Start-up tax pain could scupper Rishi Sunak’s science superpower dreams, investors warn
Further tax pain inflicted on the UK’s start-ups could scupper Rishi Sunak’s tech and science superpower plans, venture capital firms have warned.
The warning comes as Jeremy Hunt prepares to announce his first full budget next week.
Start-ups have piled pressure on Hunt to reverse changes to research and development tax credits announced in the Autumn statement last year, which will slash the amount of R&D spend that start-ups can claim back from April this year.
The tax changes kick in just as the government pushes ahead with plans to “cement the UK’s status as a science and tech superpower by 2030” and investors are now warning that the two initiatives are working at odds with each other.
“The changes made in the Autumn Statement to R&D tax credits will be hugely damaging to R&D intensive early-stage companies, undermining the Government’s ambitions for the UK to become a science and technology superpower,” a spokesperson for the British Venture Capital Association told City A.M.
“Whilst we welcome the recent consultation on the creation of a single R&D tax relief scheme, it does not address the immediate cut to funding for R&D intensive SMEs when the cuts take effect in April 2023.”
The BVCA, which represents venture capital and private equity investors in the UK, urged ministers to “agree a solution with industry as soon as possible” as the uncertainty was hampering companies’ growth plans.
Hunt came under fire from over 150 of start-ups this week who warned that the changes would “significantly damage” innovation in the UK.
The Federation of Small Business has warned the UK risks becoming an “innovation wasteland” if the government pushes ahead with the changes.
Research from the small business body last month found that that 64 per cent of firms to have earned the tax credits in the last three years would now rein in their innovation investment in light of the changes, equivalent to 50,000 small firms.
Triple Point Ventures, a London-based investor, said while the government science ambitions were welcome, they “regrettably do little to offset recent damage caused by HMRC’s heavy-handed treatment of SME R&D tax credit claims.”
“Over the past six months, tech startups across the country have been wrongly accused of fraud, or had claims delayed without communication, sometimes for months,” Seb Wallace, investment director at Triple Point Ventures, told City A.M. “This has caused significant cash flow pressures, in a difficult macro-economic environment, for businesses at the coal face of the economy.”
London-based venture firm Beringea warned that UK’s status as a hub for start-ups was “not guaranteed” and called on ministers to ease rules around some enterprise investment schemes to tempt in capital from investors.
“The Government ought to follow through on its promise to extend the seed enterprise investment scheme, enterprise investment scheme and venture capital trust schemes, which deliver huge value for the UK economy,” partner Eyal Malinger, partner at Beringea told City A.M.
A Treasury spokepserson said this week: “Our ongoing R&D tax reliefs review will ensure taxpayer’s money is spent as effectively as possible while improving the competitiveness of the Research and Development Expenditure Credit (RDEC) scheme, as well as taking a step towards a simplified, merged RDEC-like scheme.”
Government’s plans to create a “science and technology framework” include measures to “showcase the UK’s S&T strengths and ambitions” and attract talent.
However, the flow of workers into the sector has been thrown into doubt in recent weeks after ministers announced they would pull funding from quango Tech Nation, leaving the future of its visa scheme uncertain.
London-based investor Antler told City A.M. yesterday that while tax tweaks were important, a slowing flow of talent posed more of an existential threat to the UK.
“As an investor, we’re much more concerned about the budget being expanded for visa schemes that attract world-class tech talent into the country, leadership from the government to solve tech’s continued talent diversity problem and a serious commitment to invest in high-growth sectors like climate technology,” Jed Rose, Partner at Antler, told City A.M.