The National Security and Investment Bill is bad news for entrepreneurs

We don’t often comment on national security legislation, but it’s not often that national security legislation has a direct impact on the ability of entrepreneurs to attract foreign direct investment in their businesses. The National Security and Investment Bill, which passed its third reading in the Commons last week, creates a regime that is significantly less welcoming to foreign investment in British startups. 

Under the new law, any investment worth more than 15% of a company’s value in a “strategic industrial sector”, of which there are seventeen, including many that have as much or more civilian applications as military like artificial intelligence, energy and transport, can be blocked on national security grounds by the Investment and Security Unit (ISU), a soon to be created regulatory body.

In the Financial Times, John Fingleton, the former chief executive of the Office of Fair Trading, argues that the new investment regime goes way further than moves in a similar direction elsewhere:

The scope is incredibly wide. It covers all sectors of the economy, and the investment threshold for mandatory notification is incredibly low. The UK government will even be able to intervene in cases involving businesses that have no UK assets, because the law will cover foreign companies that are active, or sell goods and services, in Britain.

Second, the powers of intervention are draconian and can be applied retrospectively. The government can “call in” deals up to five years after they have been completed, and it then has the power to declare them to be null and void. This applies to any investments made after the bill was introduced

This law will have a chilling effect on foreign investment. The risk of a lengthy legal battle will discourage overseas investors. The ability to apply the rules retrospectively compounds the problem. Yet bizarrely, the Government states:

“The vast majority of the transactions will not be called in, and this process can   therefore provide more certainty and confidence for businesses and investors that the Government will not intervene in their investment.”

This seems unlikely. As Fingleton notes, many investors will need to seek full clearance from the ISU before parting with their cash, because being called in after a deal is done is so costly and disruptive. And it is likely that the process for clearance will be lengthy. The ISU is expected to examine around 200 cases each year and intervene in about a quarter. This would represent a massive increase on existing numbers. By contrast, the CMA currently only recommends remedies in 20 cases a year on competition grounds.

The low threshold for notification (15%) will be of particular concern to entrepreneurs. Tech startups in AI, quantum computing or cryptography seeking seed investment from the US or EU will be burdened with additional legal risk even for taking minority investments.

Not only will startups find it harder to grow through foreign investment, but they will also be less attractive to UK investors. After all, selling out to a larger company is a common exit strategy for startups, especially specialised ones whose products are most likely to be valuable as part of a larger product bundle, which can best be built via mergers. If overseas takeovers and investment becomes fraught with legal risks, entrepreneurs will have fewer options for exit.

Part of the problem with expanding the scope of national security objections to overseas investments is that they are often used to stop takeovers that have nothing to do with national security.

In France, they were used to block PepsiCo’s takeover of Yoghurt maker Danone in 2005 (protecting the country’s “strategic yoghurt reserve”, as some quipped at the time). In the case of the GKN/Melrose merger, a deal which involved two British firms, not a foreign buyer, the mere threat of a national security review was enough to extract commitments, many of which – such as adding to the company’s pension pot – had nothing to do with national security. These highlight that even tools ostensibly designed for national security purposes will likely become a tool for general political ends.

Foreign takeovers often enhance productivity and in some cases, ultimately save jobs by bringing over better management practices and capital investment. The classic case is Tata’s takeover and turnaround of Jaguar Land Rover, which saved 35,000 jobs.

But they are often controversial. Some workers can lose out, as can domestic competitors. Special interest groups who stand to lose out from takeovers will inevitably lobby ministers to intervene on national security grounds. This law will empower them.

In the government consultation on which sectors should covered by the national security and investment bill, the executive summary begins:

“The UK economy thrives from Foreign Direct Investment, and as a result of Foreign Direct Investment.”

It’s time they acted like they believed it.

Education Entrepreneurship Monthly – January 2021

The return of lockdown offered a grim start to the new year. That the decision to shut schools and transition to remote learning came so late didn’t set things off to a good start with a teacher workforce already worried to exhaustion, compounding the likelihood of teacher attrition to come. In a move widely regarded by Early Years practitioners as baffling, the government also announced that childcare settings would, however, remain open, despite rates of infection among staff being similar. In an effort to get ahead of this, the PM pledged to double down on the government’s public-sector recruitment drive.

On the upside, the majority of schools, and a considerably greater number of parents, were better prepared for remote schooling after last year – not to say that managing children’s learning has been easy. Ofsted issued well-grounded and useful guidance for schools on what effective remote learning means in practice – worth a look if you’re in edtech and want to think about the challenges of adoption from the perspective of the school. Although the regulator has so far resisted pressure from the DfE to develop inspection criteria for rating the quality of remote learning, this will undoubtedly come round again.

In the meantime, take a look at the Education and Training Foundation’s Digital Teaching Professional Framework, which achieved another development milestone this month with the release of a tranche of new PD modules designed to support digital content creation and delivery. In an uncharacteristically enthused speech on the opening of #BettFest online, Nick Gibb extolled the Department’s partnership with Microsoft and Google to enable collaboration between 6,500+ ‘Demonstrator’ schools in the areas of resource-sharing, pupil progress monitoring, feedback and platform-based teaching delivery.

Returning to whether to close schools and embrace remote delivery, part of the PM’s reticence will of course have been due to mounting evidence of learning gaps, the mental health repercussions that have followed young people’s separation from their peers and communities, and rising inequity. Well documented in education research last year, the debate has overtaken Westminster in earnest this month, driving increasing numbers and accelerating the distribution of laptops to schools and underscoring that the degree of learning loss is so severe in places (and especially so in the north east) as to justify consideration of a fully funded repeat year.

On the mental health front, two important reports from CoSpace and The Prince’s Trust respectively, highlighted covid’s impact on family stress and the mental health of 16-25 year-olds.

There’s been much debate on what lasting impacts the pandemic might have on inherited models of education provision in almost every area. In relation to a couple of the issues in the public eye this month I want to conclude with a look at where entrepreneurial energies are going.

First, mental health. Prior to the pandemic, the task of providing more relevant, personalised, and engaging mental-health support for young people seemed a mountain to climb. Video content curators like Boclips worked the flipped learning concept with a view to use in blended learning. Perhaps because for many the idea of an app-based solution seems counter-intuitive for addressing the issues, direct to consumer offerings have been slower to emerge – social enterprise app MeeTwo got a head-start with help from the NHS. This month, start-up EmpowerU received seed funding to launch its highly personalized, tech-powered, social-emotional learning solution nationwide. A fledgling start-up, Quol, aspires to going even further, with accessible user-led, social influencer-presented quality video content and a focus on habit-forming positive behavioural change.

Second, catch-up and remedial. Paul Johnson of the IFS soberingly explained in an article for The Times (reproduced here) that when schools do return, teachers are going to face enormous challenges, likely for years to come, managing these disparities. In policy terms, it might very well serve us at this juncture to place learning progress on a ‘stage, not age’ footing. I commented briefly in the last issue on the promise of the National Tutoring Programme to assist schools with edtech and targeted tutoring: Ian Koxvold’s ‘what’s in store for 2021’ piece has thoughts to offer on this, among other developments, too and is well worth a read.

Third, childcare. Three initiatives that pre-date covid founded in the conviction that traditional models need a rethink, are now experiencing a boon. The first (from 2014) is Capture Education’s app for managing parent communications, which journals learning in accordance with EYFS requirements and manages the payments side too. In 2020 Capture added significant value for its nursery customer base by producing some great parent-facing content to support early learning at home. Second, Tiney are taking a fresh look at the potential of small group home-based education. Tiney has developed an excellent training, start-up and ongoing support package to attract a new breed of early years educators, and it’s definitely working! And third, there is Koru Kids, a new part-time Nanny agency who’ve figured out affordable local solutions for families/parents increasingly working from home, and are drawing significant scale-up investment.

Sign up for the Entrepreneurship Education Monthly newsletter here.

Improving Mentality

Alongside research, campaigns, events and updating businesses on how policy changes impact businesses, we aim to make the case for entrepreneurs’ contributions to society.

While we can count our media hits, that doesn’t seem like it’s measuring the right thing. But just because something is hard to measure doesn’t mean it’s not important. In fact, making the positive case for entrepreneurship may be one of the most important things we do.

Our Head of Innovation Research unpacks this challenge in his latest newsletter. Anton Howes’s expertise is in the Industrial Revolution and how it happened, and why it started in Britain. His key insight is that ideas, people and connections matter more than many historians of the period assume. People became inventors because they were exposed to and inspired by other inventors – it was the spread of an “improving mentality”. Anton’s insight is that necessity isn’t the mother of invention; this improving mentality is. And what was true of the Industrial Revolution is true today.

I used to be a journalist and edited a weekly page on entrepreneurship, interviewing some of the UK’s leading entrepreneurs. Without that exposure to entrepreneurs I doubt I would have ever founded The Entrepreneurs Network. One day sticks in my mind, when I went out for drinks with a group of entrepreneurs after interviewing one of them. It was perhaps the first time that I had been in a large group of just entrepreneurs (apart from me at the time). I was used to being around friends complaining about their jobs. Instead, I was bombarded with positivity and creativity. It was infectious.

So how do we go about making the case for a more entrepreneurial society? One small contribution I’m making this year is to get back into writing more about inspirational stories, undertaking interviews with entrepreneurs and inviting our Supporters and Advisers to sit in on the calls to ask their own questions. The first was with Shamil Thakrar, the co-founder of Dishoom and I’ll share his insights in an article here next week.

Anton thinks films could play an important role in inspiring the next generation of inventors (and has crowdsourced a list here), while Alex Tabarrok suggests business owners can learn a lot from The Profit, a reality-TV show on CNBC. I also like Robin Hanson’s suggestion that we record the lives of successful managers to train the next generation. He thinks compressing the recordings, identifying key decisions and asking viewers to make their own choices (before seeing the actual choices) would be instructive.

