Memorandum submitted by Microsoft
HOME COMPUTING INITIATIVE
Microsoft was very disappointed to hear on Wednesday
that the Government had decided to abolish the tax exemption behind
the Home Computing Initiatives (HCI). We feel particularly hard
hit by this decision as it was only three years ago, in June 2003,
that we were asked by Government to become part of the committee
that advised the rest of industry on the best way to take the
existing legislation and make it a success.
Before I provide our response I think it important
to frame this by reminding ourselves as to the objectives of the
Home Computing Initiatives as laid out by in the Office of the
E-Envoy's Consultation on Policy Proposals to Promote Tax-Advantaged
Home Computing Initiatives, dated 6 October 2003.
— Increased Internet Access, to drive
broadband adoption and to enable the Government to realise the
benefits of E-Government.
— Productivity, to make the UK the
number one country for advanced ICT skills.
— Skills & learning, to help fulfil
the Governments commitments to individual learners and support
the Skills Strategy (ICT being the third key skill alongside numeracy
and literacy).
It is important to remember the objectives above
in reviewing the Government's decision because much of the present
discussion has appeared to focus on HCI's inability to successfully
target the most disadvantaged people in society rather than the
much broader goals laid down by the Government in 2003.
I'd like to take this opportunity to formally
respond to this decision.
WHY WE
DON'T
AGREE WITH
THE INLAND
REVENUE'S
DECISION TO
ABOLITION OF
THE TAX
EXEMPTION?
As with all new initiatives it has taken a while
for HCI to really take-off but our own market data and research
from the HCI Alliance suggests that HCI now accounts for approximately
500,000 new PCs each year. Furthermore, market analysis recently
undertaken by the HCI Alliance in 2005 shows that HCI was proving
successful against its objectives with 75% of computers being
taken up by standard rate tax payers and lower and 59% to blue
collar workers. Indeed amongst the 1,265 companies to have undertaken
an HCI scheme nearly 400 were in the public sector and eight were
Government departments. Post implementation research carried out
by the HCI Alliance also showed that over 70% of all those taking
part in HCI had not intended to buy a PC before participating
in their HCI scheme. HCI may not be the total solution to the
Digital Divide but there is no doubt it is making a real difference.
HCI has been shown to be a great way to buy
a computer for those on lower pay levels or those who have no
computer experience. Computers sold through HCI usually come with
security, office productivity and e-learning software, and are
backed up by thorough support arrangements for the lease of the
PC. With affordable monthly payments and the security of knowing
the computer is leased from your employer, HCI has provided a
great solution to new computer users and we have even seen take
up from people who pay no tax due to the simplicity and security
of HCI. With many low income families unable to get credit to
buy a new PC or worried about their computing knowledge to buy
from a high street retailer, HCI provides a unique solution to
these digitally disadvantaged citizens.
In order for organisations to benefit from VAT
relief business productivity and e-learning software needs to
be shipped with the PC and this has provided enormous benefits
to both employers and employees. Employees benefit because they
get a computer with the software, learning information and support
to help them and their families to increase their computing skills,
skills which have become some important both at school, in work
and at home. Indeed ICT is now considered the third core skill
after literacy and numeracy in the Government's own Skills Strategy.
Having a computer at home also helps to improve work: life balance,
indeed the Government's own NOP poll found that one in three people
with a computer at home have more time to spend with their family.
Employers benefit from HCI because the they get a more IT literate
workforce, are able to reduce IT training costs, employees have
computer at home if they need to work out of the office and the
employer can use the tax savings generated by HCI to reinvest
in their business.
The UK HCI scheme is seen as a world leading
example of public private partnership, and since its inception
over 30 other countries from around the world have followed the
leadership of the UK Government and implemented similar schemes,
understanding the importance of computer and internet access at
home and of having a workforce with excellent technology skills.
In other countries which have had similar schemes to the UK's
HCI for a similar length of time eg Norway, the Government has
changed the legislation to reduce the yearly tax benefit to ensure
it continues to meets its objectives and actually seen an increase
in participation. We are very concerned that the decision of the
Government will both send the wrong message to other countries
with similar schemes, but also that it will affect the UK's ability
to compete globally and remain as a leading e-economy.
