Budget 2011 wishes for fast growth digital and tech companies

With George Osborne promising an “unashamedly pro-growth, pro-enterprise and pro-aspiration” Budget tomorrow at 12.30pm, I am looking forward to hearing these words turn into solid, workable solutions for UK entrepreneurs.

Giving Budget predictions is almost as much fun as delving into the actual Budget announcements afterward so please allow me to indulge myself for just two minutes!

Here are the tax changes I would like to hear announced tomorrow:

  1. An increase in the enhanced R&D tax credit deduction from 175% to 200%. I’ve seen so much benefit brought to hi-tech companies from the UK R&D tax incentives but I still see a ‘brain-drain’ in talented technical or scientific entrepreneurs and workers leaving the UK to build businesses where more attractive tax breaks are on offer. Dyson has called for similar changes and we should act now to encourage and retain these export-rich companies.
  2. Introduction of specific tax reliefs for video-game companies. TIGA has been calling for such changes for a while and despite squeaks of support from the previous Chancellor, these plans got shelved by the Coalition government. Canada, South Korea and France are busy supporting their games developer industry so we should likewise support our £1bn UK videogames industry.
  3. A reduction in the 5% shareholding requirement in order for entrepreneur’s relief to be available. Company employees are rarely offered the opportunity to acquire shareholdings of 5%+ let alone have the financial capacity to fund share acquisitions of this quantum so it seems harsh for them to be taxed at a likely 28% tax rate whilst those with a small percentage more could get down to a tax rate of just 10%.
  4. A change in the EMI rules to allow for the 12 month shareholding clock to start ticking from the date of grant of the option – in the same way as the old taper relief rules allowed for the clock to start ticking from the date of grant – for the purposes of entrepreneur’s relief.
  5. Relaxation of the Enterprise Investment Scheme (EIS) rules to allow income tax relief for loans to smaller companies given that accessing lending from banks continues to be difficult – especially for early stage start up companies.
  6. Introduction of the ‘patent box’ for intellectual property income – other EU countries already offer this tax incentive. We need it sooner rather than later.
  7. Enterprise zones to encourage clusters of hi-tech businesses. Mini-Silicon-Valleys with tax breaks for qualifying companies operating within the EZs.

So these are my starter for 7. What have I missed? What measures, incentives or changes would benefit your business?

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Employee shares headaches for early stage companies

Cash is often tight for early stage start-ups.

So often, as well as the founders taking little or no cash out of the business as salary in its early days, the first (brave!) employees also end up having to share this pain.

To help ease this, it is common for employees to be offered shares in the company in lieu of salary (in full or in part). This seems like a sensible option, as the first employees they are treated like sort of quasi-founders, and by taking a small slice of the equity they have the potential to share in the upside of equity ownership if all goes well in exiting further down the line.

This can therefore work well commercially, however, it can cause a headache from a tax perspective….

The UK tax rules related to shares issued or transferred to employees are unfortunately tightly drawn. This results in shares passed to employees being treated for tax as if they were received at full market value – even if no cash changed hands – and therefore as ‘earnings’.

So, say I reward you with 500 ordinary shares in my early stage start up company for the hard work and dedication you’ve put in so far and for accepting a reduced salary, HM Revenue & Customs (HMRC) would treat these shares as employee related income subject to income tax (and possibly even National Insurance). Any employment related tax would be due on the market value of the shares at the date of issue or transfer less any amount paid (if any). The logic behind this is that had the company had cash and paid a salary instead then this would have been subject to tax via PAYE in the normal way so there should be no difference…

But so many start up and early stage companies do not think of this – why should they?

In very early stage companies this may be less of an issue but in situations where there has been external investment or where there is valuable proprietary intellectual property (IP) or even where the founders have a track record of success and there is significant ‘hope value’ or likelihood of success (and therefore value) then extreme care is required.

Complex rules like these, quite frankly, should not be inflicted on new and emerging companies, however, they can and do bite so it’s better to be forewarned (and armed) than to risk stumbling into this headache later down the line which could ultimately disrupt investment or exit opportunities – or at least result in a distracting tax investigation!

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EIS and EMI – Whaaaat?!!!