We have undertaken a lot of work on entrepreneurship education to suggest how schools, colleges and universities can imbed enterprise education in their teaching, but inspirational interventions can happen at any time. That’s why we are thinking more broadly about how we can influence society so more people are inspired by the power of entrepreneurship to make the world a better place. We are in the process of scoping out a report on this, but if you have any insights or want to support this work, drop Anton an email.

Fixing Copyright
Following last week’s launch of our report on Fixing Copyright, the King’s Intellectual Property (IP) Legal Clinic got in touch as they provide free IP advice to small traders, entrepreneurs, start-ups and organisations on matters relating to copyright, patents, trademarks and designs, as well as procedures and forms for registration of IP rights, their protection and enforcement, among others.

At the IP Clinic, law students work on cases under the supervision of qualified lawyers from leading IP law firms to provide free legal advice by interviewing clients and researching the legal issues involved. Clients are then sent a written letter of advice, normally within two weeks of the initial interview.

This is the first time we’ve recommended them, so if you get advice it would be great if you could let me know how it goes. Find out more here and get in touch with them here.

Sign up to our Newsletters here.

Fixing Copyright

Yesterday we launched a report on how to fix copyright (appropriately called Fixing Copyright), in which Dr Anton Howes sets out in detail how creativity is increasingly being dampened and innovation stifled by the current regime.

As Anton explains in this Tweet thread, copyright law has become a bit of a joke. Most of us are unintentionally breaking the law all the time, and while it has largely been unenforced, automation means that we’re about to enter an age of mass enforcement.

The report has a number of recommendations, including the creation of an exemption from copyright for format shifting for personal use; extending the exemption from copyright for text-and-data mining to for-profit uses; and limiting the liability for the use of orphan works that are of a certain age, provided the rightsholders have not registered the works on the government’s Orphan Works Register.

While there are limits to what can be reformed due to international treaties, we have more room for manoeuvre now we’ve left the EU (in fact, the UK has already decided not to implement the badly designed 2019 EU Directive on Copyright). The Directive is not all bad though. As Anton argues, we should implement Article 14, which stipulates that for something to be copyrighted, it must actually be original.

It’s a timely paper, but it’s also entertaining and informative (as you might expect from an award-winning writer). Read the report here, Anton’s article here, and our research director Sam Dumitriu’s article on the report here.

As always, we would value any feedback. Sooner or later, reform of some sort will become inevitable – not just in the UK but internationally. We have meetings lined up with the government to discuss this, so your considered thoughts will be properly considered by us. And as always, you can support us by sharing the report through social media or sending it on to people who you think might find it interesting.

Mission Impossible
Mariana Mazzucato is one of the most influential public intellectuals in innovation policy. Unlike so much academic work, her book, The Entrepreneurial State, cut through to politics, with successive governments inviting her in to advise them.

Mazzucato has been important (though probably not essential) in ensuring that successive governments have continued to fund research and development. But, as detailed here by Stian Westlake, her policy recommendations are less convincing (you can read Mazzucato’s response to Westlake here).

With a new book out, Mazzucato’s ideas will no doubt once more pique the interest of policymakers. ‘Mission Economy: A Moonshot Guide to Changing Capitalism’ makes the case for why governments should be inspired by the Apollo programme for solving problems.

Writing in the FT, John Kay isn’t convinced. Kay’s argument is that a key component of innovation is the pressure of market forces – including failure. Unlike the moon landings, Kay argues that the development of IT, perhaps the greatest innovation we’ve seen lately, “was characterised by a striking absence of centralised vision and direction.” Though he doesn’t frame it in Darwinian terms, failure and the redirection of resources to more productive uses is an essential part of why market economies trump those directed from the centre.

There is a lot that governments can do to support entrepreneurship, but more often than not they mess up incentives. For example, Mazzucato has suggested the UK government creates a sovereign wealth fund that invests and takes stakes in innovative companies.

I think there are objectively successful sovereign wealth funds; however, as I argue in this article, the management of these is diametrically opposite to the way Mazzucato wants the government to run one. There has never been an example of a fund of the sort Mazzucato wants being run successfully – I’m sceptical that there ever will be. While governments are in a unique position to tax and spend money on research whose spillovers make us all better off, there are limits to their ability to invest successfully.

Along these lines, Nicolas Colin has a great article in Sifted this week on why the EU is wrong to invest directly in startups. And as Josh Lerner argues in the brilliant Boulevard of Broken Dreams, sovereign wealth funds face the same problems as other government schemes to promote venture activity: “the temptation to invest too locally without considering broader options, a failure to assess performance, and pressures to invest in the ‘pet projects’ of political leaders and their associates.”

Peer(more)
We have been long-term champions of peer networks. So we are only too happy to pass on this opportunity from the Department for Business, Energy and Industrial Strategy for their Peer Networks programme. It aims to support you to find practical solutions to the challenges you're facing and new opportunities. They are delivered locally by Growth Hubs and supported by local enterprise partnerships. It’s for businesses in England with 5 or more employees that have been in business for at least a year, with turnover of over £100,000 and an aspiration to improve. Apparently it takes less than three minutes to enquire.

Read the whole newsletter here, and sign up for our newsletters here.

UK copyright laws can be changed for the better, now that we’ve left the EU

Today we release a new report, which identifies opportunities for reforming UK copyright law post-Brexit. It argues:

• Leaving the European Union creates an opportunity to reform the UK’s copyright laws and develop a world-beating system, by picking out the best practices from the EU and US systems.

• Creating a new copyright exemption for all text-and-data mining would spur on AI innovation and help UK startups compete with tech giants who already have access to massive data sets.

• We are living in an age of mass infringement, with artists and consumers frequently infringing upon copyright without realising. However, new technology is making it easier to identify infringers and threaten legal action.

• Recent court cases, such as the ruling that the song Blurred Lines infringed upon Marvin Gaye’s Got to Give it Up, have created a dangerous legal precedent that could have a chilling effect on creativity in an era of mass enforcement.

• There are an estimated 91 million “orphan” works, but only 1,100 have been registered on the government’s Orphan Works Register since it was established six years ago.

The UK should take advantage of new post-Brexit freedoms to create a world-leading copyright system, Fixing Copyright, a new report by The Entrepreneurs Network think tank argues. 

According to the report, modernising copyright would provide a boost to the UK’s artificial intelligence startups. 

Breakthroughs like OpenAI’s DALL·E, which has been trained to generate complex images from oddly specific text prompts, face massive uncertainty about their legality in the UK. AI companies often do not know whether or how their algorithms are infringing on copyright, which is encouraging them to be less transparent about the datasets they use to train them. 

To remove this uncertainty, the report proposes introducing an exemption from copyright for all text-and-data mining, including for-profit uses, which would provide greater certainty for AI companies than in the EU or US. Such a move would make it easier for AI startups to compete with tech giants such as Google and Facebook who already possess massive amounts of user data.

Under the status quo, copyright infringement is widespread. Many users infringe copyright without realising, for instance copying a song from a CD to an MP3 player is against the law. A spate of copyright lawsuits in the past two decades have set a precedent for minor aspects of a composition to be the basis of successful infringement cases, with abstract elements like just the “feel”of a song rather than the melody or lyrics becoming sufficient to win an infringement case.

For example, Pharrell Williams’s and Robin Thicke’s song Blurred Lines was deemed to have infringed upon Marvin Gaye’s Got to Give it Up, despite some experts arguing the songs only similar in ‘groove’.

The report’s author, innovation historian Anton Howes, believes that new technology may end the era of mass infringement. He warns that, without reform, this could have a chilling effect on creativity. Due to high legal costs, infringement cases are typically only brought against the most successful artists, but new digital technology, by lowering the costs of identifying infringement, will make it easier for rightsholders to threaten all potential infringers no matter how small. We may be about to enter an age of mass enforcement. 

Copyright also lasts for a very long time. On January 1st, Pygmalion and Animal Farm finally entered the public domain because their authors died 70 years ago. Filmmakers, authors, and playwrights will now have the freedom to reimagine those works without the permission of the authors’ estates. For example, one of the year’s most anticipated books is Michael Farris Smith’s Nick, a prequel to The Great Gatsby that could also only be published in the new year for copyright reasons. The death plus 70 years rule means that many written works are restricted for well over a century, with similar durations for other kinds of creative work. 

Unlike The Great Gatsby, however, most creative works are simply unusable, as their owners cannot be traced. There are an estimated 91 million of these “orphan” works, but only 1,100 have been registered on the government’s Orphan Works Register since it was established six years ago. To solve this problem, the report proposes an overhaul of how orphan works are treated by limiting liability for works that are not registered on the government’s Orphan Works Register.

Many of the recommendations from past government reviews into copyright policy such as the Gowers and Hargreaves Reviews of over a decade ago have still not been implemented, or only partially so. And technology has moved on since then too.

Brexit, however, presents an opportunity to reform the UK’s copyright laws and develop a world-beating intellectual property regime. The UK can implement the best aspects of the EU’s Copyright Directives such as a focus on promoting originality and allowing format shifting, while avoiding the EU’s ‘meme ban’ and the controversial ‘Links Tax’ for news publications.

Dr Anton Howes, author of the report and Head of Innovation Research at The Entrepreneurs Network says:

“Copyright reform is more urgent than ever. It affects our economy in more ways than people realise, and if left unheeded can become a major barrier to innovation, creativity and growth. With recent changes to technology, the system needs to be brought up to date, and I hope this report will at least stimulate a debate as to how.”

Matt Ridley, Author of How Innovation Works says:

"Copyright law is badly out of step with the way the real world actually works, leading to mass breaking of the law by almost everybody, but with a growing threat of mass litigation by the powerful. Neither is a good thing. As Anton Howes argues, there is a golden opportunity as we leave the European Union to reform copyright law in an area where Britain can be a world leader. Copyright should be about encouraging innovation and creativity, whereas at present it often stifles them."

