College spin-offs win DTI support

A new report calls for tax cuts and grants to aid entrepreneurs. Kam Patel reports

A Department of Trade and Industry report out next month will call for better rewards and more support for academics who set up high-tech businesses. The report suggests a lighter capital gains tax regime and access to research funds at critical phases in development.

The study follows a high-level mission led by science minister Lord Sainsbury to universities that have been successful in spinning off companies and have forged links with local industry to create high-technology clusters. The government is keen to encourage the growth of these clusters, especially in biotechnology and information technology.

According to Whitehall sources, the mission team heard many complaints from both universities and businesses about capital gains tax. The system, which levies an average 30 per cent tax on profits from the selling of shares for instance, is seen as a powerful disincentive and compares unfavourably with the United States.

"Reducing the capital gains tax burden would be a powerful motivator for academics to become more entrepreneurial. They would know that if they are successful there would be substantial financial benefits. It would also encourage more investment into the sector," one source said.

The mission team has also noted that there are many able, highly paid Britons managing high-tech enterprises in the US who would need such incentives to lure them back home.

DTI and Treasury officials have been discussing how the capital gains tax regime can be made more favourable for the high-tech sectors.

The mission team uncovered widespread dissatisfaction with the level of investment high-tech firms can attract in their early

years. While limited in funds,

government schemes such as the enterprise challenge are viewed favourably, but high-tech firms can take up to ten years to become fully established. While venture capitalists are seen as a crucial source of investment for firms in later years, the mission team has concluded that in Britain they are still too "risk averse".

The mission team believes the problem could be alleviated if government departments, directly or indirectly connected with wealth creation, earmarked a small percentage of their R&D budget to help support R&D in high-tech companies during their critical growth phase. The recommendation has been inspired by the US, where 2.5 per cent of the external R&D budgets of federal government departments is allocated for such purposes through the small business innovation research grants scheme.

High-tech firms have also complained that restrictive local authority planning regulations hamper their expansion. DTI and Department of Environment officials have been in talks aimed at addressing the problem.

The mission team's report is likely to suggest that new regional development agencies and local authorities collaborate to encourage the growth of small firms in special designated areas. New planning guidelines are likely to result. "The aim is to plan for growth, take advantage as much as possible of existing infrastructure and not have market forces so heavily drive the development of areas," a source said.