The UK Ecosystem for Innovative SMEs:

Taxation, Investment & Incubation

A Presentation to the EU-Israel Workshop on Start-Ups and Innovation

30-31 May 2011

Fergus Harradence

Deputy Director, Innovation Policy

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Innovation in the UKInnovation in the UK

Challenges Low levels of R&D investment

Innovation unevenly spread in UK

10% companies account for over 40% of investment

Opportunities UK open to tech – 4th in INSEAD Global

Innovation Index World leading capabilities in

science, technology and research, intangibles investment

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Fiscal Policies for R&DFiscal Policies for R&D• Support for R&D

- R&D Tax Credit SMEs - 200%, rising to 225% in April 2012- Covers a range of activities (capital investment, contracted research)- SMEs not in profit may exchange enhanced relief for a cash payment - FY08-09 - 6,600 SME claims, worth £270m against R&D expenditure of £1.69bn- CBI survey found it had encouraged investment, and savings on R&D costs delivered by the scheme now averaged 10.5% for SMEs, 8.5% for medium-sized companies and 6% for large companies

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Venture Investment IncentivesVenture Investment Incentives

• Enterprise Investment Scheme

- Available to individuals and trusts – for investments in unquoted SMEs

- Income tax relief (30%) for individual investors who purchase ordinary shares in qualifying company – offset against income tax

- Relief on share purchases up to £500K (e.g. max relief £100K)

- Shares must be held for 3 years after issue – then free from Capital Gains Tax/can offset losses against income tax in year of disposal

• Venture Capital Trusts

- Launched 1995 – enables individuals to invest in SMEs via trusts

- VCTs listed on LSE – investors purchase shares

- 70% assets of trust must be in qualifying companies (restricted activities)

- Need to be approved by HM Revenue & Customs to qualify

- Offers income tax relief (30%) on shares purchased – and on dividends

- Shares to be held for 5 years

- Capital Gains Tax Relief in some cases on disposal

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Venture Capital InvestmentVenture Capital Investment

• Venture Capital- Largest VC market in Europe- UK Investment declined £359m in 2008 to £313m in 2010

• Enterprise Capital Funds (ECFs)- Target market failure in early stage investment- Began in 2006 – 10 funds in operation – invested in 85 businesses - HMG investment £182m, £200m committed next 4 years – will leverage additional c£100m from private sector- Investment of £250,000-£2m in an individual company

• UK Innovation Investment Fund

- Launched 2010 - £325m pool of capital- 2 funds of funds – general tech and greentech- 6 investments made into tech funds so far- HMG invests on equal terms private sector- No restrictions on investments (size, stage etc)

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Business IncubationBusiness Incubation

• Role of Government

- No national policy or funding programme for incubation

- Reflects structure UK innovation system

- Public funding supports - indirectly• Types of Incubators

- Linked to universities

- Linked to Public Sector Research Establishments

- Run by innovation-supporting organisations (Carbon Trust)

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UK SME Innovation ProgrammesUK SME Innovation Programmes• Grant for R&D

- Proof of Concept/Market and R&D support (50% costs)

- Support for projects conducted within a single business

- Grants of up to £500K (typically £10s of K)• Knowledge Transfer Partnerships

- Support for SMEs to work with knowledge base institutions

- Place associate within company for 6 months – 3-4 years

- Work on innovation related project in business• Small Business Research Initiative

- Procurement programme, based US SBIR

- 2 Phase competitions to develop technology-based products

- Scheme value c£20m pa