Sam Dumitriu, Research Director of The Entrepreneurs Network says:

“The UK’s departure from the EU is a great opportunity to look again at the UK’s copyright laws. We can pick and choose the best aspects of the US and EU systems to create a world-leading system. By creating a copyright exemption for commercial text-and-data mining, we can make Britain a more attractive place to build the technologies of the future such as AI and Machine Learning.”

Big Shot

Happy New Year!

By far the most important task for the Government right now is getting vaccines as quickly as possible into the arms of the UK population.

As James Lawson, our newest Research Adviser, argues in his paper Worth a Shot, the Government can and should speed things up (Tony Blair’s think tank also released a paper arguing along similar lines). We, like the FT’s Chris Giles, have argued consistently from the start of the pandemic that the protection of human life and the protection of the economy have never been in conflict. That has never been truer, with over a 1,000 deaths a day, and every additional week of the pandemic costing the taxpayer £6 billion, while reducing economic activity by £5 billion.

But this too shall pass (hopefully more quickly than the current trajectory), and when it does entrepreneurs will be key to the economic fightback. The Prime Minister wants part of this to be driven by regulatory divergence from EU rules. While the trade deal limits areas where we can diverge, and there are areas where we would be worse off doing so, there will be opportunities (no matter what you think about the rights and wrongs of us having left). 

Now is the time to let us know about regulatory reforms that you think would help make life easier for UK entrepreneurs, as it’s our job to try to make them happen. Get in touch with Sam Dumitru with your ideas.

Kapow!
We have lots of exciting plans for this year, but I won’t overload you with them all in one go. I’ll limit myself to two today.
 
First, as part of the APPG for Entrepreneurship, this year we are undertaking a project with the Enterprise Research Centre (ERC) on Levelling Up. Find out more about how you can get involved here, and let me know if you want to support any other policy areas pertinent to entrepreneurship.

Second, this year I’m going to do a weekly interview with an entrepreneur in our network who has something interesting to teach us about policy and more broadly scaling a business. These will run from 8.30am to 9am on Thursdays, with our Advisers and Supporters invited to sit in on the interview and ask questions via chat. The first is with the founder of Dishoom. Let me know who else you would like to hear from. Current Advisers and Supporters should just drop us an email for a diary invite to this, and if you want to find out more about becoming a Supporter or Adviser please feel free to get in touch with me.

Incentives matter
The prospect of the Chancellor aligning Capital Gains Tax (CGT) and Income Tax in the upcoming Budget has understandably spooked many entrepreneurs in our network. I can’t think of many potential policy changes that have resulted in so many people getting in touch with me to raise concerns. 

It’s not quite as straightforward as many seem to imply on either side of the debate, but luckily our Research Director is a tax expert and has written a detailed article on the key issues.

In essence, we think alignment would create more problems than it solves by deterring investment and entrepreneurial risk-taking, without more strategic reforms that better incentivise people to take the risk of starting and growing a business. I encourage you to read and share Sam’s article, as well as signing up to his weekly Substack email. This won’t be the last thing we do on the proposed CGT changes, so watch this space.

(New)sletter
We have a new newsletter! This one focuses on entrepreneurship education policy, and is written by our Research Adviser James Croft. I’ve known James for years, and the brilliant work he undertook in founding and running the Centre for Education Economics think tank. You can read his first newsletter here and sign up for future monthly updates here.

Imitating art
As many of you will know, in normal times we've packed out private cinemas for premieres of films like The Founder for our network.  I can't wait to do so again. Through Twitter, Anton Howes (our Head of Innovation Research) has come up with a list of films, TV and documentaries that his followers think accurately portray the process of innovation and entrepreneurship. Hopefully there’s something there to help you get through Lockdown 3.0!

Read the whole newsletter here, and sign up for our newsletters here.

Should Capital Gains Tax Change?

Rumour has it Rishi Sunak is planning to hike Capital Gains Tax (CGT) at the next budget. His hands are tied. Sunak’s predecessor backed him into a corner. The Conservative manifesto ruled out rises in Income Tax, National Insurance, and VAT leaving Sunak with limited options for raising revenue to pay for spending on the COVID-19 crisis.

Some of the likely measures can be gleaned from a recent review from the Office for Tax Simplification, commissioned by the Chancellor in July, which concludes in favour of aligning the CGT and Income Tax rates, paring back the Annual Exempt Amount and abolishing Business Asset Disposal Relief (the unfortunately named successor to Entrepreneurs’ Relief).

Entrepreneurs, who often receive the majority of their income in capital gains, are understandably concerned. Groups such as E2E and data provider Beauhurst are speaking out. Many prominent entrepreneurs have expressed their dismay to us in private.

So who’s right? Is there a case for aligning Capital Gains and Income Tax rates? Would it discourage entrepreneurship and investment? The answer, unfortunately, is that it’s complicated.

Policymakers are faced with an inevitable conflict between two compelling ideas. 

The logic behind alignment

On the one hand, they don’t want to favour one type of income over another. Why do some types of earning deserve special treatment? After all, it would be strange to favour income from accountancy over income from plumbing. In fact, it would not just be strange, it would be inefficient. By taxing different activities at different rates we distort the ability of markets to function. In the above case, we end up with too many plumbers and not enough accountants (or vice versa). And if the wealthiest are more likely to receive income from one source over another the case for unequal treatment is weaker still. Treating income from different sources differently can also create avoid opportunities. Ordinary income liable for tax at full whack can, by crafty accountants, be relabelled as capital gains. In some cases, this can allow the very wealthy to pay a much lower rate of tax.

The trade-off: Risk-taking and Investment

At the same time, policymakers also understand that entrepreneurship and investment are the engines of growth. Both of which are discouraged by CGT as it taxes the return to investment. People save or invest to finance future consumption. If the return to saving is taxed, then there’s an implicit incentive to consume now rather than later. In effect, it creates a tax wedge between present and future consumption

This is why a poll of leading economists by IGM Chicago found a plurality agreed that “taxing capital income at a permanently lower rate than labor income would result in higher average long-term prosperity, relative to an alternative that generated the same amount of tax revenue by permanently taxing capital and labor income at equal rates instead.”

Under the status quo, CGT also hits risk-taking as the upside is taxed at a higher rate than the downside is subsidised. Entrepreneurship is an inherently risky activity, so this is a major problem.

When people advocate equalising rates, they often want to reform taxation in other ways. For instance, when Nigel Lawson equalised rates of CGT and Income Tax in 1982, he also indexed capital gains to inflation. The alternative would have been to allow individuals with investments that fail to keep up with inflation to be left with massive tax bills despite being worse off in real terms.

But this still doesn’t resolve the problem. CGT will still discourage saving and it will still discourage entrepreneurship.

In a recent debate over the future of CGT, Stuart Adam from the IFS pointed out that while a reduced rate of capital gains tax may lessen the disincentive effects on entrepreneurship and saving, it also provides the largest benefit to the people making the highest returns. High returns could occur for many reasons, many of which wouldn’t warrant a lower rate. For instance, if high returns are predictable (e.g. I have a surefire investment) then it is still worth making the investment even if part of my return is taxed away. Likewise, if my return is the result of good fortune (e.g. I bought Zoom stock before the pandemic) then it isn’t clear why I should be rewarded for factors out of my control.

Effort and skill complicates the issue. Intuitively, we might think high returns generated by the hard work or talent of an entrepreneur building a successful company are more deserving of a lower-rate. Yet it’s not clear why hard work warrants a lower tax rate only when it's done by an employer rather than by an employee. We want the tax system to interfere as little as possible with the decision to start a business. As such, we should avoid creating a system where highly-skilled workers decide to start their own companies purely to reduce their overall tax bill. Some people can create more value as an employee rather than as an entrepreneur and that’s fine. Not everyone has to be an entrepreneur, and tax policy should not try to push everyone towards it.

If we are concerned the tax system discourages hard work, then it is a case for lower taxes on all work, not just lower taxes on capital gains.

A balanced approach

But there is a middle option. We can equalise rates, while reforming the base to avoid discouraging investment and risk-taking.

On investment, there are two ways to do this. You could deduct the upfront cost of any investment made by an entrepreneur. It would mirror the pension system, where pension savings are sheltered from tax when they’re paid in and only taxed on withdrawal. It is also similar to the Annual Investment Allowance where capital expenses can be immediately written off for Corporation Tax purposes. The key drawback with such a system is that it can generate large negative tax bills, which may create avoidance opportunities.

Alternatively, and more likely, you could index investments to inflation and the risk-free return on capital. This is known as a rate of return allowance (RRA). Under this system, if I invest £1000 in my business, the RRA is 5% and then I sell up next year for £1100, I am only taxed on half of my £100 gain. In other words, I am only taxed on the excess return. When Capital Gains Tax and Income Tax were aligned in the 1980s when Nigel Lawson was Chancellor, gains were indexed to inflation.

For risk, it is more complicated. The problem with CGT is that while it taxes lucky gains, it doesn’t fully subsidise or offset unlucky losses. The lack of symmetry in the system creates a bias against risk-taking. To resolve this problem, entrepreneurs should be able to offset capital losses against their taxable income (from any source). In some cases, where capital losses are large, this may mean spreading the loss over multiple years’ tax returns. Policymakers should be careful here. There is a risk that unlimited deductions for losses can create avoidance opportunities. The best approach would probably be to allow losses to be carried forward into future years but with an interest factor to ensure the losses don’t lose their value going forward.

The latter reform may create perception issues. For instance, Amazon is often criticised for carrying forward losses from past years to reduce their annual tax bill. Even though this is the tax system working as intended, it can be hard to explain to the public and create a sense of unfairness. 

A system with the above caveats would have many advantages over the status quo, but it would not be the revenue raiser the Chancellor seems to desire. Past estimates from the IPPR (see page 15) suggest that the cost of introducing a Rate of Return Allowance based on bond yields would wipe out most of the revenue gains from aligning rates with income tax. The reform would only raise revenue if the annual exempt allowance was cut significantly (or abolished) and Business Asset Disposal relief was abolished altogether.

However, the IPPR’s calculation does not include measures to make it easier to deduct losses. I suspect once they are included the proposal may end up revenue neutral or even mildly negative.