I don’t know if there’s something in the water around here right now but I seem to spending a huge proportion of my time advising clients on either:

  • the benefits (and potential pitfalls!) of the Enterprise Investment Scheme (EIS) aimed at tax efficient investments into fledgling fast growth companies and
  • rewarding employees under an approved HMRC tax efficient share option scheme called the Enterprise Management Incentive Scheme (EMI)

I will follow up with a more detailed analysis of the pros and cons of these UK statutory tax reliefs in future posts.

In the meantime, you know where I am if these are already on your agenda and you need some help.

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Reimagine your business using mobile technology

An interesting event this morning on “Redefining the Customer Experience using Mobile” hosted by the Institute of Directors (Young Directors Forum) held at the Alchemist in Manchester’s Spinningfields.

In addition to some mind-boggling stats about the proliferation of mobile connections and apps being launched on a daily basis, the overarching message for businesses is that the mobile tech opportunity whittles down to three key advantages:

1. Better customer information
2. Better customer understanding
3. Better customer relationships

After all, a smart phone or mobile device sits in the pocket of pretty much every single one of your target customers.

Some interesting case studies demonstrated how apps can add a element of engagement and fun e.g. Barrett shoes asking for user’s dates of birth to identify their birth stone and therefore their likely personality traits and of course shoe preferences (the live demo worked!). Plus Kiddicare who has built in a multitude of capabilities into their app to allow customers to view video demos of products and even scan barcodes in competitors’ shops to get a price match – plus next day delivery and a 365 day return policy (a no-brainer?!):

“so our competitors become shop windows for our products”

Watch out bricks and mortar retailers!

In designing apps, advice was given to focus on your target market and ideally get them to help design it – otherwise you’ll risk ending up with a highly functional yet dull and unengaging app. And to:

“think multi-channel rather then just Internet in approaching and targeting your market”

Disruptive technologies such as mobile point of sale apps and hardware were highlighted (I was surprised that Dorsey’s Square was not mentioned?) plus user friendly technologies to help offsite / mobile workers transfer data for processing in realtime as opposed to dropping in and out of the office.

Mobiles or smart phones have become such an integral part of daily life that if you as a business owner do not have (or at least are not thinking about building) a channel into your existing or future customers’ mobile device, then you’re pretty much toast!

I liked the comment from Kiddicare:

“we’re a tech company that happens to sell childrens stuff”

Its like McDonalds founder, Ray Kroc‘s comment “we’re a real estate company that happens to sell hamburgers” updated for the 21st Century.

Approached from this perspective, it should help us all reimagine our business or even our entire industry.

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Finding your true North

Richard North, Managing Director of Wow! Stuff, provides some great advice for entrepreneurs:

“You are either an employee and you are prepared not to take risks and end up with a bonus or you become an employer, you take risks but you also end up with the rewards”

Despite selling his first business for a 7 figure sum is next venture (boystuff.co.uk) came back to bite by heading into administration in 2005. His explanation for the business downfall sounds counter-intuitive yet it is a common reason for many business failures:

“We ended up with too many people on board and too many ideas on strategy. We tried to do too many things in a short period of time”

He goes on to say:

“I had become remote from the business as there were so many people running it, so I wasn’t feeling that emotional, but what did feel emotional was that I had lost huge amounts of money”

This is where the power of leverage can go horribly wrong – leverage of people and money. In an effort to grow a business fast, it can start to lose direction and when more and more (external) strategic heads get onboard then the founding entrepreneur can start to feel disempowered and disconnected from their ‘baby’ – this can be acutely common in VC backed businesses.  Often resulting in lights out.

North appears to be growing his latest business more gradually with a focus on a handful of products that will succeed and best of all, he appears to have rediscovered his passion for his latest venture.

Good stuff. Read more at Director

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Preventing potentially expensive business balls-ups!

It’s been a busy start to the year so far. It’s nice to see businesses that I’ve been talking to and getting to know for a number of weeks, months (or in some cases years) reach critical points in their business lifecycle in either starting new ventures, seeking and raising funding or selling their businesses.

I’ve been privileged to work alongside and advise these businesses across all of the above scenarios in just the past week alone and have sought to put them in the best possible position (and side-step any potentially expensive business balls-ups!).

