Budget ’07: you have read the headlines - now read the analysis for high-tech start-ups
We open the hood of the latest budget
and extract the pertinent information that matters to entrepreneurs,
start-ups, investors and advisors. As has been pointed out several times
in The Chilli, the UK’s productivity, rate of science
R&D investments, and amount of risk capital has been lagging when
compared to other OECD countries. In order to meet these challenges,
the UK Government’s strategy focuses on five key drivers of productivity
performance. This article looks at this strategy and analysis how and
if the Budget ’07 will meet these goals.
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Five key drivers for productivity
performance:
- improving competition, which promotes flexible markets and increases business efficiency and consumer choice; improving competition to create the right incentives for firms to innovate, adopt new technologies;
- promoting enterprise to build a more flexible business environment, capable of adjusting to the opportunities and challenges in a more globalized economy;
- supporting science and innovation which is central to success in the international economy, as global restructuring focuses developed economies toward knowledge-based and high value-added sectors; supporting science and innovation to spur new ideas and translate them into innovative goods and services for the UK’s long-run economic success;
- raising UK skills to create a more flexible and productive workforce, meet the long-term challenge of rising skills levels in emerging markets and to take advantage of new technologies and organizational structures;
- encouraging investment to increase the stock of physical capital supported by stronger, more efficient capital markets, attracting international capital and investment; encouraging investment to increase the quantity and quality of physical capital used in the production process.
R&D investments
Early comprehensive spending review (CSR)
settlements for the Department for Trade and Industry’s science budget
and the Department for Education and Skills, which together will ensure
that total investment in the public science base will meet the Government’s
long-term ambition for public and private investment in R&D to reach
2.5 percent of GDP. The last spending period saw an increase in public
funding for the research base, and by 2007-08, total UK science spending
will be £5.4 billion. The Chilli
perspective: This seems to be slightly at odds, as recently
the Engineering and Science Research Council had its budget cut; maybe
this will be restored back to its original level and grow further.
£600m annual tax bill for R&D tax relief
Take-up of the R&D tax credit has
been strong – more than 6,000 claims were received in 2004-05 alone
amounting to nearly £600 million of Government support for business
R&D. In total, more than £1.8 billion of support has been given
to business R&D through R&D tax credits since their introduction
in 2000.
Increased R&D tax credits for start-ups & SMEs but also large companies
As part of the wider package of reforms
to the corporate tax system, the Government is introducing further improvements
to R&D tax credits, an increase in the enhanced deduction element
of the SME and mid-sized R&D tax credit from 150 per cent to 175
per cent from April 2008 subject to state aid clearance. There is also
an increase in the large company ( ie: more than 500 employees) R&D
tax credit from 125 percent to 130 percent from April 2008
Credits to be extended to firms with fewer than 500
Legislation will be included in the Finance
Bill 2007 to extend the current SME R&D tax credit to companies
with fewer than 500 employees. The extension will provide firms with
between 250 and 500 employees with 150 per cent tax relief and a payable
cash credit for loss-making companies. The legislation will be activated
upon receipt of state aid clearance.
The Chilli perspective
The focus on big companies, whose R&D investment is a bare minimum to survive until the next financial year, is misplaced. They get a disproportionate amount of R&D tax reliefs, and will not meet the government stated goals. Big companies have all the administrative resources to fill in all the paperwork and the R&D tax relief for big companies goes straight to their bottom line.
Instead, more of these funds should be
re-directed (so that we have 1000s of new technology intensive start-ups
and SMEs) in the form of R&D grants and re-instating the SMART programme.
Out of this will come several global winners, which combined will meet
the stated goals. Big companies already have resources to fund their
own R&D, and they do not need public money.
