How Britain can take advantage of a global growth in digital industries

MOST new jobs are not created by established big businesses adding a few people here and there, or by the many smaller firms that are happy to stay small rather than take a risk and expand. Our future prosperity depends on a relatively small number of rapidly growing firms: high growth “gazelles”.

So if we want a recovery built on firmer foundations than emergency low interest rates and mortgage guarantees, we need more of those vital companies. And there are enormous opportunities in the digital economy in particular, which is set to grow by around 12 per cent in the next few years. But there are five things the government must do to allow UK digital entrepreneurship to prosper.

First, it must dramatically simplify the tax system so that firms stop spending so much time and energy navigating its complexities. Companies should pay a single rate of tax when money is distributed to shareholders, directors or employees, not endless taxes on the same money: corporation tax, income tax, capital gains tax. Reform along those lines would not only make taxes simpler and fairer, it would also mean we would stop taxing companies which reinvest all of their profits for future growth. You should pay tax when you take an income, not before, or – as is the case with capital gains tax – after.

Second, the government should implement the recommendations of the Hargreaves Review, and ensure that our patent system remains transparent and supports innovation. The UK should cement its position as a leader in patents by addressing the questionable use of profit-maximising patent pooling (where organisations club together to cross-license patents relating to a particular technology), and by attacking government-sponsored patent pools abroad that threaten innovation here.

The UK is free of patent trolls, and has established a centre for responsible pharmaceutical patent management. But the danger in the US is clear. It is struggling to find a legislative remedy for trolls and is trying to rein in pools that are abusing the market. The ICT sector in the US is plagued by a complex system of cross-licensing, with one or more patents deemed essential to technology standards held by pools to the detriment of innovation. These include the MPEG 2 video compression standard, which is controlled by the for-profit MPEG LA company.

The patent pooling process has been exploited by firms with absolute power over tech standards, and consumers end up paying more for electronics. By contrast, the UK continues to act as a strong legal hub for European lawsuits, and is considering a version of small claims courts for patents disputes. Taking these steps will allow the UK to learn from mistakes in the US and become a centre for responsible innovation.

Third, ensure a competitive internet infrastructure ecosystem, which does not rely on subsidy. The Broadband Delivery UK (BDUK) programme is set to spend over £1.2bn of taxpayer money providing fixed line “superfast” internet access of at least 2 megabytes per second. But the UK already enjoys competitive broadband in urban areas and, increasingly, competition in rural areas, with fixed line fibre, mobile 4G, and satellite all viable. There is no reason why, with competition and community-led co-op projects, we need to spend so much money subsidising broadband. Thankfully, the £150m urban broadband fund has been pulled in favour of other schemes. Recent Freedom of Information requests by the Countryside Alliance also reveal that regional councils have yet to receive BDUK funding. There is time to prevent that money being wasted.

Fourth, open up data. The Shakespeare Review on public sector information recommended, among other things, that core data be opened up and shared as part of a National Information Infrastructure. This would lead to a much stronger – open by default – data programme for the UK. But this needs to happen quickly and should include as much data as possible. There can be sensible exemptions for personal data.

Finally, ensure that the European Commission’s remit on digital issues is restrained and its reach is limited. This includes the upcoming Data Protection Directive as well as the proposed centralisation of spectrum auctions. We live in a competitive digital economy, and any form of external regulation on top of our own rules is a serious threat to growth. Forcing firms to comply with two sets of burdensome regulation could even stop innovation in its tracks.

None of these proposals are new, but they are worth repeating until someone in government takes notice. We are on the cusp of becoming a very successful digital economy. But we must make practical reforms to put Britain in a strong position to take advantage of the global growth in digital industries.

Dominique Lazanski is head of digital policy at the TaxPayers’ Alliance.