As an organisation we have been keen to make
HCI available to citizens who due to the present legislation are
excluded from participating in the scheme, such as those on the
National Minimum Wage and teachers for example. Over the last
year we have consulted with Government regarding extending the
availability of HCI to these citizens who we view as being a key
target audience for HCI, as well as discussing ways to counteract
the regressive nature of HCI in that the current legislation allows
higher rate tax payers gain the most through HCI. And only two
weeks ago, through the HCI Alliance, we proposed to Government
that the definition of eligible equipment should be tightened
from their initial proposals to ensure that the initiative remains
true to its objectives and is not able to be abused due to the
ambiguity of the current wording.
Since 2003, an industry has slowly developed
to support HCI and now numbers approximately 100 companies and
3,000 employees with a unique knowledge and understanding of the
current legislation and consumer market. In summary, a skilled
and experienced workforce now exists capable of efficiently and
effectively providing computers and the associated skills and
support to those citizens who are presently digitally excluded.
HCI was never designed to be a panacea to digital exclusion due
to the legislation that was created, but within this legislation
it has effectively targeted many of the citizens set out in the
Government's Digital Strategy. If the Government feels that HCI
wasn't do this job, surely it would be better to take what is
already in place and working with the interested parties to evolve
HCI rather than abolish the scheme altogether without a replacement
to take over?
We were also extremely surprised and dismayed
by the details of the end of the tax exemption. HCI has taken
since 2003 to become the scheme we see today, and Microsoft has
played a pivotal role with Intel and BT in encouraging large companies
to support the HCI market (Dell, HP) but also in supporting new
start up companies to invest in HCI (Red PC, OneCall) and bet
their livelihood on HCI. The industry responded magnificently
to the call of Government and the HCI Alliance, but now sees the
industry being closed down in just two weeks. Microsoft has already
had numerous partners contacting us to say they will now have
to close down and lay of their workforce because of this decision.
Not only will this lead to numerous job losses in the IT industry
but we also fear for many consumers who bought computers through
an HCI scheme and now may see their HCI Provider, OEM of the PC
or support outsource company go out of business leaving them with
an unsupported computer for the next three years. How does Government
intend to support those effected in this way?
OUR RESPONSE
TO GOVERNMENT
CONCERNS
We have formally been told by the Paymaster
General that the Government's decision to abolish the tax exemption
was due to four key reasons and we would like to take this opportunity
to respond to the points that the Government has raised as we
will be doing directly with the Paymaster General's office.
— Cost of a PC has reduced significantly
since 1999 and hence is affordable to the majority.
There is no doubt that the cost of a PC has
reduced since 1999 but for many we feel it still remains a luxury
purchase, particularly for many on low incomes or with poor credit
history. Analyst research from Forrester Technographics shows
that household PC penetration had not significantly increased
amongst low income households over between 1999 and 2003 and had
reached only 32.9%, however since HCI was launched in 2003 this
has increased 7% (to 39.9% in Q4 2005) which is faster than upper
income households (5.9% growth over same period). This would strongly
suggest that price alone is not the key driver of PC adoption
amongst those on lower incomes. HCI has proved an effective sales
channel because it provides a package of real benefits; reassurance
of Government/employer, easy credit and monthly payments, tax
benefit so more affordable, simple and secure process to purchase,
support for period of lease etc.
— HCI has become a significant burden
on the tax system.
The Treasury has estimated tax savings of £300
million over the next three years with the abolition of the tax
exemption behind HCI. We would be interested to know how this
figure has been calculated as unfortunately no detail has been
provided apart from that it grows from £50 million in 2006-07
to £150 million in 2008-09 which we assume is due to the
three year term of most schemes. We are concerned that these calculations
do not account for:
— Only 30% of the computer purchases
through HCI would be made through other channels if HCI did not
exist (source: HCI Alliance Post Implementation Research).
The tax saving would only therefore be on these 30% and not all
the computers presently leased through HCI.
— The tax paid by both the organisations
(approx 100) and the employees (approx 2,000) who currently work
in the HCI industry.
— The tax benefit the Government receives
from any new computer eg VAT on paper for a printer or new software/hardware.
