2014-09-13

Scottish Independence and Startups

I was discussing some issues that Scottish independence may have for high tech startups recently, and two key points were raised that are relevant, and I felt required answering. Scottish technology companies currently rely heavily on various tax schemes from the UK HMRC and their continuity or otherwise under an independent Scotland will have a huge impact on small startups.

The result of these decisions will affect everyone working in Scotland's technology sector, including my employer and the many other companies in Codebase, which is the largest technology incubator in Scotland. I think it is essential to have all of the facts available to help shape any decision making process for the eighteenth. Accordingly, I have tried to determine what the proposed status of these schemes would be in an independent Scotland, as well as how long these schemes might be offered for before being changed.

In the UK, these schemes have been running for some time; EIS from 1994, SEIS from 2012 and R&D tax credits from 2000. The exact details are assessed and adjusted each year in the UK Budget by the Chancellor, and although they could be withdrawn at any time so far the changes have been positive.

Enterprise Investment Scheme

The Enterprise Investment Scheme or EIS is designed to help smaller, higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. Many venture capital firms and funds or investment companies rely on this as an integral part of their business, such as Par Equity and their Par Syndicate EIS Fund.

The Seed Enterprise Investment Scheme (SEIS) scheme complements EIS and is designed to help small, early-stage companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies. SEIS is intended to recognise the particular difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by the existing EIS. The rules have been designed to mirror those of EIS as it is anticipated that companies may want to go on to use EIS after an initial investment under SEIS.

The Scotland's Future document has a Q&A section with a series of questions relating to Entrepreneurs and the Self Employed. This mentions Seed EIS status after independence in question 68 which states that it will continue. The answers to questions 69 and 70 on venture capital and research commercialisation are also relevant.

Would the UK Seed Enterprise Investment Scheme continue?
Yes. The current Scottish Government proposes that this scheme will continue on independence. Future decisions on the Seed Enterprise Investment Scheme will be made by the Government of an independent Scotland.

Note however, that this is not EIS, which is the major tax break for high net worth individuals, such as angel investors. There is also no information about how long SEIS is guaranteed to be available for in Scotland.

It should be noted that the generous tax relief given to individuals who invest in small early stage businesses via EIS and SEIS is for UK income and capital gains taxes and in an independent Scotland the equivalent schemes would apply to Scottish taxes only which immediately reduces the investor base to that of Scottish high net worth individuals.

Research and Development Tax Credit

Research and Development TaxCredit is a mechanism allowing companies to reduce their tax bill or claim payable cash credits based on R&D expenditure. Any company carrying out R&D is likely to qualify and it can be an integral part of the finances of many startups, which are often struggling for cash, and any technology company that is doing innovative work should be claiming this.

In this article from an accounting website, John Swinney MSP is quoted as saying that the Scottish government will extend and focus research and development tax relief in the event of a Yes vote.

Note that there is no information about how long the R&D tax relief is guaranteed to be available for in Scotland.