In the 20 years to 1995, 24 US companies, mainly in high technology businesses, raised their turnover a hundred-fold, from $2.1bn (£1.26bn) to $248bn, and created 1.3 million jobs as they did it. The UK could do with 24 companies like that.
The working group on the financing of high-tech businesses was asked by Geoffrey Robinson, the Paymaster General, to identify barriers to growth experienced by high-tech firms, and to come up with proposals for overcoming those barriers. Group members were drawn from high-tech companies, venture capitalists, financial institutions, government, the Bank of England and the CBI. Our report was published by the Treasury on the day the Chancellor delivered his pre-Budget report.
We saw two main financing issues for early stage high-tech companies: getting financing on the right terms from the outset; and recruiting top-quality managers from established companies.
We identified a range of barriers to growth, including: the appraisal of technology’s commercial possibilities by potential sources of finance; long lead times because of the R&D needed in some sectors; the perceived risks of such investments; and their relatively small size and the attention they need from investors. The group learned a great deal from US experience.
Proposed solutions include a radical reform of capital gains tax, building on the 1998 reform, with preferably a zero rate for high-tech investments after five years. If that is not possible, we would like to see a marginal rate of 20% after 3 5 years and 10% after seven years (compared with the current 10 years).
Investors should also be able to reinvest the proceeds of one early-stage high-tech investment in subsequent ones at any time within the time limit without tax penalty. At present, the 10% rate of CGT only applies if a share is held for the entire 10 years.
Second, UK financial institutions appear to invest much less in early-stage high-technology firms than their US counterparts. Insurance companies in particular have enormous funds at their disposal, but seem to invest comparatively little in such firms compared with the US. Technology Venture Capital Trusts (TVCTs) should be set up to create an incentive for insurance companies to invest in the target group of companies. TVCTs would give tax relief on such investments, to help open up the market.
Third, VCTs for individuals should be beefed up, providing they are invested in early-stage high-tech stocks. A general improvement in existing VCT and Enterprise Investment Scheme reliefs would encourage more venture capital investments generally, from which the high-tech sector would no doubt benefit.
Fourth, early-stage companies should be able to offer equity incentives to key managers with more rational tax treatment than now, to boost the smaller firms’ ability to lure them from established companies.
Fifth, we propose an emerging growth tax rebate, payable in exchange for the surrender of a proportion of a firm’s tax losses, to meet the needs of firms with long lead times before they make income, much less profits, while they do their initial R&D. It would be market driven, in that the firm would have to make a judgement about present cash flows and future prospects. It thus escapes the ‘picking winners’ criticism.
Sixth, provisions should be included in the new Financial Services Bill to make it easier to advertise venture opportunities to high net-worth individuals. It is a widely held myth, incidentally, that the regulatory system is a significant barrier to other forms of investment in the high-tech sector, especially by pension funds and insurance companies.
Seventh, the culture of institutional investors and their advisers needs to change. One useful step would be to ask the Governor of the Bank of England to hold an annual meeting of high-tech early stagers and the major institutions.
Gordon Brown’s pre-Budget statement was an encouraging response to our report. The Chancellor emphasised the need to encourage innovation, small business and science.
He promised that the Government would invite further private-sector involvement in University Challenge, the scheme backed by the working group for providing venture capital to UK universities. Other proposals included setting up eight Institutes of Enterprise in British universities (another idea championed by the group); and consultation on incentives for early-stage high-tech venture capital firms (and possibly for venture capital generally). This could be a reference to our proposals for technology VCTs for insurance companies and individuals.
There is much to do, in government and the private sector. The working group welcomes publication of our report and wants a public debate on the issues and our proposals. We trust the engineering profession will play a full part in that debate, and help to create those 24 high-tech giants.
Sir Peter Williams is chairman of Oxford Instruments and chairman of the working group on the financing of high technology businesses. Dr Craig Pickering, head of asset finance at the Finance and Leasing Association, is a group member. Report from the Treasury or at: www.hm-treasury.gov.uk.