What are the risks of raising rates?

Lock-in

If Capital Gains Tax were to be equalised with Income Tax then the lock-in issue would need to be addressed. Individuals only pay Capital Gains Tax when they realise their gain (i.e. when they make the sale). However, when capital is passed on at death the gain is re-indexed. This creates a massive incentive to hold onto assets until death even if more profit could be made by selling and reinvesting in new assets. Under the low rate status quo, lock-in is a problem, but the higher the rate is set then the stronger the lock-in effect is.

This can be resolved, however, by removing the relief at death. To avoid increasing the inheritance tax at the same time, any revenue raised could be used to fund cuts to Inheritance Tax.

This might not resolve the lock-in problem altogether as there are other causes too, but it would address the main problem. At higher rates of Capital Gains Taxation, it becomes increasingly important to resolve these problems.

Mobility

A key fact about high-growth entrepreneurship in the UK is it is disproportionately done by migrants. Research we carried out in 2018 revealed that while just 14% of UK residents are foreign-born, 49% of the UK’s fastest-growing startups have at least one foreign-born co-founder. The UK’s 45% rate of Income Tax may not have led to the Brain Drain some predicted, but we should take seriously the risk that the UK may be a less attractive place to start and sell a business if capital gains were taxed at 45%.

There’s also a risk that it will become harder for startups to access international talent. High-growth startups typically pay their employees in stock options (taxed as capital gains) as opposed to high salaries. After all, why would a top coder leave the safety of a job at Google to work for a company that might go bust in six months. Under the status quo with Business Asset Disposal Relief, startup employees in the UK pay less tax (10%) on the exercise of stock options than in any other OECD country.

One study by Paul Gompers and Josh Lerner found that tax-exempt institutions were just as responsive to capital gains tax cuts as taxable investors. This has an important implication: venture capital activity responds to the supply of entrepreneurial talent. A less attractive environment for entrepreneurs and startup employees may also make it harder to raise funds.

There’s more direct evidence too. A cross-country analysis by Magnus Henrekson and Tino Sanandaji found that a 1% (not percentage point) drop in the tax rate on share options is associated with a 1% increase in VC activity. This is why we’ve argued that in response to places like France getting their act together on stock options, that the UK should expand the Enterprise Management Incentive to businesses with 250 to 500 employees and £100m in assets to attract in-demand product managers to the UK.

There might be a case for trying to treat innovative entrepreneurship differently. Stanford’s Charles Jones points out that many of the most beneficial business innovations such as Uber’s algorithms and Amazon’s logistics are difficult to protect with patents or subsidise with R&D credits. In fact, the Nobel Prize Winning economist William Nordhaus estimated that innovators only capture about 2.2 percent of the total surplus from innovation. Taxing entrepreneurial capital gains at a lower rate may have merit as an indirect research subsidy to ensure innovative risk-taking is properly rewarded.

What does it all mean?

I think there are three key takeaways.

1. Aligning Capital Gains Tax and Income Tax should not be seen as an easy way to raise revenue. If it is treated that way, then alignment will create more problems than it will solve by deterring investment and entrepreneurial risk-taking.

2. But there is merit to alignment provided you fix the base at the same time. Reform should be a strategic exercise designed to eliminate perverse incentives and opportunities for avoidance. By removing distortions, this would be a pro-growth approach.

3. There may still be a case for not treating all income the same. Taxing stock options at a lower rate may help attract and retain highly mobile skilled workers to the UK’s startup scene. A system where rates are aligned, the base is fixed, but EMI is functionally unchanged (e.g. startup employees only pay 10% tax on the realisation of their gains) could be the best of both worlds. 

Entrepreneurship Education Monthly – December 2020

It's been a tough year for teachers. Last month new evidence that working hours (already lengthy by European standards) are now being stretched to unmanageable levels was submitted by Hayes Education Training. Since then, Oak National Academy has reported that as many as 90% believe their workload to have increased under COVID, for the majority substantially. According to an RSA survey, 66% have been angered by the lack of support from government. Teachers received validation from Chief Inspector Amanda Spielman in the Ofsted Annual Report, who expressed concern with the way in which schools had come to be regarded as the 'go-to solution' for society’s ills – even as Chancellor Rishi Sunak announced a pay freeze.

In face of these challenges, radical proposals for reducing workload and transforming the way schools work seem more important than ever. With delivery support from a number of private providers, the government’s National Tutoring Programme got off the ground last month to support disadvantaged students and their schools in the aftermath of the pandemic. Though the overall level of funding has in the end been disappointing, in the long term we believe that, to echo EEF CEO Becky Francis, it’s a partnership “which could make a significant contribution to efforts to close the disadvantage gap”. 

As inroads into the lower mid-market widen as a result of ongoing scale-up investment into online private tuition provision (Mobeus Equity Partners’ substantial follow-on investment in MyTutor; Supporting Education Group’s acquisition of toota; and Ananda/Downing/NESTA’s investment into Third Space Learning), there’s plenty of headroom for growth for school-based tutoring provision. (For an innovative model of how to approach the latter, take a look at Montreal-based Paper.)

As if to highlight the efficiency gains to be made from tech-based whole school solutions, Arbor Education joined The Key Group (including ScholarPack) last month, so tightening its already strong grip on the MIS switcher market. More recently dominant provider Capita SIMS was acquired by Montagu Private Equity. And alongside The Key Group, Kinderly nursery management made the finals of the Education Investor Awards, pointing to a similar need among preschools. Taking a wider view of the Edtech scene, it’s evident that positive impact for teacher workload remains a key criterion for success.

Online learning providers have gone above and beyond this year and it’s clear that without their resources, learning loss would have been much worse. Not to diminish these efforts, Teach First highlighted that the digital divide has worsened. In their Teacher Tapp survey report they reported that schools in the poorest areas of the country were struggling to provide the access and resources necessary to help pupils with online learning. The conclusion is obvious: government must increase the number of devices for schools and pupils most in need.

On a brighter note, KPMG reported that VC investment in European Edtech in general was on the rise. Getting in on the act, Fintech accelerator SuperCharger got its first cohort of Edtech entrepreneurs motoring and deep tech investors Brighteye VC announced a new fund for investing in Edtech start-ups.

In an indicator of the seismic shifts in the market this year HolonIQ’s MetaEduSummit report found there had been an increase and acceleration in direct-to-consumer offerings, as parents, students and workers seek learning support, upskilling and progression in the labour market. The trend continues among start-ups, for example, Arc Education and Scribeasy.

Notably, half of those at Seed through Series B on Holon’s European Edtech 100 list of the most innovative are worker or labour-market oriented, as entrepreneurs mobilise to the challenges of labour market entry, training and retraining, upskilling and outskilling. Reflective of these concerns, the government’s Spending Review committed significant funding to the Restart Programme and to the delivery of the Lifetime Skills Guarantee. Countering the fatalism of many, the Behavioural Insights Team published a useful report showing how deploying insights from behavioural and data science might open-up new job opportunities and equip jobseekers with the support they need by focusing on job goals rather than compliance with benefit criteria.
 

News and Views

A fair result: It was always inevitable that next year’s exam arrangements would involve a series of concessions to mitigating circumstances. As the government fleshed out what it had in mind, Ofqual offered this explanation, while hastily kicking off a consultation into the one bit it hadn’t been prepared for – giving advanced information about the content of exams to candidates.

Regulator Review: In a separate report on the progress of onscreen assessment, the regulator identified five equity-related issues inhibiting adoption at the country level, which would require significant additional funding to rectify. These are: (i) variance local network capability; (ii) variable staff competence and training requirements; (iii) tech resources; (iv) upgrades to security; (v) planning and implementation. 

Annual review: The Office for Students (OfS) published its Annual Review of HE in England focusing on the response to the pandemic and the rapid shift to online learning. It also scopes out priorities for the coming year that include building on that investment, raising the bar on quality and standards, and improving opportunities for mature students.

Education for entrepreneurship: Octopus recently released Spinning out Success, highlighting universities’ positive track records in turning academic achievement into entrepreneurial success. The report considers the innovative and thriving companies these institutions have supported and distils lessons about the nature and kind of support needed for them to spin out investor-ready businesses. 

Visa routes: The government opened a number of new visa routes of relevance to entrepreneurs seeking to make England their base of operations, including the Skilled Worker, Global Talent, Start-up and Innovator visas, under its new points-based immigration system. Good news for early-stage businesses hampered in their efforts to recruit the skilled people they need to grow.

European EdTech: HolonIQ released its ‘Europe EdTech 100’ annual list of the most innovative EdTech start-ups across Europe.

Education speak: Following a recent gathering of Edtech innovators and educators, Mindcet Edtech offered this useful summary of what to keep in mind when doing an investor pitch or seeking to persuade early adopters to trial.

Was this forwarded on to you? If so, you can sign up here. James Croft is Co-Founder and Head of Education at specialist corporate advisory firm Whitebeam Strategy. An experienced entrepreneur, James was previously Founder and Director of the Centre for Education Economics (CfEE) think tank. He is a Fellow of the Institute of Economic Affairs and a former editor of Investor Publishing’s EducationInvestor Global magazine. Connect with James on LinkedIn or pick-up Whitebeam’s #InvestEd feed on Twitter, where they track development, opportunity and investment in education markets around the world.

2020 Revision

This will be the last Friday Newsletter of the year, so I hope you don’t mind indulging me in looking back at the year through our reports, events and webinars.

As regular readers will know, it only scrapes the surface of the work we do, but I hope it offers a useful snapshot that inspires you to get even more involved with The Entrepreneurs Network in 2021.

January
We started the year by launching Cashing Out – a report by Fred de Fossard looking at the rise of cashless commerce and its implications for SMEs. It concluded that the decline of cash offered opportunities for SMEs and argued that rather than banning cashless retail as some US cities have, there are better ways for the government to solve the challenge of the unbanked. The report turned out to be prescient, with many businesses switching to cashless to help reduce the spread of the virus.

