Time to Leave

Why are UK start-ups leaving?

Time to Leave

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Today's newsletter is a 7 min read:

  • 🇬🇧 Time to Leave: Why are UK start-ups leaving?
  • ➕ Plus: Germany's GDP Misses the Mark, Toyota Domination, The Green Subsidy race, Memory Chip Industry Struggles

🤿 Deep Dive

Time to Leave

In brief:

  • Leading UK start-ups are accelerating their overseas expansion plans as a result of recent cuts to Research and Development (R&D) tax credits, Brexit and a slowdown in venture capital funding. All this is threatening the UK's position as a tech hub.

Why is this happening?

Many early-stage tech companies are considering international opportunities as other countries become increasingly attractive places to do business.

  • In Stats: A survey of 267 UK tech start-ups showed that 84% are concerned they may have to offshore more tech development following the cuts!

What cuts?

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 measures come in on April 1 2023 and will hit the hardest start-ups in strategic industries such as artificial intelligence, biotechnology and climate tech who are typically loss-making.

Don't go yet!

The government has launched a consultation on merging the R&D schemes for large and small businesses, which it claims would simplify the system and give businesses more clarity on funding.

Despite these efforts, funding will still be reduced from April. Start-up founders said the cuts, along with other economic policies, were undermining the government's ambitions to grow the UK's tech sector.

Losing the Tech Crown

Tax credits have been instrumental in attracting international investors to UK businesses and growing jobs in the country. The UK has 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.

The change means that other countries could pull ahead in terms of attracting future growth industries. The US with its new Inflation Reduction Act passed in August will provide about $370bn of subsidies, some of which have been set aside for clean energy.

Impact on Law Firms and their Clients?

💼 What does this mean for law firm's clients?

Tech Start-ups relying on R&D Credits:

  • How are they affected? Cuts to research and development tax credits, along with Brexit and a slowdown in venture capital funding, have made it less attractive for tech startups to grow in the UK. In short: the costs get too high, too quickly. As a result, many start-ups are speeding up their plans to expand overseas as they see opportunities in, for example, the US as key to benefit from government subsidies, access more investors and cut losses whilst growing their business.

UK Government

  • How are they affected? The cuts to R&D tax credits, along with other economic policies, are undermining the government’s ambitions to grow the UK’s tech sector. This means the UK could quite easily lose its title as a leader in the tech space in Europe and beyond. Despite its consultations on the issue, funding will still be reduced from April. If companies do end up leaving in large numbers, the government may also have to deal with a rise in job losses, and a drop in profitability and innovation.

Investors in tech startups

  • How are they affected? Tax credits have played a strong role in attracting international investors to UK businesses, so the changes to the system could impact their interest. They may quite easily decide to pivot to the US and urge many of the companies they are invested in to move there too. Marvel Fusion, one of the few European start-ups trying to deliver zero-carbon fusion power, is being pushed by investors to move to the US to benefit from the subsidies.

Other governments

  • How are they affected? Other governments, including the US and Asian countries, are becoming increasingly attractive places to do business for tech startups due to more generous support and attractive sources of funding. This could put the UK at risk of losing its position as the European hub for tech and could result in other countries pulling ahead in terms of attracting future growth industries. Here we also covered what this could mean for hydrogen energy, a key energy source for 2023 and beyond!

⚖ Which legal departments would this impact?

Corporate

  • Who would they advise: Start-ups that are looking to expand overseas.
  • Would they see an increase in work: They would see an increase in instructions as the start-ups look to expand overseas due to the cuts to research and development tax credits and more generous support in other countries.
  • What would they advise on: The legal requirements and processes involved in setting up an international office and claiming subsidies, including registering the company in a new jurisdiction, obtaining any necessary licenses, and ensuring compliance with local laws and regulations. They would also advise on contracts and agreements with partners, employees, and suppliers, as well as corporate structure and governance issues. They may also need to lead them through new funding rounds, and investment agreements with US-based investors.

Tax

  • Who would they advise: They would advise the start-ups on the tax implications of their international expansion.
  • Would they see an increase in work: They would see an increase in instructions as the start-ups are concerned about the cuts to research and development tax credits and are exploring international opportunities that offer more attractive tax incentives.
  • What would they advise on: The tax implications of setting up an international office, including tax registration, compliance with local tax laws and regulations, transfer pricing, and tax planning and optimization strategies.

Intellectual Property

  • Who would they advise: They would advise the start-ups on protecting their intellectual property in international markets.
  • Would they see an increase in work: They would see an increase in instructions as the start-ups are expanding overseas and need to ensure their IP is protected in the new jurisdictions.
  • What would they advise on: They would advise on the registration of trademarks, patents, and copyrights, as well as the enforcement of IP rights and strategies for preventing IP theft and infringement. Many of these start-ups operate in highly technical and sensitive areas in technology and clean energy. The tech behind their products and services is key to their business, and IP lawyers will need to advise them on how to protect them in any investment, services and re-location agreements.

Employment

  • Who would they advise: They would advise the start-ups on the employment law implications of their international expansion.
  • Would they see an increase in work: They would see an increase in instructions as the start-ups are setting up international offices and hiring employees in new jurisdictions.
  • What would they advise on: They would advise on the legal requirements for hiring and employing employees, including compliance with local employment laws, immigration and visa requirements, and employment contracts and agreements. They would also advise on employee benefits, health and safety, and dispute resolution. On the flip side, start-ups with less cash available may need to terminate part of their workforce to fund their expansion. Employment lawyers will need to advise on that side too, to avoid claims for unfair dismissal from the employees.

🔮 What trends does this highlight?

The recent cuts to the UK's research and development tax credits and the lack of support for start-ups have caused a shift in UK-based tech companies' expansion plans. The cuts, along with Brexit and a slowdown in venture capital funding, have led several start-up founders to consider expanding overseas.

Several companies such as Sylvera, Epoch Biodesign, and Hoxton Farms, have already opened offices in the US and Asia-Pacific region due to the lack of favourable policies in the UK. We can expect this trend to continue and slow down the UK's economic activity and innovation sector.

Less innovative start-ups mean less opportunities for acquisitions and investment in the UK. It also reduces the availability of jobs and the UK's ability to lead the world in key emerging industries such as Artificial Intelligence. Meanwhile, the US could greatly benefit from the arrival of these key companies to boost its own economy and innovation sector.

📰 News Spotlight

💸 Germany's GDP Misses the Mark

  • In Q4 2022, Germany's GDP shrunk by 0.2%. Most analysts expected GDP to be flat, but high energy costs & rising interest rates put a damper on things. If it shrinks again, Germany would end up in a recession.

🚗 Toyota Domination

  • For 3rd year in a row, Toyota sold 10.5m vehicles and remained the world's top seller. Despite supply-chain challenges, Toyota was able to increase production. New CEO Koji Sato is leading Toyota to capture more of the electric vehicle market. Volkswagen came in 2nd place, selling 8.3m vehicles (lowest in over a decade)

🌿 The Green Subsidy race

  • In response to US's $369bn Inflation Reduction Act, the EU plans to loosen rules on tax credits for green investment. The European Commission will support investment in new green production facilities via tax benefits. Some of the €800bn in its NextGenerationEU Covid-19 recovery fund could also be redirected towards tax credits.

💾 Memory Chip Industry Struggles

  • The $160 billion memory chip industry is facing a severe crisis. A high supply of chips, declining orders, & plunging prices are causing problems. The crisis is also affecting Asian economies that rely on tech exports, forcing players to form alliances or consider mergers.

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