Reduced corporation tax, but increased rates for SMEs
The key points were:
- a reduction in the main corporation tax rate from 30 per cent to 28 per cent from April 2008, making it the most competitive rate in the G7 and other major economies;
- modernizing and simplifying the capital allowance system; a reduction in the rate of capital allowances on the general pool of plant and machinery from 25 percent to 20 percent, effective April 2008, bringing it closer into line with economic depreciation;
- increasing the small companies’ rate to tackle individuals incorporating to minimize tax and national insurance liabilities; a phased increase in the small companies’ rate from 19 percent to 20 percent from April 2007, 21 percent from April 2008 and 22 percent from April 2009 to reduce the differential between incorporated and unincorporated businesses;
- the 50 percent first year allowance for small enterprises will continue to April 2008;
- the introduction of an annual investment allowance (AIA) available to all businesses regardless of size and regardless of their legal form. This new allowance will mean that 100 per cent of expenditure up to £50,000 on general plant and machinery (other than cars) can be offset against taxable profits. The AIA will be effective from April 2008 and will target support on all businesses that are investing for growth. It will be particularly beneficial to small and medium sized businesses.
EU ‘re-invents’ equity gap – imposes new limits for VCT, EIS
Following the publication of the new
State Aid for Risk Capital Guidelines 18 by the European Commission,
the Government is required to introduce changes to the enterprise investment
scheme (EIS), venture capital trusts (VCTs) and the corporate venturing
scheme (CVS). Although the Government believes that the changes risk
reducing the effectiveness of the schemes in addressing the equity gap
faced by smaller companies with high growth potential, it is imperative
that these changes are made to giver greater certainty to investors
and the companies they invest in, and to secure the future of the schemes.
The Government will introduce, effective 6 April 2007 for VCTs and from
Royal Assent for EIS and CVS:
• an annual investment limit across the three schemes of £2 million per target company; and
• for target companies, at the time
of investment, a limit equivalent to fewer than 50 full-time employees.
The Chilli perspective:
UK corporation tax at 30 percent was already lower than US, Japan, France, Germany, Italy and Canada before this budget. We doubt that a 2 percent reduction to 28 percent will stop some of the multi-national companies which have long term plans to quit and re-locate to other low corporate tax regions, like Ireland. The corporate tax rate in Ireland has been 12.5 percent since 1st January 2003. In 1998 the standard rate of corporation tax in Ireland was 32% but following the Irish Government's nod and a wink with the EU, the corporate rate applied to trading income fell in stages between 1999 and 2003, to reach a general rate of 12.5 percent. With such a huge differential like this, increasing numbers of corporates are going to quit UK.
Think about it: while places like Ireland have a 12.5 percent rate, the rate for small companies in the UK is going in the wrong direction for all (just to catch a few abusers). It going to rise from 19 to 22 percent, thus discouraging SMEs from ever making any profit and always incurring a loss, thus taking maximum benefit from any R&D tax relief. This seems highly discouraging for SMEs considering starting up in the UK.
It makes sense to provide a single limit
for publicly subsidized funds, by curtailment of the total amount of
funds that can go into a single company from a combination of EIS, VCT,
CVS; however the limit of £2 million is too small for most R&D
intensive technology companies and limiting it to companies employing
50 is artificially too low. Both these numbers will have to be revised,
as it will jeopardize the well being of many start-ups and SMEs.
Other notable announcements in Budget ’07
Musical chairs and rationalization of business support
Budget 2006 announced plans to reduce
the number of business support services offered from over 3,000 to 100
or fewer by 2010. As part of this process, the programme is taking a
fresh look at the kinds of business support most appropriate for Government
to provide. A consultation document will be published before the summer
recess, seeking views from businesses and other stakeholders on the
proposals for the design of the new portfolio of government business
support.
Just one fund for South East (SEEDA)
An example of further rationalization
was the announcement of the closure of UK Trade and Investment’s
‘New Products from Britain’ service and DTI’s ‘Grant for Investigating
an Innovative Idea’ – allowing the re-direction of funds to higher
performing support products. Also all of the South East England Development
Agency’s existing investment funds will be rolled into one.
Re-breeding business links support for start-ups
The Business Link brand will be strengthened
as the channel for all publicly-funded business information, support
and advice. Progress is already being made by bringing into Business
Link:
• The East Midlands Development Agency and the East of England Development Agency’s support to start-ups.
• Defra’s business advice to farmers
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