corporation tax for companies with profits under [sterling pounds]10,000 ($14,570) will help startups in their vulnerable, early years.

One has to be glad there's a chancellor who knows who are the real wealth creators in our society--perhaps a case of Scottish Presbyterian rectitude prevailing over the values of the party fundraisers.

Having heard a would-be entrepreneur recently say (not entirely jokingly) that she was put off setting up a business because of the daunting prospect of working out the VAT, it is also extremely welcome to see Brown allowing companies to assess their VAT liability by one calculation, based on a percentage of sales, rather than having to calculate it on every individual transaction.

With high-tech startups growing in number, Brown seems to have been as accurate in his assessment of where our high-tech sector is going as in his analysis of the needs of the microbrewers. It has been a long-held truism in high-tech industry that big companies are best at doing research while startup companies are best at doing the development to bring the fruits of that research to market.

Accordingly, extending the 25 percent R&D credit to large companies--where previously it only applied to small- and medium-sized companies--is good news for the entire sector. It means that as well as writing off all R&D costs as current expenditure, a company can shave an additional 25 percent of the R&D cost off its tax bill.

If this increases the amount of R&D done by big companies in the United Kingdom, it should benefit the entrepreneurial sector by growing a larger pool of U.K.-based scientists and engineers who may go on to found the startup companies of the future.

It has taken a long time for a British chancellor to present such a favorable bunch of measures for startups. Obviously the words of those high-tech entrepreneurs who've trotted along to breakfasts at Nos. 10 and 11 Downing Street have not been wasted.

David Manners is an editor for Electronics Weekly, a sister publication of Electronic News.