Having the benefit of working alongside and advising growing entrepreneurial businesses every single day allows me the benefit of spotting latest trends and recurring issues which in turn allows for practical hands-on advice to be passed on – in nearly all cases aimed where possible at ‘prevention’ rather than cure – as digging businesses out of holes that they have inadvertently created is normally a whole lot tougher (and more expensive) than getting things right from the outset.

This is where a good relationship with an accountant who is familiar with your sector can help. Even if it’s just to meet up for a coffee and chat. There’s no need for this to be overly formal or regimented. We’re here to help.

If you’re in the digital, tech or media space (or simply an ambitious business with BIG plans) then please get in touch. It costs nothing to have a chat. I would love the opportunity to show how we can help.

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Utilising spare office space across cities

We are proud to be hosting the next Techcelerate event on Funding Options for the North West next Wednesday evening.

This promises to be a fantastic event which has been matched by the high level of interest and ticket sales so far. The rising number of attendees means that we may need to decamp the event from our office due to capacity constraints and instead hire external conference space say in a local Manchester hotel. (No longer in our building and additional cost. Ugh.)

This got us thinking about the newly refurbished (and currently empty) floor in our Manchester office building. Utilising this would have the advantage of allowing us to host the event in the same office building without incurring the cost of a hotel whilst providing a great opportunity for our landlord to showcase the available refurbed office space. A win-win.

With so much spare office space available across most major cities and towns, think about how you could match this opportunity to your future events programme with minimal, if any cost?

I should add that we’ve yet to receive the final nod from the landlord as to whether we can go ahead with this plan but hey at least the thought was there!

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Have you become a daily cyborg?

From the second my alarm goes off on my Blackberry at 6am in the morning, my daily “cyborg life” begins and typically ends with a scan through my blog RSS feeds or perhaps a read of a digital book on my iPad. It is amazing to think how much has changed in our use and interaction with technology in such a short space of time?

This short video is worth watching to reflect on just how much we rely on technology on a daily basis and how this might be impacting on us as humans. In so many ways technology has introduced changes for the better, but Amber Case also highlights some less positive factors such as the time we lose for self reflection – and therefore to re-establish our connection with our innermost self – when we find ourselves constantly reacting to information (overload).  There’s also the gradual erosion of simple face-to-face human interaction. Its funny, a client of mine moaned today about the constant use of email and how this might be slowing down the conclusion of some outstanding issues over a deal, to which he recommended that we get together over the telephone – yet this is still one stage removed with technology still in the way….!

Overall, I love technology and the changes it has made – in most cases for the better to so many aspects of our lives – but its worth taking the time to step outside ourselves and reflect on this issue.

In what ways have you become a daily cyborg?

Why 2011 should be a great year for north west entrepreneurs

Despite talk of economic doom and gloom, here are just 3 reasons why I think 2011 will be a great year for entrepreneurs and fast growth businesses across the north west:

  1. The North West Fund is here to provide £185m of equity and loan funding making investments of £50,000 to £2m into fast growth businesses across the North West. This includes specialist funding for local emerging sectors such as digital and creative, biomedical plus energy / environmental.  Just the spark that businesses have been looking for to help them achieve their ambitious growth plans – I look forward to working with my clients to make this happen in 2011.
  2. MediaCityUK finally launches. A £650m new city built to service creative and digital companies. Large parts of the BBC are on their way; ITV is also coming and, more excitingly, a hot-bed of exciting new talent and businesses should flourish to support these Goliaths of the creative sector. (I look forward to taking a trip around it to check on progress this Friday).
  3. Despite public sector cuts and the demise of the NWDA, local initiatives like Techcelerate, Manchester Digital, Sharp Project, Daresbury Innovation Campus plus many others will step up to the plate in delivering access to services and support for new businesses – and further new initiatives will no doubt emerge to plug gaps as they emerge.

This is an exciting time to be living and working in the north west. Make no bones about it, its going to be tough plus I am mindful that we need to continue to build solid links with London and internationally, but so long as we can get our own entrepreneurial infrastructure firing in the north west then we should be in good shape for 2011.

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