UK tech start-ups accelerate overseas expansion after R&D tax cuts

Leading UK start-ups are accelerating overseas expansion plans as government cuts to research and development tax credits and more generous support elsewhere threaten the UK’s position as a hub technological.

Half a dozen founders of UK tech start-ups have told the Financial Times that budget cuts, alongside Brexit and a slowdown in venture capital funding, have made them look more seriously at international opportunities, other countries are now becoming more and more attractive places. Business.

Sylvera, a British carbon offset start-up, is opening offices in the United States and the Asia-Pacific region this year, a move the company says has been accelerated by recent British policy.

Epoch Biodesign, which develops enzymes to break down plastics, Ocher Bio, a start-up developing RNA-based drugs for liver disease, and Hoxton Farms, a maker of meatless animal protein, said changes to the system of R&D tax credits, which come into effect from April 1, would make large-scale manufacturing or labs in the UK less attractive.

“We feel the need to diversify much sooner than we would have,” said Sam Gill, co-founder and president of Sylvera. “It’s about that drip, shoddy drip [government] decisions that together create a much more hostile environment.

A survey of 267 UK tech start-ups last week found 84 per cent worried they would have to consider outsourcing more tech development as a result of the cuts, according to lobby group Coadec.

In November, Chancellor Jeremy Hunt cut rebates for small and medium-sized businesses in a bid to reduce fraudulent claims, while increasing credits for large businesses.

The move particularly hit start-ups in strategically important sectors such as artificial intelligence, biotech and climate tech, which are typically loss-making because they return up to a third of their high research costs to companies.

The government has tried to address the concerns, with Hunt this month acknowledging that there was “merit in making the case for additional support” for research-intensive businesses.

She also launched a consultation on merging R&D programs for large and small companies, which she said would simplify the system and give companies more clarity on how much they will receive each year to help with budgeting. .

But funding will be further reduced from April. “[The] the government should be looking for more targeted ways to help R&D-intensive SMEs grow and scale, not cut support,” said Alex Kendall, chief executive of self-driving vehicle startup Wayve.

While international expansion is a natural part of growing start-ups, the start-up founders said the budget cuts, along with other economic policies, were undermining the government’s ambitions to grow Britain’s tech sector .

“These [R&D] the changes only make other countries more attractive,” said Jacob Nathan, co-founder of Epoch Biodesign. “I’m just not convinced that we’re going to expand in the UK now. It just doesn’t make sense.”

Tax credits have played a significant role in attracting international investors to UK businesses as well as creating jobs in the country, according to start-ups.

Ocher Bio received £1million in tax credits in 2021 for its research in the UK, a figure it had expected to reach £3million in 2023 and 2024 before proposed cuts. It also has research facilities in New York and Taiwan.

Co-founder and chief executive Jack O’Meara said Ocher Bio found it cheaper to hire in Taiwan, but the UK’s tax credit scheme meant that job creation research in the country was always competitive. “If that goes away, that sort of changes the calculus. . . that advantage is no longer realized in the UK,” he said.

The UK has long been Europe’s tech hub, with $19.2 billion in venture capital invested in London in 2022, double the $9.9 billion raised in second-place Paris, according to the Dealroom data published by Atomico, the venture capital group.

Tech start-ups have warned that other countries may get ahead of the game in attracting these future growth industries.

Climate tech companies with high manufacturing costs, including Epoch Bio, have pointed to the US Inflation Reduction Act as an attractive funding source. The $369 billion Climate, Health, and Taxation Act provides billions of dollars in grants for clean energy and decarbonization investments.

South Korea’s Hanwha this month announced plans to spend $2.5 billion to expand its solar panel production in Georgia, a sign of how US President Joe Biden’s climate policy is attracting investment.

Asian governments are also launching concerted attempts to attract British investment. Hoxton Farms said it had discussions with government bodies in Japan and Singapore, adding that the city-state was “at the forefront” of food regulations, a point echoed by artificial meat maker Higher Steaks based in Cambridge.

The companies also highlighted uncertainty over their access to the EU’s €95bn Horizon grant scheme following disputes over post-Brexit trade deals in Northern Ireland. Prime Minister Rishi Sunak has tasked Science Minister George Freeman with drawing up an alternative UK plan.

Announcing her consultation on tax schemes, Victoria Atkins, Financial Secretary to the Treasury, said that “getting tax relief for R&D fit for the future is at the heart of ensuring the UK remains a place competitive for cutting-edge research – helping new businesses grow.” The Treasury declined to comment on the start-ups’ expansion beyond the UK.

Any international move is unlikely to be immediate, but companies have warned that the deteriorating political environment will suck capital out of the UK.

“I was brought up in London and we want to be in the UK,” said Ed Steele, co-founder of Hoxton Farms. “But we also have to make economic decisions.”

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