Over three years this becomes a sizeable tax benefit with research
from France showing on its own it can negate the original loss
of tax to the Government.
We hope to be provided with the detail behind
the Inland Revenue estimates so we can ensure they have taken
a complete view of tax gains and losses in calculating their forecasted
savings.
— Abuse of the scheme—companies
offering games consoles, home entertainment centers and providing
equipment to be bought and not leased.
There is no doubt that the broadness of the
eligible equipment guidelines that support HCI have made it possible
for the scheme to be interpreted very differently eg a computer
is a machine that computes. Over the last three years we have
been aware of HCI providers testing the guidelines either with
their local tax office or through the court system where guidance
was needed eg originally Pocket PC devices were excluded but later
were deemed to meet the guidelines, however during this period
we have not been made aware by Government of specific examples
of where HCI has been abused. The legislation of eligible equipment
is clearly owned by the Government and policed by local tax offices.
There is no doubt that the vast majority of schemes (where the
majority of computers are leased) did not abuse the guidelines
and we are unsure as to why if there were a small minority of
offenders that were known about, why these organisations were
not targeted by the Government directly? As a core member of the
HCI Alliance we had been discussing with Government over the last
year how to firm up the original list of eligible equipment to
ensure that no schemes were open for abuse. The HCI Alliance would
have been delighted to support the Government in policing the
industry.
OUR DISAPPOINTMENT
WITH THE
CONSULTATION PROCESS
As a core member of the HCI Alliance we have
been fortunate to have met with both the Department of Trade &
Industry and HM Treasury in the last six months to provide our
view on the HCI market. We welcomed this opportunity and were
keen to work with the Government on agreeing how to ensure HCI
continued to meet the Government's objectives. During these discussions
we were assured that for any changes to be made to HCI that a
formal consultation process would need to be followed, and were
pleased to see that there was no mention of HCI or the tax exemption
in the pre-budget report.
As you can imagine we were therefore totally
surprised by the decision on Wednesday to remove the tax exemption
without any further discussion or consultation with the broader
HCI industry. The consultation process to set up HCI was very
thorough, indeed a full Regulatory Impact Assessment was carried
out to ensure that HCI was the right solution. Given this it's
even more surprising that the Inland Revenue felt that only two
weeks noticed need be provided for the end of HCI.
WHAT WE
WOULD LIKE
TO SEE
HAPPEN NOW
Microsoft remains committed to working in partnership
with the Government to tackle digital exclusion and to drive improved
IT skills in all UK citizens. We propose that the Government delay
implementation of the Budget change until after a thorough consultation
with the industry to discuss the Government's concerns with the
present HCI and to develop modifications to the current scheme
which could increase its impact on digital inclusion objectives
and/or increase tax flows to the Exchequer. We feel strongly that
HCI was making a real difference to digital inclusion and skills
development in the UK and that rather than scrap the initiative
altogether the Government should be looking at how to improve
the initiative to ensure it continues to meet their objectives.
Microsoft would be very happy to be part of a working party, set
up to look at how well HCI addressed Government objectives and
if these have changed over the last three years how the present
HCI scheme and associated legislation could be altered to ensure
that in the future HCI addressed any Government concerns with
the present initiative.
If after the consultation the Government remains
of the view that HCI should be abolished, then we would propose
an adjustment period of two years before the tax change is brought
in. This would allow current schemes being developed—including
those by DTI and DWP—to be implemented and would allow the
HCI industry time to plan its future in a more orderly manner.
In summary we feel that the Inland Revenue's
decision to abolish the tax exemption and hence result in the
termination of HCI will impact:
— The Government's ability to delivery
it's Digital Strategy.
— The UK's international competitiveness.
— The Government's Skills Strategy
on making ICT the third core skill.
— Confidence of industry and employers
for Government backed schemes (eg Digital Challenge).
— An entire industry that has been
created to deliver a Government initiative.
— Low skilled/income consumers who
will be affected most by this decision.
— Employers who will be denied an invaluable
employee benefit.
— Considerable loss of investment and
jobs.
Charles Eales
Digital Inclusion Programmes Manager
27 March 2006
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