February
We held an informal meetup of the Female Founders Forum at The Office Group in February to discuss plans for the year, and later in the month relaunched the APPG for Entrepreneurship on the Terrace of the House of Commons with Andrew Griffith MP. We also held an Entrepreneurs Dinner with Chris Philp MP with support from Mishcon de Reya.

March
In March, we released the first of our two 2020 reports with the Enterprise Trust. In Unlocking Growth Sam Dumitriu and I evaluated the funding options open to SMEs from Start-Up Loans and grants to equity crowdfunding and peer-to-peer lending, identifying key reforms to boost SME access to capital.

The APPG for Entrepreneurship also held a Parliamentary Reception with Lord Howard Flight and the Enterprise Investment Scheme Association on the role that EIS and Seed EIS plays in providing access to finance for UK start-ups, scale-ups, and would-be unicorns.

April
Like many organisations, we moved to webinars in April. The first was on what businesses should know regarding HR & COVID-19 with the Department of International Trade.

May
I think one of the best webinars of the year we undertook looked at how Covid was impacting entrepreneurs with disabilities, featuring Dr Lisa Cameron MP, Liz Johnson (gold-medal winning Paralympic swimmer) and Kush Kanodia (social entrepreneur) (video). A lot of the attendees would have been prevented from joining the event if we had held it in Parliament, proving the advantages of the technologies like Zoom – advantages that will remain even after the vaccine.

We also undertook an event with John Penrose MP, Baroness Kramer and Gary Richards (Mishcon de Reya )on the impact of Coronavirus on the economy and business (video).

June
In June we hosted Andrew Griffith MP again for a webinar on innovation, international trade and the economic recovery, alongside Chris Hulatt (co-founder of Octopus), and Katherine Fletcher MP (video).

July
We released Upgrade over the summer – supported by Xero and written by Sam Dumitriu. It argues that small firms should make better use of digital technologies to tackle the sluggish productivity which characterised the pre-Covid economy. We launched it at an event with Paul Scully, the Small Business Minister, Irene Graham (ScaleUp Institute), Gary Turner, (co-founder of Xero UK) and Dom Hallas (Coadec) (launch video).

We also hosted Gagan Mohindra MP for a webinar on supporting local economic growth, with Mark Bretton (Chair of the LEP Network) and Tom Forth (co-founder of TheDataCity.com). Later in the month we hosted a webinar on supporting employment during Covid with Seema Malhotra MP, Sharon Tan (Mischon de Reya) and Julia Rouse (Manchester Metropolitan University).

September
With support from ABE Global, Educating Future Founders reviewed the evidence for early interventions in entrepreneurship education, making the case for teaching children as young as eleven the basics of running a business. We had Rt Hon. the Baroness D'Souza CMG, Dr Lisa Cameron, Shadow MP, Rob May (ABE) and Mark Watson-Gandy (founder of KidsMBA) for the launch (launch video). Sam Dumtriu’s report built on his previous one in 2019 with Octopus on Future Founders.

In September we undertook a webinar with the Female Founders Forum. The speakers were Alexandra Daly (founder of AA Advisors), Julia Elliott Brown (founder of Enter the Arena) and Juliet Rogan (Barclays). We also hosted an event with Lord Leigh (co-founder of Cavendish Corporate Finance) and Kevin McCarthy (Mishcon de Reya) on the future of funding, floating and selling your business (video).

October
In October we released The Case for Remote Work by US economist Matt Clancy. It makes the case for policymakers supporting the switch to remote work. To mark the launch of the report, we recorded a launch discussion between the paper’s author Matt Clancy, Oglivy’s Rory Sutherland and Upwork’s Adam Ozimek (launch video).

October also saw the release of this year’s Female Founders Forum report authored by Aria Babu. Using data from Beauhurst, Resilience and Recovery found that female-led, high-growth companies were disproportionately impacted throughout the pandemic. The Female Founders Forum is joint project with Barclays and we have big plans for it in 2021. To find out more about the project and sign up to the newsletter, check out this dedicated page on our website. We also hosted an event on attracting and retaining talent with Tugce Bulut (founder of Streetbees), Aimee Bateman (founder of Careercake), and Eugenia Migliori (Confederation of British Industry).

It was a busy month for webinars, with another one with Holly Lynch MP, Shadow Minister for Immigration, on the future of visas and immigration and Nicolas Rollason (Kingsley Napley). This was followed by an event on supporting diversity with Kemi Badenoch MP, the Exchequer Secretary and Minister for Equalities, and Wilfred Emmanuel-Jones (aka The Black Farmer), Melanie Eusebe (founder of the Black British Business Awards), and Professor Monder Ram OBE (Director of CREME).

November
Last month we released Green Entrepreneurship by Eamonn Ives. Once again we were supported by the Enterprise Trust to examine how entrepreneurs, and their innovative technologies and ideas, can help deliver not only a more sustainable tomorrow, but also economic growth, exports, and jobs. I’ve just written a blog on the role of entrepreneurs in tackling climate change, which includes an overview of four of the 20 recommendations.

We hosted another Female Founders event in November on building business resilience, with Anna Sofat (previous founder of Addidi Wealth), Anne-Laure Le Cunff (founder of Ness Labs), and Juliet Rogan (Barclays). We also hosted Kevin Foster MP, Minister for Future Borders and Immigration, for another event with Kingsley Napley looking at the future of visas and immigration.

December
We undertook a launch of the Green Entrepreneurship report with Luke Pollard MP, the Shadow Environment Secretary in December. Also speaking at the launch were Alex Fisher (founder of Saturn Bioponics) and Helen Booth and Liz Slee (Enterprise Trust). These followed launches earlier in the year with Bim Afolami MP and JoJo Hubbard (co-founder of Electron) and Jo Bamford (founder of Ryse Hydrogen).

We also hosted a webinar with the Female Founders Forum on how entrepreneurs can better tell their story, with Dana Denis-Smith (founder of Obelisk Support), Cordelia Meacher (founder of FieldHouse Associates), Juliet Rogan (Barclays) and Ruth Saunders (author of Female Entrepreneurs – The Secrets of Their Success)

We hosted Nahim Zahawi, Minister for Business & Industry and COVID Vaccine Deployment, for our second Entrepreneurs’ Drinks. The first was with Dr Alan Whitehead MP, Shadow Minister for Energy and the Green New Deal and last of the year was earlier this week with George Freeman MP. These are for our Advisers and we have plenty more planned for 2021 – the first is with Chi Onwurah MP, Shadow Minister for Digital, Science and Tech.

We have lots of exciting plans for 2021, but even before then we are launching a new monthly newsletter next week focused on eduction policy with our new Research Adviser James Croft. You can sign up here. And if you haven't already signed up as a Member, please do so here (it's free) to make sure we know what issues you're interested in.

The Role of Entrepreneurs in Combatting Climate Change

The Committee on Climate Change (CCC) has just released its Sixth Carbon Budget. It’s a sizable report, which will be influential – not least because it is the CCC’s job to advise government – in setting out the UK’s approach to combating and coping with climate change.

We recently released a report of our own on Green Entrepreneurship, supported by the Enterprise Trust and written by Eamonn Ives. Both reports have some overlap in policy recommendations that are worth reflecting upon.

For example, the CCC report calls for the government to incentivise the continued roll-out of zero-emission buses and coaches to ensure that new sales of diesel vehicles end by 2040 at the latest. While the wide-ranging report doesn’t specifically suggest how to do this, Eamonn does:

“The government currently subsidises bus operators to the tune of around £250 million a year through the Bus Service Operators Grant (BSOG). The BSOG pays bus operators a set amount per litre of fuel their buses consume. Strictly speaking, therefore, what the subsidy incentivises is fuel consumption. This model has come in for criticism of late, because it puts newer, more fuel-efficient models at a relative disadvantage. A more appropriate funding approach might be a distance-travelled model, perhaps with a passenger number multiplier, as this is fundamentally what the government is seeking to encourage.”

These reforms would incentivise research and development into zero-emission powertrains (which aren’t actually trains) – such as hydrogen, or even batteries if they can advance enough to cope with the particular demands of heavier vehicles.

Green Entrepreneurship and the CCC report both call for reforms to Energy Performance Certificates (EMPs), with the former citing research suggesting that perhaps up to 62% of EPCs contain errors. More broadly, EPCs fail to show benefits of decarbonising electricity or savings possible from smart tariffs. Government has recognised the urgent need to improve EPCs, with the CCC recommending the introduction of green building passports, which would document a full record of a building, showing upgrades and improvements throughout its lifetime, as recommended elsewhere by the Green Finance Institute, to “unlock green finance at scale by providing a robust, quality source of information to raise finance against, track progress and help make standards enforceable.”

The last of the 20 recommendations in our report called for the government to examine how it can stimulate demand for more environmentally sustainable foodstuffs. Similarly the CCC calls on the public sector to take a lead in providing plant-based options with all meals. Green Entrepreneurship specifically suggests promoting clean meat and dairy and other animal produce substitutes, or instigating initiatives such as ‘meat free Mondays’, as other governments around the world already have, including in Tokyo.

In Green Entrepreneurship we call for the Government to commit to simplifying, standardising, and broadening carbon pricing. This is also a significant strain of the CCC report.

Economists mostly favour carbon pricing to cut carbon. The key advantage of pricing over targeted subsidies or regulation is that the government doesn’t need to try to work out which technology to bet on. Instead, the tax will spur entrepreneurs and investors with local knowledge to focus on where they can make the biggest gains – they would also bear the risk of picking the wrong solution.

With this year’s COP postponed until 2021, there’s time for the UK to ensure it has a clear set of policies. The EU and the Biden Administration are drawing up plans to introduce border carbon tariffs – the border element combats carbon leakage – so this is an issue in which the UK set out a clear set of proposals, worthy of the effort of bringing the world’s leader together to solve climate change.

