Tech tax breaks given UK Budget boost

The tech industry welcomed moves by the British chancellor to boost two key tax breaks for start-ups, as part of a sweeping set of measures designed to turn the UK into a “scientific superpower”.

Rishi Sunak said the Treasury would consult on reforming two longstanding tax benefits for tech companies: credits for R&D and relief on employee stock options.

As part of his Budget, he also promised the government would implement “ambitious visa reforms” as part of a post-Brexit drive to attract “scientific superstars” to Britain and launched a new £375m tech fund.

“Broadly speaking we are very happy with what’s been put forward,” said Julia Hawkins, general partner at LocalGlobe, an early-stage tech investor based in London’s King’s Cross.

Investors in the technology sector have long campaigned for an expansion of the so-called enterprise management incentives (EMI), which were first introduced 20 years ago but have evolved little since.

EMI provides a tax-efficient way for start-ups to grant stock options to employees, helping them to lure and retain talent — particularly experienced executives — even if they cannot afford to pay large salaries.

A consultation document published on Wednesday said the government would examine whether more companies should be eligible for the EMI scheme.

Since 2008, only companies with under £30m in gross assets and fewer than 250 full-time employees could benefit from EMI tax breaks. Employers were also restricted by a £3m ceiling on total stock options and a £250,000 limit per employee.

“We really need to move with the times and make sure the limits are fit for purpose with new tech companies, which are much bigger and more ambitious than when it was written,” said Hawkins.

Martin Mignot, partner at Index Ventures, who was an early investor in Deliveroo and Revolut, warned that other countries, including France, had more generous stock option rules in place.

“The UK must revisit the terms of EMI urgently if the country is to retain its position as a magnet for talent and benefit from the growth of globally competitive start-ups,” Mignot said.

The tech community also welcomed the prospect of more R&D tax credits, which can help to incentivise investment in advanced technologies. Existing rules limit the tax relief to areas such as staff and consumable materials, as well as some software and clinical trials costs, and exclude capital spending on labs, buildings and machinery.

The government will also look at whether companies should be able to claim back some of their data and cloud computing costs.

Dom Hallas, executive director of Coalition for a Digital Economy, which represents UK start-ups, said he was “delighted” by the prospect of a scheme that was already popular with start-ups being set for reform.

Harry Briggs, managing partner at Omers Ventures, the VC arm of a Canadian pension fund, said it made sense to extend the R&D credit to larger companies “at a time when they will need help to invest and grow”.

Briggs said the “biggest plus” in the Budget was in the expanded visa programme for innovative companies. “If these are relatively easy to apply for, they will really help to attract talent to the UK,” he said.

Sunak also confirmed the launch of a £375m fund, dubbed the “Future Fund: Breakthrough”. The state-backed vehicle will invest alongside venture capital funds in growing tech companies looking to raise more than £20m.

Some investors questioned whether the fund was really necessary, given that £7.5bn of venture funding had flooded into London tech companies alone last year, according to deal tracker Dealroom.