Cisco poised to cut UK investment

Software giant says the Government's share regulations are stifling its ambitions

Cisco Systems, which vies with Microsoft to be the world's largest company, is threatening to pull the plug on hundreds of million of pounds worth of investment in the UK over a row with the Government on tax.

The manufacturer of technology for the internet, which has a market capitalisation of $524bn (£329bn), claims that a tax on share options is stifling the UK's thriving high technology industry. Unless the Chancellor reverses the 12.2 per cent National Insurance levy Cisco will move its research & development and support services to continental Europe.

Chris Dedicoat, Cisco's UK managing director, told the Independent on Sunday: "The tax is a big threat. The UK is a great place for us. It attracts highly qualified people, and there are lots of benefits of doing business here. But if the tax remains the same we will have to seriously look at where we develop our products and where we have our European support operation."

Cisco occupies around 250,000 square feet of office space in the UK. It had planned to quadruple this by employing an extra 3,000-4,000 people at an estimated cost of over £200m. But a question mark now hangs over the expansion.

Mr Dedicoat said: "We will have to look at what happens over the next 12 months. If it [the cost of doing business] becomes too high, then we will have to question our plans very carefully.

"Around 80 per cent of our costs go on people. But the tax makes this impossible to budget for."

He stressed, however, that there was no question of Cisco entirely pulling out of the UK.

The move is a huge personal blow to Tony Blair. He is known to be one of Cisco's biggest admirers and has based many of the Government's e-commerce policies on the Cisco model.

Cisco isn't the only company putting pressure on the Government about the tax. The Computing Services and Software Association, a trade organisation whose members include IBM, Microsoft and Oracle, is also lobbying.

Its director-general John Higgins said: "It is an utterly ridiculous and counter-productive tax.

"On one hand we have a government which says it wants to grow the electronic industry in the UK, but at the same time we have a stupid tax like this It is a classic example of unjoined-up government."

The tax is paid when employees exercise their stock options. It is seen as a particular threat to e-commerce and technology companies, which use share options to attract and recruit high-earning staff.

The tax was introduced in last April as part of the Social Security Act. But despite being law for less than a year, Gordon Brown in last month's Budget said he would open a period of consultation into the tax.

Many analysts read this as a sign the Government was preparing to do a U-turn.

The Government may also have to deal with another gripe from Cisco, this time with John Prescott's Department of Environment, Transport and the Regions.

In the UK, much of Cisco's operation is based at Stockley Park in Middlesex, and it wants to expand into an adjacent brownfield site. However, it is unhappy with the DETR's restrictive policies and car parking arrangements.

Mr Dedicoat said: "The site we are looking at has 1,200 parking spaces. But if it were redeveloped we would only be allowed 400.

"The public transport system at Stockley Park is not that great, so people have to rely on getting to work by car. The planners really have to look at that, because the regulations are pretty restrictive."