Taxing Times

First, the good news: I won’t mention the ‘B’ word this week (it will be unavoidable next week). Now the bad news: I’ve got a couple of things to say about tax.

It’s not a new idea, but Simplifying by Design, the Office of Tax Simplification's recent review of Capital Gains Tax (CGT), has put equalising CGT with income taxes back on the agenda. As reported in The Times, more than 2,200 entrepreneurs have joined a campaign to try to thwart this, with Lord (Howard) Leigh, founder of Cavendish Corporate Finance and an Officer of the APPG for Entrepreneurship, and Shalini Khemka, chief executive of E2E leading the charge. Henry Whorwood – Adviser to The Entrepreneurs Network – is also leading a campaign at Beauhurst to lobby against the changes.

If this is on the cards, it would be announced (without warning) at the March Budget. Watch this space for updates on these campaigns.

Elsewhere, the final report of the Wealth Tax Commission has called for a one-off wealth tax. The benefits of this tax – if that’s the right way of talking about a new tax – is if it were a one-off tax. An annual wealth tax, for example, would be open to avoidance, make a mess of the tax system (like in Spain), and make the UK much less attractive to investment and entrepreneurs.

The inability to credibly make it a one-off tax should in itself make the idea a non-starter. In July of this year Chancellor Rishi said: “I do not believe that now is the time, or ever would be the time, for a wealth tax.” I would be surprised if this report will be enough to convince him otherwise.

Sneak preview
Many of us who work in think tanks tend to stay in our particular policy and political niches, but if we were forced – from the most leftwing to the most rightwing, and from the most socially focused to the most economically minded – to sit in a room and decide on a policy to change, it would likely be around planning policy.

While there are disagreements on the best remedy, pretty much everyone in wonk world thinks something needs to change. To this end, we’re scoping out a project looking at the cost of planning policy on entrepreneurship and we want you to be involved.

Is the cost of housing or commercial space too expensive for you to build your business where you want? If so, get in touch with us to let us know your experiences, as we will need some case studies for the report.

Before that, we will have a report out early next year on reforming copyright from Dr Anton Howes. I can’t go into too much detail, but if you’re an expert in intellectual property or journalist who wants to look at an embargoed copy do get in touch.

Creative thinking
The Deutsche Bank Awards for Creative Entrepreneurs is accepting submissions from 18-30-year-old creative entrepreneurs driving positive impact through their enterprise. The prize pot is £60,000 across five winners, and £100,000 worth of business support. Find out more on their website, and forward this onto any young creative entrepreneurs you think should apply.

Sign up to the Friday Newsletter here.

The easy option

Over on my Substack, I’ve written about why technical fixes are underrated. Specifically, I take on an argument made in The Guardian last week that we should avoid the technical fix of lab-grown meat.

Here’s an excerpt:

Moral progress is often tangled with technological progress. We are more likely to do the right thing when it’s easy. It is hard to imagine the practice of sending eight year olds up chimneys would have been abolished when it had, if not for inventions such as George Smart’s mechanical chimney sweep.

Kleeman’s view of human nature, i.e. malleable, altruistic, and open to persuasion, may seem attractive, but it doesn’t seem accurate.

Reading between the lines, Kleeman appears to think that some preferences can be intrinsically bad. It’s not enough to eliminate the associated harms of acting upon them, you need to get rid of them altogether. I think this is a strange view in general, but a particularly strange one to apply to meat eating. After all, it would presumably apply to oat milk and the Impossible Burger as well cultured meat. 

Even if it were possible, at some sacrifice, to get the world to adopt a vegan diet (or at the very least, limit meat consumption to a meal a week) on ethical grounds alone, it is not clear why this is preferable to a world of no-kill cultured meat.

You can read the whole piece here.

Twenty Hands

Weirdo and misfits are presumably no longer needed. Number 10 is looking to hire 10 Innovation Fellows to accelerate the adoption of cutting edge tech in government.

The Government wants to harness the power of technology and data to improve public services, and is seeking the best digital and tech talent from industry, academia and civil society.

Taking inspiration from the US Presidential Innovation Fellowship Programme, the No.10 Innovation Fellowship Programme will see around 10 Fellows enter government each year. Since 2012, the US version has been matching outstanding technologists with federal leaders to improve the way government builds, designs, and delivers public services. It might be worth checking out their projects and fellows to get a sense what the UK government is looking to replicate. The US fellows are quite eclectic, so I wouldn't discount yourself without checking first.

Number 10 claims to be offering unparalleled opportunities to deliver the type of high impact technology and data projects that are only possible in government. You’ll be matched with a government department; have access to senior decision makers; and help tackle public sector challenges of national importance.

I wouldn’t normally lead a newsletter with a job advert, but I think this is important enough to do so. While I’m sure there will be frustrations working in Government, the upside for the country could be potentially huge if the Fellows are the very best the UK has to offer. The contracts are for 12 to 14 months and there’s more information here.

Queen Be
Octopus recently released Spinning out Success. It reveals universities’ success at turning academic achievements into thriving companies, and identifies what works in supporting investor-ready spinouts. Queen’s University Belfast came top for the second consecutive year, with Cambridge University second, and Cardiff University third.

As James Hurley explains in The Times: “The ranking considers universities’ effectiveness in producing intellectual property and the creation and eventual sale of spin-out companies, relative to the institution’s total funding, so smaller universities that get more bang for their buck can outrank more illustrious rivals.”

Read All About It
Sam Dumitriu has written a thoughtful article on what the Moderna vaccine tells us about complaints about stock market short-termism – namely, that they're often overblown. As always, it’s a great article. It’s not on our website, but has gone out through Substack – an increasingly popular platform for newsletters. You can access it by signing up to Sam’s Weekly Thoughts here.

History buffs should also sign up to Age of Invention, the Substack of Anton Howes, our Head of Innovation Research. Anton’s Substack recently won a prestigious Emergent Ventures prize.

Even before Sam’s Substack, we already had quite a few newsletters, including this one, our monthly APPG for Entrepreneurship newsletter, our fortnightly Female Founders Forum newsletter, and our ad hoc Policy Updates. You can sign up to those you're interested in by joining us (for free) as a Member, or we’ve just created a Newsletters page on our website, which is a little quicker.

The idea behind all these newsletters isn’t to overload your inbox, but to ensure you get more of what’s useful and less of what’s not. We’re even experimenting soon with a sector-specific newsletter, so I hope you take this chance to experiment with what everything we have to offer.

Join the network here, or sign up for our newsletter here.

Masters of none

Entrepreneurship is essential in a modern economy, yet economists devote surprisingly little time to understanding entrepreneurs. Ed Lazear, who sadly passed away this week, was one of the exceptions. He’s best known for serving as Chairman of the Council of Economic Advisers during the financial crisis and creating the subdiscipline of personnel economics.  But he also wrote a widely-cited paper on what sets entrepreneurs apart from the rest of us.

It is tempting to argue that skills such as creativity or attitudes to risk best predict who becomes an entrepreneur, but Lazear’s key insight was that entrepreneurs are jacks-of-all-trades. Entrepreneurs don’t have one special skill, but are instead quite good at many different things.

To be an entrepreneur, you need to not only be good at management but also be able to understand a field well enough to identify talent and opportunities for investment. Looking at graduates, we should expect the students that studied a wide range of subjects to be more likely to become entrepreneurs. A good example might be Steve Jobs, who as well as learning to design computers famously took calligraphy lessons. Entrepreneurs will also tend to have more varied job histories. 

Lazear’s theory helps shed light on questions such as why some professions see high degrees of entrepreneurship (e.g. insurance) while others don’t (art). The ability to understand complicated insurance policies is likely to be correlated with other key business skills such as accounting or  management. By contrast, artistic ability is less likely to correlate with business skills so artists are more likely to specialise.

Another key feature of Lazear’s model is that at the very highest income levels, entrepreneurs will be over-represented while at lower income there’ll be an even mix of entrepreneurs and employees.

To test his idea that what makes entrepreneurs special are their balanced skillsets, he used data from Stanford Graduate School of Business’ survey of alumni. As his theory predicted, the graduates who went on to start businesses tended to take a wider variety of courses, tended to do equally well across courses, and when they entered the world of work they were more likely to have taken on different roles. Likewise, at the top income levels a greater share of alumni were entrepreneurs.

Other economists have tested Lazear’s jack-of-all-trades hypothesis against different data and found it bears out. Joachim Wagner applied it to a large representative sample of the German population and found that individuals who have worked in different fields and have multiple areas of study were more likely to start businesses. While Orazem, Yu, and Jolly looked at Iowa State alumni from 1982 to 2006 and found that alumni who selected a broad college curriculum and had a varied work career were more likely to become entrepreneurs.

It is tempting to search for a single skill that sets entrepreneurs apart. But Lazear's theory and the data that backs it up show that entrepreneurship isn’t just about creativity or an attitude to risk, rather it’s about having the ability to do multiple things well.

Carbon Copy

While innovators are overcoming the immediate threat of the pandemic, the Government also wants to set more of them to work on the longer term challenge of combating climate change.

To this end, the Prime Minister announced a ten-point plan this week, which is a smorgasbord of policies – mostly funnelling more money into areas where the Government thinks the UK is already leading the way. It’s ambitious and no doubt welcome for those entrepreneurs running offshore wind farms, producing electric vehicles, capturing carbon, and the many other technologies that will see the cash.

But while more funding is one way to solve the problem of climate change, it shouldn’t be the main or only policy lever.

The main lever for cutting carbon emissions should be pricing carbon. Unlike pet projects, this let’s the market decide the best way to cut carbon, with behavioural changes and business decisions rippling throughout the economy. It means the lowest hanging fruits are picked first and creates an incentive to innovate. If you’re concerned about its effects on competitiveness and are worried that it will just shift emission overseas, then it can be border adjusted, as is being considered in the EU.

Though pricing carbon should be the main lever, as argued in Green Entrepreneurship our recent report with the Enterprise Trust, there are plenty more tweaks in that report the Government could make beyond funding, including simply stopping subsidies to fossil fuels companies.

