Emergency Budget analysis: Tougher times ahead for IT

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The coalition Government’s Emergency Budget confirmed that the“broadband tax” on landlines will be scrapped before it has even come into force. But the Budget, aimed at plugging a £150 billion gap in the public finances, will have wider repercussions for the information economy.

The most obvious measures, such as the new, higher VAT rate of 20 per cent, due to start from January, and a £1,000 increase in personal allowances, might well lead to increased consumer spending.

For individuals and non-VAT registered businesses, it can make financial sense to bring forward spending on “big ticket” items, such as computers and consumer electronics, before the rate increase comes in. At the margins, some lower-paid workers might also feel they have more money in their pockets.

Optimism about a short-term boost to consumer spending will be tempered, though, by the knowledge that tax rises are to come. Businesses also face several changes to taxation, which could affect their investment in technology.

Under the Chancellor’s proposals, corporation tax will fall by one per cent a year, until it reaches 24 per cent, and the rate for smaller companies will be cut to 20 per cent. From next April, the threshold where employers start to pay National Insurance contributions will rise by £21 a week.

But the changes have to be set against a less generous regime for investment, in the form of capital allowances.

Capital allowances – which determine how quickly a business can write off the cost of an asset, such as plant or machinery – are being cut from 20 per cent to 18 per cent a year.

The Annual Investment Allowance, which allows most companies to write off the full cost of their plant and machinery, up to a threshold, is being cut in half, to £25,000, although the measure will not come into force until April 2012.

A proposed tax break for the video games industry will not go ahead. There will, though, be further measures to encourage investment in “green” technology, though Mr Osborne did not provide further details.

Cuts now, cuts to come

Business groups broadly welcomed the Budget, with the Federation of Small Businesses describing the decision to increase VAT on 4 January , not 1 January, as “common sense”.

Richard Lambert, the director-general of the Confederation of British Industry, said that the changes to company taxes provided “much-needed consistency”.

“Taken together with proposals on foreign profits and intellectual property, these will help prevent and could even reverse the flow of companies overseas,” he said.

The Budget outlined that most of the work to cut the deficit would be done through spending cuts, rather than higher taxes.

However, aside from announcing plans to cut welfare bills, and stating that capital spending would be protected, the Chancellor did little to expand on the spending reductions already announced.

These include £6.25 billion of cuts announced in May, which included a freeze on any IT spending over £1m, and reduced spending on outside consultants. A further £2 billion of cuts to projects was announced last week.

The full scale of spending cuts, and their potential impact on the information economy, might not be known until the main spending round in the Autumn.

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