London for Tech Start-ups
Partner Steen Rosenfalck of European business law firm, ebl Miller Rosenfalck examines the range of benefits for Paris and Berlin start-ups relocating to London due to its current business development promise
By Steen Rosenfalck, Partner of ebl Miller Rosenfalck
In a recent global report, London was ranked first above New York for the first time as a centre for business, finance and culture.
The report analysed a range of factors across 30 global cities and concluded that London’s economic clout, reputation as an urban gateway, technology access, and development and design capabilities topped a strong performance across a range of indicators measuring how major international cities are developing.
Compared to its European rivals in the tech markets of Paris and Berlin, technology start-ups in London have attracted record levels of investment in the past year, receiving more than £1 billion in funding in 2014, as venture capitalists bet that Britain’s capital city will produce major digital companies in the future. More than 136,000 new businesses were registered in 2013 accounting for 26 percent of the total number across Britain.
Increasingly, such levels of investment are luring start-ups from both European rivals, to establish their operations in the UK’s capital.
One of the main destinations for start-ups is London’s Tech City, a concentration of IT start-ups, advisory businesses and accelerators situated in and around “Silicon Roundabout”, in the Old Street and Shoreditch areas bordering the City of London.
A number of factors have combined to assist the appeal of London, and the UK’s global appeal, to start-ups including ease and speed in starting a company, a favourable tax regime, access to funding at all stages of development and a competitive and cost efficient labour market in which to scale a business from the start-up to listing or IPO.
UK employment law regulations are flexible
The rules governing termination of employment in the UK are very employer friendly with minimal procedural requirements. In the first two years of employment, employees do not benefit from protection against unfair dismissal. Thereafter, the procedural requirements to effect a fair dismissal are relatively ‘light’ compared to France and Germany. Employers in the UK should however be mindful to follow a fair, documented process when dismissing an employee to avoid claims for discrimination, as protection against discrimination on grounds of the nine Protected Characteristics in the Equality Act 2010 does not require a minimum length of employment.
The tax environment
The UK offers one of Europe’s most favourable tax regimes and ranks third lowest for tax payable in Europe. Recently corporation tax has been lowered to 20 percent with effect from 2015 to stimulate business growth.
The government has also put in place a number of schemes to support tech companies such as R&D tax credits and the so-called Patent Box.
With R&D tax credits large companies are entitled to deduct from their taxable income a further 30 percent of their current spending on qualifying research and development over and above the normal 100 percent deduction.
The Patent Box scheme provides an incentive for companies to retain and commercialise patents and other intellectual property rights (IPRs) and to develop new innovative patented products in the UK. It also encourages companies to locate high value jobs associated with the development, manufacture and exploitation of those patents in the UK. The effect is to lower corporation tax to 10 percent on profits attributable to the development and exploitation of patents and IPRs in the UK.
Other tax schemes for investors are the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). The EIS is designed to help smaller, higher-risk companies raise finance by offering tax relief on new shares in those companies that qualify. For the investor, it’s a tax efficient way to invest in small companies – up to £1,000,000 a person per year in qualifying companies. What makes it even more attractive is the 'carry back' facility where investments can be applied to the preceding tax year.
In terms of SEIS, investors can receive initial income tax relief of 50 percent on investments up to £100,000 per tax year in qualifying shares issued on or after 6 April 2012. The company must have 25 or less employees and gross assets of up to £200,000.
Government programmes and initiatives
The Government is funding a number programmes for small, medium and large companies through Innovate UK whose purpose it is to fund, support and connect innovative businesses to accelerate sustainable economic growth. One such programme is IC Tomorrow which aims to stimulate innovation and economic growth in the digital and creative sectors, by breaking down barriers and opening doors for a new generation of entrepreneurs to include start-ups and SMEs and venture capitalists looking for investment opportunities.
The Government has also announced plans to create a world-class institute specialising in data science dedicated to the British WW2 code-breaker Alan Turing - the Alan Turing Institute for Data Science. The Institute will receive £42 million of government investment over five years.
The legal environment
It is probably universally accepted that the UK offers a world-class, stable and fair legal environment for the regulation of businesses etc.
The UK is currently ranked eighth in the world for ease of doing business, while above Germany ranked 14th and France 31st respectively. A high ease of doing business ranking means the regulatory environment is more conducive to starting and operating a business in the UK.
Setting up a company in the UK is straightforward and fast compared with other European jurisdictions. It can be done online on the same day and without the need to involve outside advisers such as notaries. The minimum capital requirements are low; typically companies are formed with a share capital of either £1.00 or £100.
London’s digital tech sector is expected to grow by an average of 5.1 percent over the next 10 years and to create an additional £12 billion of economic activity in that period. Being a part of this rapid development process appeals to many start-ups and indeed, to more mature businesses whether they are a technology company or an investor.
Incubators and accelerators in Tech City are playing a central role in supporting this process. According to a recent report, London currently has 36 programmes running split between 24 accelerators and 12 incubators.
The City of London which borders Tech City is recognised as one of the world’s leading financial centres. The City opens up the possibility for many start-ups and more mature businesses to get access to external funding whether it is traditional seed capital/early stage funding, funding at a later stage or crowd based funding. London also offers the opportunity to list on its different markets and stock exchanges when the business is at a mature stage.
Many of the world’s leading tech companies are in London and many of them support new tech businesses either directly or indirectly through investment schemes, mentoring or other programmes.
One such programme is the Open Data Institute in Shoreditch funded by UK Innovate, Telefonica and Quanta. The ODI is a non-profit and independent company looking to catalyse the evolution of open data culture with a view to creating economic, environmental and social value.
The three key indicators of intellectual capital and innovation; technology readiness; and openness to the rest of the world represent a group of criteria with a powerful impact on the growth of cities.
By harnessing these factors London has transformed itself into a city of opportunity and leadership over its continental rivals in Paris and Berlin, largely by a combination of education, technology, and openness to the world; a willingness to become a gateway to, the rest of the world.