Read Eamonn Ives, author of Green Entrepreneurship, on why carbon pricing would incentivise polluters to solve the simplest problems first at the lowest cost. And after our successful launch of Green Entrepreneurship with Bim Afolomi MP earlier this week, register here for our launch with Luke Pollard MP, Shadow Environment, Food and Rural Affairs Secretary.

World goes round
While at the margin entrepreneurs are motivated by money – which group isn’t? – having met thousands of them over recent years, it’s not what gets them out of bed in the morning.

The great British public doesn’t agree, with a YouGov survey finding that 40% of respondents chose ‘money-motivated’ as a key descriptor of entrepreneurs, and 50% thinking money was the biggest motivator for entrepreneurs.

The survey was commissioned by the Entrepreneurs Institute at King's College London, which also asked 100 of their own ventures what motivated them, finding that a majority said that solving problems and driving change were at the heart of their endeavours.

Personally, I don’t think there is anything much wrong with being motivated by money. After all, someone wiser than me once said that individuals in pursuing their own self interest act as if they are led by an invisible hand to promote an end which was no part of their intention. However, some people don’t subscribe to this world view and we don’t want them being put off becoming entrepreneurs just because they don’t feel like money matters (or should matter) to them.

Unhidden GEM
The latest Global Entrepreneurship Monitor report has just been released. It reveals that last year nearly 1 in 10 working age adults were in the early stages of starting or running a business, with women catching up with men.

However, the author Professor Mark Hart of Aston Business School thinks this progress is in jeopardy because of the gaps in support for people in the early stages of running a business since the pandemic.

According to Professor Hart: “While the pandemic has hit all businesses hard, the decision by the Government since March to exclude three million early-stage entrepreneurs and company directors from any financial support has created an arbitrary and unfair distinction that can only harm enterprise.”

Read the press release here, and the full report here.

Strong Medicine

Finally some good news! A vaccine that’s 90% effective – or perhaps even 97% – is certainly a reason to celebrate. While this sort of timeframe was predicted by many – including me last month – the Government and media have been mostly silent about the prospect of a vaccine up until now, so it's come as a big surprise to many.

It was especially good news for those who believe in the power of entrepreneurship. As detailed in the Guardian, alongside Pfizer the vaccine was developed by BioNTech, a small biotechnology company. And it's fantastic news for those of us who believe in the power of immigration. BioNTech was founded by two scientists, Uğur Şahin and Özlem Türeci, who were both born to Turkish immigrant parents, and the Austrian oncologist Christopher Huber.

If the parents of Şahin and Türeci were still in Turkey, they wouldn’t be in an environment conducive to unlocking their talents. This is because equally talented people are more productive in wealthier countries. And as shown with the creation of this vaccine, the value isn’t restricted to one country but will benefit humanity at large. This is because innovators are only able to capture a tiny percentage of their new product or service, and only for a limited time.

We’ve been thinking about how the UK can attract the best and brightest for a while. Some of our ideas were captured in our influential Job Creators report, which revealed that 49% of the UK’s fastest growing companies had at least one immigrant founder. But this week we built on those ideas in a briefing on How the UK can Attract the Best and Brightest. It argues that we should attract scientists to the UK by replicating low-bureaucracy grant funding systems such as the Howard Hughes Medical Institute; reform the under-utilised Startup and Innovator Visas; expand the Enterprise Management Incentive (EMI) scheme; and better promote the UK abroad as a place to start and grow a business.

On this theme, we have a webinar with Kevin Foster, Minister for Future Borders and Immigration on 24th November, which you would be welcome to attend. It’s only 45 minutes long, so should be an efficient use of your time. Sign up here.

Play it again
This week, Research Director Sam Dumitru has written two articles you should add to your reading list. On our blog, he makes a considered case for allowing dual-class share structures and removing the 25% minimum free float requirement for premium listings. This is in response to Rishi Sunak announcing that a taskforce will look into reforms to make the UK’s listing regime more attractive to tech. Sam would be keen to hear any thoughts you have about this, as it’s an area where we might undertake more research.

A strategist in the Thematic Research division at Deutsche Bank temporarily grabbed the headlines when he suggested a 5% tax on remote workers. Sam asks: is this the worst policy idea of the pandemic? His answer is an unequivocal yes. In fact, based on our recent report, Sam can think of a few reasons why remote working should be accelerated. I would recommend reading it in full.

Life’s a pitch
Next week is Global Entrepreneurship Week. There are too many events to tell you about all of them, but two worth checking out are Reset for Growth, featuring Russell Dalgleish, Lord Leigh of Hurley, Sam Dumitriu and Dr Christopher Haley of Nesta. Our friends at Nesta also have an event on boosting startup-third sector collaboration. But this is just the tip of the iceberg – head over to the GEW hub to find out more (you have to scroll down and sign up at the bottom to see all the events).

To coincide with Global Entrepreneurship Week NatWest has launched Life’s a Pitch. The bank is running hundreds of free virtual pitching workshops to help participants structure, write and deliver a 60-second pitch. Sign up here and submit your final pitch via YouTube by 30 November 2020 for a chance to pitch at the live Grand Final Event in early 2021 and win the grand prize of £10,000.

Next week is also the European Startup Festival, with speakers such as Roger Dooley, Mitch Joel and Tim Urban. Find out more here.

Take the slack
If Entrepreneurs’ Drinks with George Freeman MP, Dr Alan Whitehead MP, Chi Onwurah MP and Nadhim Zahawi MP aren’t enough to tempt you to get further involved in our work, next week we’re opening up a Slack Channel to our Advisers. It’s a bit of an experiment, but we hope it will be a useful way to connect with us and other Advisers in the network.

If anyone has any advice on running a more open Slack channel like this, I’m all ears. Also, if you want to find out more about becoming an Adviser, drop me an email so we can arrange a time to chat over Zoom.

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The case for allowing dual-class shares structures

The UK hosts one of the world’s deepest public capital markets. Businesses from across the world list on the London Stock Exchange’s Main Market and its reputation among institutional investors is top-notch. But policymakers are concerned that the market is no longer a draw for some of the world’s most innovative businesses. It’s part of a broader concern that while many great tech businesses are started in the UK, many sell up to US tech giants. Autonomy (acquired by HP in 2017) and DeepMind (acquired by Google in 2014) are probably the two most famous cases.

Rishi Sunak aims to change that. This week, he announced a taskforce to look into reforms to make the UK’s listing regime more attractive to tech. The biggest question for the taskforce to tackle is whether or not to allow dual class share listings.

In recent years, when tech companies have gone public, their founders have been reluctant to give up control. They’re afraid their long-term vision will be bogged down by short-termist stock markets preoccupied with quarterly returns. To access the benefits of public markets without relinquishing control, tech companies have employed a dual class share structure. Take Facebook: everyday shareholders own Class A shares worth 1 vote per share, by contrast Class B shares controlled by Mark Zuckerberg and other Facebook insiders are worth 10 votes. As a result, Zuckerberg controls 60% of the voting shares at Facebook. The situation is similar at Google. Tesla is slightly different, but has strict super-majority rules that ensure that any proposal opposed by Elon Musk must be backed by 89.5% of outside shareholders.

Another way founder-led tech businesses can retain control is by only floating a small percentage of their shares when they IPO. For instance, when LinkedIn floated in 2011 they only released 9.4% of their shares. On this, Google was a trendsetter having only issued 8.3% of its shares when it floated in 2004.

Both of the above arrangements would bar a business from a Premium Listing on the London Stock Exchange’s Main Markets, which means the company could not join any FTSE indices. 

Should this change? On the one hand, the London Stock Exchange’s shareholder friendly rules are a hit with institutional investors. Without strong protections, there is a risk that investors would be unable to protect their interests when they conflict with management. George Dallas of the International Corporate Governance Network, who opposes the move, alleges that allowing dual class shares would “erode accountability to management and have the effect of entrenching managers and controlling owners.” It certainly isn’t hard to find examples in the 1970s where management took advantage of shareholders, investing in vanity projects and empire building. Whatever you think of Michael Milken and his ilk, his opponents such as RJR Nabisco’s Ross Johnson were hardly deserving of sympathy.

On the other hand, founders are attracted to dual-class share listings and small floats because they allow them to retain control and execute their long-term vision. They fear that a narrow focus on short-term quarterly results can lead to under-investment in research and development and long-run irrelevance.

Fears around stock market short-termism may be overblown, but they are clearly taken seriously by tech founders. With VC markets allowing businesses to stay private for longer, there is a clear need for greater flexibility in public markets. In the US, Lean Startup author Eric Ries has responded by founding the Long-Term Stock Exchange and received backing from major VCs such as Marc Andressen. It’s designed to allow Silicon Valley businesses to access the benefits of public markets, such as allowing employees to easily sell their shares while prioritising patient capital.

There is a broader political case for making it easier for innovative founder-led businesses to list. We risk undermining a culture of shareholder capitalism if ordinary investors are shut out from the fastest growing parts of the economy.

On dual-class shares, the UK is an outlier. The US has allowed the arrangements for a while and recently Singapore and Hong Kong have liberalised rules allowing founders to have greater control in certain circumstances.

Some may argue that reform is unnecessary. After all, Deliveroo and Darktrace are both set to IPO on the London Stock Exchange. However, some businesses are clearly frustrated. The Hut Group’s recent £5.4bn IPO did not achieve a premium listing and as a result, investors in FTSE indices will miss out. 

With existing rules deterring tech businesses from listing in London, the burden of proof should be on opponents of reform to prove harm. Yet, a range of studies suggest that relaxing the UK’s rules on premium listings carry little risk to investors. 

One study in the Stanford Law Review, which looked at 34 years of data of board staggering and destaggerings, found that staggered boards are “associated with a statistically and economically significant increase in firm value”. Stronger boards, which give shareholders less direct influence, deliver better returns. It is worth noting that past cross-sectional research found the opposite, but unlike this study, that research did not control for the reasons why boards staggered or destaggered.

