Can't Get No (Tax Relief)!

UK tech start-ups are looking for overseas support after dissatisfaction with UK Government

After numerous ‘poor quality decisions’1 from the UK Government, tech start-ups are accelerating their expansion plans to countries which provide more support.

Dissatisfaction amongst tech start-ups towards the government is high. A survey found that 84% out of 267 UK tech start-ups are concerned that they have to look to offshoring their work after facing cuts.2 Sylvera - a UK start-up - recently decided to open offices in the US and Asia-Pacific region, citing an unfavourable change in UK policies.3

Government cuts to R&D schemes

Research and Development (R&D) schemes were born in the UK out of the Government’s ambition to become a ‘science superpower’4. This was supported by a commitment to increase investment in R&D to £22 billion by 2025 at the latest.5 However, contrary to this announcement, the government has in fact decreased their support. After 1 April 2023, small and medium enterprises (SMEs) will receive a reduction in R&D tax relief from 130% to 86%, and the SME credit rate will be reduced from 14.5% to 10%.6

The Government has described these changes as ‘a step towards a simplified, RDEC-like scheme for all’7. The RDEC is a government scheme which allows companies to reduce their tax bill as a proportion of their R&D spending. However, a move to a single RDEC-like scheme would not be favourable for SMEs in the UK’s innovation ecosystem.8

Although the Government has promised further consultation and mentioned desires of ‘“more targeted support” measures for “R&D intensive SMES,”’9 it is uncertain if any of these promises will come to fruition as we are yet to see any new policies arise.

Tech start-ups are quick to highlight that the UK Government proudly proclaims its pro-innovation credentials on its website. Having taken the Government up on their offer, they now feel short-changed. Tax credits were a big part of what attracted tech start-ups.11 and these tax changes feel like a ‘U-turn’ on their previous policies.12

Despite facing so much opposition against these tax cuts, the Government refuses to change its position and will continue to enforce benefit cuts in April.

Overseas opportunities

Co-founder Jacob Nathan of Epoch Biodesign has said that ‘these changes only make other countries more attractive. I’m just not convinced we’re going to scale in the UK now. It just doesn’t make sense.’13 There is currently interest in Epoch Biodesign offshoring to the US due to that country’s newly adopted Inflation Reduction Act, which offers more attractive benefits.14

There is already interest in the US for its climate policies. Hanwha - a solar panel manufacturer - announced this month plans to spend $2.5bn in an expansion of its solar panel production in the US.15

Ochre Bio has research facilities in the UK, New York and Taiwan. After these tax cuts, co-founder and chief executive Jack O-Meara no longer sees any benefit in focusing their research in the UK, and is considering changing their focus to Taiwan due to cheaper hiring policies.16

Japan and Singapore are ‘at the forefront’17 of food regulation, and are holding discussions with Hoxton Farms, a London based start-up, on a possible move. Higher Steaks, based in Cambridge, has also made this point.18

It is clear that the Government’s previous tax reliefs attracted a wide variety of start-ups to the UK. Now, facing tax changes, the UK has lost a big reason for start-ups to come to the UK. It is understandable that since start-ups are facing less support from the Government in R&D, they are looking to move to more favourable countries. Although this move won’t happen immediately, the Government would do well to quickly deliver on their promises of targeted support for SMEs. The Government is in need of shoring up support and needs to stem the outflow of valuable start-up talent and investment.

1 https://www.ft.com/content/f9b8a08a-2e98-4e10-9dd1-188d30408c36
2 Ibid
3 Ibid
4 https://www.gov.uk/government/publications/uk-research-and-development-roadmap
5 Ibid
6 https://www.bioindustry.org/news-listing/autumn-statement-proposes-cuts-to-sme-rd-tax-reliefs.html
7 Ibid
8 See more on this here: https://www.bioindustry.org/resource-listing/bia-response-to-r-d-tax-reliefs-consultation-pdf.html
9 https://www.bioindustry.org/news-listing/autumn-statement-proposes-cuts-to-sme-rd-tax-reliefs.html
10 https://www.gov.uk/government/publications/uk-research-and-development-roadmap
11 https://www.ft.com/content/f9b8a08a-2e98-4e10-9dd1-188d30408c36
12 https://www.ft.com/content/e5fa8d66-8fc1-488f-a82c-3c39bdc52a2c13 https://www.ft.com/content/f9b8a08a-2e98-4e10-9dd1-188d30408c36
14 Ibid
15 See more on this here: https://www.ft.com/content/85683d1d-c5ad-4fef-b53c-3a8da66586ca
16 https://www.ft.com/content/f9b8a08a-2e98-4e10-9dd1-188d30408c36
17 Ibid
18 Ibid