R&D tax credits benefit technology businesses more than any other single government initiative, finds James Cowper technology survey
A survey of over 1300 technology companies in and around the Thames Valley has found that of all the government initiatives to help the sector through the recession it is the R&D tax credit that has been of most assistance.
In January this year accountants and business advisers James Cowper asked 1300 businesses operating in the medical, life sciences, software and software services, hardware, environment, communications and advisory community for their views on the business and political environment and for their thoughts on what 2010 might hold for them and their sector.
80 per cent of respondents are classed as small or medium-sized businesses employing less than 50 people, and 80 per cent of companies classify themselves as established businesses, operating for many years. Seventy seven per cent of respondents have a turnover of less than £5 million annually, with 10 per cent having a turnover of between £6 and 20 million.
The government has, over the past 18 months, made a great play of the help and assistance it has offered businesses to ensure they survive the toughest recession for a generation. The technology sector, in its broadest sense, has not escaped the impact of this recession, struggling like many businesses across many different sectors with access to finance and funding.
However, the James Cowper survey found that three quarters of all respondents have been adversely affected by the recession. Of those affected, the single biggest problem has not, surprisingly, been the lack of funding (a perennial problem for businesses in this sector), but generating revenue – an issue that is undoubtedly felt by businesses irrespective of sector or location. Seventy per cent of all respondents cite difficulties in generating revenue as being the single biggest issue. Customers struggling to pay (36 per cent) and lack of funding (26 per cent) follow.
Exit strategies are fundamental for technology based businesses partly due to the need to achieve exit for 3rd party investors, whether through trade sale or flotation. Our survey suggests that any immediate plans for an exit have been delayed, with the focus being more on survival. A float is for over 60 per cent of respondents of little importance. A sale is higher up the agenda, but for more than a third (36 per cent) it has been pushed down the priority list.
Of the support offered by the government it is R&D tax credits that are singularly seen as being the most effective, with 78 per cent of respondents benefitting from them. Enterprise Management Incentive (EMI) share schemes follow closely with 69 per cent of respondents benefitting.
The Enterprise Investment Scheme (EIS) has helped just under a third of respondents (30 per cent), with the Enterprise Finance Guarantee Scheme (EFGS) helping just 13 per cent of companies.
Yet whilst the government has made repeated references to the importance of a technology-based economy the clear message from technology companies across the Thames Valley is that the government “could do more”, with one respondent bemoaning the lack of “ubiquitous broadband” – surely a basic need for a technology-based economy! The government’s assistance is perhaps best summed up by one respondent from Oxford who said “mainly platitudes with no real substance.”
Grants have always played an important role in supporting technology businesses, particularly those that are in early stages or pre-revenue. The sources of these grants are varied, yet just 20 per cent credit SEEDA, the region’s inward investment agency, with providing help. It is perhaps more telling that 70 per cent of respondents didn’t answer this question all, suggesting that funding has all but dried up.
The government were very quick to announce the UK lifting officially out of recession in January this year, but there is clearly still a long way to go before the economy really picks up and those precious green shoots of recovery become a little more evident.
Respondents were asked what they believed would be the most important influences on growth and development of businesses in the technology sector over the course of the next five years. The answers are perhaps not that surprising and reflect more immediate concerns.
Thirty two per cent believe that funding, and access to money from all sources, as being the most important influence, with government input particularly in skills and training following closely (with 29 per cent). Innovation and new technology are also obvious drivers with 27 per cent citing it as one of the key factors behind growth.
The government’s tax regime also comes under criticism, particularly for staff and company directors/owners. The government whilst offering help at a corporate level is perceived to be reluctant to provide the tax incentives directly to individual entrepreneurs.
Interestingly, more than half (59 per cent) of all respondents do not see overseas markets as playing a role in future growth over the next three years. Of those that do, Europe and the US are seen as the most important markets, following by the Middle East. Historically, the technology sector has always had a more global focus than other more traditional sectors.
James Cowper asked respondents for their thoughts on being physically located in the Thames Valley. When asked whether the proximity to research and academic institutions is an important factor, a quarter (27 per cent) agreed, with 50 per cent stating that it is of no importance at all. The same response was given when asked whether the proximity to like-minded business was important, with just 21 per cent agreeing and 66 per cent stating that it is of no importance. It appears that from these responses the benefits of business clusters are greatly over-exaggerated.
The Thames Valley communications links (65 per cent) following by access to suitably qualified staff (58 per cent) are the biggest benefit to being located in the Thames Valley.
Business confidence in the Thames Valley seems to remain quite high with 56 per cent of respondents stating that they believe the region has fared better or slightly better than other parts of the UK. Just 16 per cent believe that it has fared worse.
When asked if the wider technology sector has fared better than other industry sectors 65 per cent of respondents agreed, compared against 27 per cent who believed that it performed worse or on a par.
The technology sector is “more mature and realistic in its expectations” said one respondent with another adding that “technology is seen as a route to sustainable development”. On the other side of the coin however, one respondent said that it is often an “easy target for clients to slow spending”.
The forthcoming general election, a date of which has yet to be formally announced, cannot be avoided and its results will undoubtedly have a significant impact on the technology sector.
James Cowper asked respondents to state the three most important things any government could do to help the sector. Topping the list is revisiting the tax regime, followed by increased financial support and access to funding. In joint third place respondents would ask that the new government leave R&D tax credits as they are and provide greater emphasis on training and support in providing the relevant skills needed to support the sector.
Bearing in mind the forthcoming election, what do you believe are the most important things that a new government can do to benefit the technology sector? |
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Provide greater degree of training and support in key skills the sector needs |
It is also interesting to note that falling just outside this list is the need for development to broadband infrastructure, particularly in providing greater connectivity in rural areas and enhanced connectivity speeds.
The survey concluded by asking respondents to gaze into their crystal balls and predict what they believe to be the next important area of technological breakthrough. The answers were varied, with not one underlying technology emerging.
Respondents expect to see improvements in battery life, increased mobile computing, increased use of nanotechnology and a variety of green and clean tech.
Sue Staunton, Partner at James Cowper, gives her comments on the results of this survey. “Our survey was carried out at a time of great uncertainty for businesses in the UK – the outcome of the recession and the prospects of governmental change. It is clear from the responses to our survey that whilst the technology sector in our region remains a key part of our local economy, it like so many other sectors, has been hit by the impact of the recession, forcing many to alter their plans for the development of their business and hindering those at the earliest stages from being able to develop the potential within their core technology.
However, we see a sector that is flexible and resourceful, possibly far more so than other sectors. Whilst funding may be more difficult to obtain within the UK – especially for those companies that are pre-revenue – we are seeing companies seeking it overseas. Other companies are approaching their funding crisis by perhaps cutting costs; slowing down research programmes – may be concentrating on a few applications; or developing a swift revenue generating model to fund the core research internally.”
Looking forward there are concerns as to how the sector will fare in the short to medium term. For many years the development of the technology sector has been a key focus for Government economic policy. There have been key initiatives in the past such as research and development tax credits, but our respondents clearly consider that more needs to be done to ensure that we are able as a country to retain our place on the world technology stage. There are also concerns about the impact of university cuts upon the future development of new technology.
As a firm James Cowper will be continuing to support its clients through these difficult times and as part of a commitment to the sector we will continue to lobby on the behalf of the sector, to help to ensure that the interests of the businesses comprising the Thames Valley’s technology sector are heard by those who will be making policy.
Sue Staunton, Partner, James Cowper LLP, 01865 200500 or email: sstaunton@jamescowper.co.uk