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

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

Half a dozen founders of early-stage British tech companies told the Financial Times that the cuts, alongside Brexit and a slowdown in venture capital funding, have led them to look at international opportunities more seriously, with other countries now becoming increasingly attractive places to do business.

Sylvera, a UK carbon credits start-up, is opening offices in the US and Asia-Pacific region this year, a decision the company said had been accelerated by recent UK policy.

Epoch Biodesign, which develops enzymes to break down plastics, Ochre Bio, a start-up developing RNA medicines for liver disease, and Hoxton Farms, a maker of meat-free animal proteins, said changes to the R&D tax credits system, which come into effect from April 1, would make scaling manufacturing or labs in the UK less attractive.

“We’re feeling the need to diversify much earlier than we would have,” said Sam Gill, co-founder and president of Sylvera. “It’s about this drip, drip, drip of poor quality [government] decisions that together creates a much more hostile environment.”

A survey of 267 UK tech start-ups last week found that 84 per cent said they were concerned they would have to look at offshoring more tech development in the wake of the cuts, according to lobby group Coadec.

In November, chancellor Jeremy Hunt cut the rebates available to small and medium-sized businesses in a bid to reduce fraudulent claims, while increasing credits for larger companies.

The move has particularly hit start-ups in strategically important industries such as artificial intelligence, biotechnology and climate tech that are typically lossmaking, as they give businesses back up to a third of their high research costs.

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

It has also launched a consultation on merging the R&D schemes for large and small businesses, which it says would simplify the system and give businesses more clarity on how much they will receive each year to help with budgeting.

But funding will still be reduced from April. “[The] government should be looking for more targeted ways to help R&D intensive SMEs grow and scale, not cutting its support,” said Alex Kendall, chief executive of autonomous vehicle start-up Wayve.

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

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

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

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

Co-founder and chief executive Jack O’Meara said Ochre Bio found it cheaper to hire in Taiwan but the UK’s tax credit scheme had meant creating research jobs in the country was still competitive. “If that goes away, it sort of changes the calculus . . . that benefit is no longer realised in the UK,” he said.

The UK has long been the European hub for tech, with $19.2bn in venture capital invested in London in 2022, double the $9.9bn raised in second-placed Paris, according to Dealroom data published by Atomico, the venture capital group.

Tech start-ups have warned that other countries could pull ahead in terms of attracting these future growth industries.

Businesses in the climate tech sector with high manufacturing costs, including Epoch Bio, pointed to the US’s Inflation Reduction Act as an attractive source of funding. The $369bn climate, healthcare and tax law provides billions of dollars of subsidies to investments in clean energy and decarbonisation.

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

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

Businesses also pointed to uncertainty over their access to the EU’s €95bn Horizon grant programme following disputes over post-Brexit trading agreements in Northern Ireland. Prime minister Rishi Sunak has charged science minister George Freeman with developing an alternative British plan.

Announcing its consultation on tax schemes, Victoria Atkins, financial secretary to the Treasury, said that “getting R&D tax relief right and fit for the future sits at the heart of making sure the UK remains a competitive location for cutting edge research — helping new firms grow.” The Treasury declined to comment on start-ups’ expanding beyond the UK.

Any international moves are unlikely to be immediate but businesses warned that the deteriorating policy environment would suck capital away from 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.”