How The Government Supports Tech Startups

Technology is one of the few sectors to have been mostly immune to recession. The UK government has pledged its support by allocating significant resources, expertise and investment into the technology sector. It has also introduced favourable legislative changes and tax cuts to encourage business start-ups.

These efforts have not been in vain. The UK has become a major technology hub, with many US companies choosing to base their European headquarters here. The UK is increasingly known for expertise in the internet and app industries, where new business creation has taken off. Some well-known successes have included Last.fm (acquired by CBS), Tweetdeck (acquired by Twitter) and Mind Candy (behind Moshi Monsters).

London – Europe’s Tech Capital

London, now considered the digital capital of Europe, has been key to the UK’s success. A staggering 15,720 new businesses were set up between March 2012 and March 2013 in the Tech City/Silicon Roundabout area. London provides technology innovators, such as accelerator space Level 39, with direct access to hundreds of well-connected local mentors and Europe’s largest venture capitalist community. Further advantages include competitive property costs, international transport links, and close proximity to advertising resources, media clusters and some of the world’s leading technology universities.

In a drive to encourage innovation, millions of pounds in funding are available for UK technology and communications companies. For example, the Technology Strategy Board can allocate up to £375,000 through its SMART award to small and medium enterprises seeking to engage in R&D projects, and the Regional Growth Fund uses private sector investment to support projects to create economic growth and sustainable employment. The new ‘Future Fifty’ government programme works with selected high-growth companies to match them with publicly funded schemes applicable to their stage of growth.

Tax incentives

It is relatively straightforward and very cost effective to incorporate a company in the UK. In addition, the government has established numerous tax incentives which provide invaluable benefits for start-up businesses in the technological sector.

Any company undertaking a project to bring about an advance in science or technology can reduce its corporation tax by claiming an R&D tax credit. Companies with fewer than 500 employees and an annual turnover of less than €100 million can claim relief equivalent to 225 per cent of qualifying expenditure, which includes labour, materials, software, utilities and, in some circumstances, capital expenditure. Large businesses can claim relief of 130 per cent or an above-the-line credit worth 10 per cent of eligible costs.

Another initiative, the Patent Box, allows companies to apply a 10 per cent rate of corporation tax to all profits attributable to qualifying patents, whether paid separately as royalties or embedded in the sale price of products. This scheme aims to provide a further incentive for companies to exploit new ideas whilst compensating for the cost of the patent process itself. HMRC predicts the Patent Box will provide £1.1 billion in tax relief by 2019.

The UK immigration system offers several well-defined immigration routes to allow investors and entrepreneurs to establish a presence in the UK. Some categories are more difficult than others due to stringent financial requirements and, in some instances, English language requirements. Getting upfront advice on the best route for working in the UK is therefore essential. Whilst other legal areas in the UK give a positive perception of being ‘open for business,’ this can be a little more challenging from an immigration perspective for start-ups with great products and ideas but no cash.

There is a constant drive by the UK to develop more options for start-ups, particularly by the Mayor of London who recently proposed a “London visa” targeted at talented tech experts and fashion designers, giving them an “easier” route to obtain immigration permission to work in London. The Mayor also announced on 30 October 2013 that a £100 million fund would be created to encourage Islamic technology entrepreneurs to set up business in the UK. This would include access to cost-efficient legal advice and assistance with visa and residence applications.

It is clear that the UK government is committed to attracting business into the UK, and has the technological industry firmly at the forefront of those incentives. The recently implemented changes to the UK tax and immigration regimes, together with the existing strong business environment and technological expertise that the UK tech industry can offer, make a compelling proposition for technology businesses thinking of locating their activities in the UK.

Emma Cartwright (associate) and Douglas Badder (trainee solicitor) work at law firm Faegre Baker Daniels. Frankie Cooke also contributed to this article.