The situation is analogous to dual class share ownership. While staggered boards reduce the ability of shareholders to kick out management when quarterly results disappoint, they also give management more flexibility to focus on the long term. 

Additional research casts doubt on the merit of the London Stock Exchange’s 25% minimum free float requirement for premium listings. A study to be published in the Journal of Banking and Finance finds that companies that float less than 20% of their shares outperform the market over the long term. The status quo is in some ways, the worst of both worlds. The researchers find that while small floats do best, big floats also perform well. It’s the inbetweeners selling between 20% and 40% that perform worst.

This is not to advocate a free-for-all, however. We may be better off charting a middle course as Hong Kong and Singapore have. As the SEC commissioner Robert Jackson Jr notes: “Nearly half of the companies who went public with dual-class over the last 15 years gave corporate insiders outsized voting rights in perpetuity. Those companies are asking shareholders to trust management’s business judgment—not just for five years, or 10 years, or even 50 years. Forever.” 

He analysed 157 dual-class IPOs form the past 15 years and found that businesses that had sunset provisions on their dual-class shares performed better over the medium to long term. 

There’s a strong case for reform and liberalisation. The taskforce should update outdated rules on dual-class shares and minimum float requirements, but consider sunset provisions to protect investors. Doing so would preserve London’s position as a world-leading financial centre and allow more retail investors to gain a stake in Britain’s most innovative businesses.

How the UK can Attract the Best and Brightest

The UK government has a long and proud history of attracting top scientific and innovative talent, not just through liberal immigration rules for skilled workers, but through proactively identifying and persuading them to settle in the country – a policy of promigration. 

In the late sixteenth century, for example, it hired hundreds of German metallurgical experts, giving denizenship rights to them and their families, in order to start Britain’s copper and brass industries, which soon became world-beating. It poached France’s textile workers and engineers, and in the seventeenth century proactively acquired civil engineering talent from the Netherlands. In the eighteenth century, the government was so keenly aware of the importance of talented individuals to innovation, that it banned the emigration of skilled workers (we don’t advise this), and spent vast sums ensuring that those who had already emigrated to France could be persuaded to return. 

If it had not been for the government’s proactive approach, then Isambard Kingdom Brunel may never have become a British engineer. His father, the prominent civil engineer Marc Isambard Brunel, was an immigrant from France who was even bailed out of debtors’ prison by the British government on the condition that he remain in the country and not emigrate to Russia.

In this briefing, we identify four policies that will enable Britain to rediscover its tradition of actively seeking to draw in the world’s brightest innovators, scientists, and entrepreneurs.  

1. Attract scientists to the UK by replicating low-bureaucracy grant funding systems such as the Howard Hughes Medical Institute. 

By some estimates, researchers spend half of their time writing and applying for grant-funding. However, some of the most successful research funding initiatives have focused on identifying  promising individuals, as opposed to evaluating each individual project proposed and regularly monitoring the researcher’s progress. For instance, Yale’s Institute for Advanced Studies (IAS), responsible for two-thirds of Fields Medalists and 34 Nobel Prize winners, famously gives researchers no teaching responsibilities, and research is not directed or contracted. It was instrumental in the transfer of scientists from Europe to the US.

The UK could learn from the IAS and other institutes, which prioritise funding individuals over projects, and draw in high-impact scientists by limiting their administrative workload and allowing them to work on the research projects they are most interested in.

Research from Azoulay et al. suggests that this low-bureaucracy approach can lead to higher researcher productivity. They studied the Howard Hughes Medical Institute, which supports more than 300 researchers for at least 5 years based on their personal qualifications – not what the project they are working on. The researchers receive limited oversight once approved. HHMI grantees wrote 50% more papers in the top 1% of their field (as measured by citations), when compared with similarly qualified researchers who went through standard project-based grant funding. 

The UK should consider developing a similar individual-based funding programme for early career researchers, and make strenuous efforts to promote the scheme overseas.

2. Reform the under-utilised Startup and Innovator Visa by allowing endorsing bodies to charge for applications.

While just 14% of UK residents are foreign-born, 49% of the UK’s 100 fastest-growing startups and 11 out of the UK’s 16 startup unicorns (pre-IPO startups with a valuation of over $1bn) have at least one foreign-born co-founder. 

To attract international entrepreneurial talent, the government created the Innovator and Start Up visas, which aim to give incubators, accelerators, and venture capital firms a key role as external endorsing bodies. These organisations should be well placed to identify top talent, but serious flaws in their implementation have made it even harder for entrepreneurs to come to the UK than through the much-criticised scheme it replaced. In the first quarter since the Innovator visa route opened, just two applications were successful, and at least four of the initial 30 endorsing bodies have already dropped out.

The new visa routes have been blighted by poor consultation, communication, and unclear guidance. Most critically, not allowing endorsing bodies to charge immigration fees has meant the schemes are underpromoted by legitimate organisations and have been partially hijacked by a few organisations that charge thousands for supplementary services through the back door.

The system could be fixed by allowing endorsing bodies to charge fees to applicants for the visa (which could be capped, if deemed necessary). A significant number of more credible organisations would apply to become endorsing bodies, who would have an incentive to actively promote their scheme through their networks – including internationally. These are the incentives we see functioning in the Government Authorised Exchange (GAE) visa (Tier 5) scheme, for which endorsing bodies charge reasonable fees due to their being enough of them to create a competitive market. 

In addition, allowing endorsing bodies to charge fees would diversify away from the accelerator model, a few of whom have an incentive in endorsing entrepreneurs through this route because they’re taking equity in the companies they invest in. While accelerators can be beneficial for some, a lot of entrepreneurs don’t see them as useful for their business, for example, serial entrepreneurs who have already received Venture Capital investment,  and don’t want to give away equity unnecessarily. 

3. Expand the Enterprise Management Incentive (EMI) scheme, where stock options are taxed as capital gains (not income), to businesses with 250 to 500 employees and £100m in assets to attract in-demand product managers to the UK.

Due to the relative immaturity of the UK’s tech sector, at least compared to Silicon Valley, there are relatively few senior product managers and domain experts who have scaled startups from 10 to 10,000 people. As a result, most UK unicorns and scale-ups will seek to hire managers from Silicon Valley.

The salaries of such managers are typically very high, as British startups must compete with Silicon Valley wages to draw talent to the UK. They can, however, attract talent by also paying workers with stock options for the chance of a large payout down the line. The UK’s tax treatment of stock options, through the Enterprise Management Incentive is attractive, with stock options taxed as capital gains (not income) and qualifying for Entrepreneurs’ Relief. The EMI scheme may also stimulate VC activity, as there is solid econometric evidence that countries with lower rates of taxes on stock options see increased venture capital activity. 

But other nations, such as France, are now developing similarly attractive ways of taxing stock options. And UK scaleups face a further problem. To qualify for EMI, they must have under 250 employees and £30m in assets. Many startups believe this requirement, set in 2000, is out of date. In fact, three quarters of startups have cited a ‘brain drain’ of talent to large tech firms over the last 5 years because their growth and success has unintentionally locked them out of the EMI scheme.

To prevent this brain drain overseas and allow scale-ups to compete for the highly sought-after product managers, the government should increase the current limits of EMI from a £30M asset capitalisation to £100M, and from 250 to 500 employees.

4. The UK isn’t properly promoted abroad and the visa system is too slow and complex. 

The UK government doesn’t adequately promote itself abroad to leading innovators and scientists. Due to mid-stream changes to the criteria of the Highly Skilled Migrant Migrant Programme, the scheme was accused of false advertising. But the wrong lesson was learned from this episode. Instead of redoubling efforts, we are now failing to promote the UK’s competitive visa system, as well as its other significant advantages.

To attract the very best and the brightest, we need to properly promote the UK abroad, such as the ease of access to capital, its universities, other talent, and tax breaks, as well as the relevant visa routes. The UK’s forward-looking approach to regulation, through such innovations as regulatory sandboxes, should be especially highlighted. Such promotion should be done centrally but delivered locally, by every relevant arm of government (e.g. the Global Entrepreneur Programme, embassies etc.) in concert with the private sector (e.g. universities with foreign campuses, and UK business organisations with an international reach).

To aid in these efforts, the government also needs to offer more clarity and certainty on the timeframe for visas – it is often a deciding factor in people’s choices to immigrate. Top talent is being dissuaded from the Global Talent visa (formally the Exceptional Talent visa), Innovator visa, and Investor visa due to their complexity and the time it takes to process applications.

In addition, the complex rules associated with keeping your visa (e.g. Start Up and Innovator visas) and for moving between different routes, put off many people from applying. Many entrepreneurs understandably don’t want to take on the added risk of not knowing how or whether they can stay in the country. For example, a startup founder who used to work at Entrepreneur First told us: “The number of people we were offering who were on Tier 4s or Tier 2s, who couldn't switch to a Tier 1 without going back to their home country was painfully low”.

Additionally, many leading innovators may need to look after their parent(s) at some point and we risk losing them to emigration (or them never coming in anticipation of this). The current system requires too much bureaucracy for close relatives to prove that they are a dependent, with very few able to move to the UK. The government should consider relaxing the rules on dependency provided funds are available for support, with an additional NHS surcharge applied to cover the cost to the government.

Sound of Victory

Barring a Pastor Paula White-Cain induced miracle, Joe Biden will be the next President of America. Many US entrepreneurs seem to be on the verge of celebrating – particularly immigrant entrepreneurs – but a case can be made that UK entrepreneurs will also be better off with someone else in the White House. In fact, our Adviser Andrew Dixon does just that in a City AM debate:

“Over the last four years, time and time again, Trump has undermined global cooperation — in everything from pulling out of the Paris Climate Agreement and the Global Compact for Migration, to his sustained efforts to weaken the WTO and Nato. Trump’s populist “America First” approach to international relations has undermined the prospects for global trade — and directly impacted British businesses.

After the pandemic has been defeated, huge global challenges will remain — from the demographic (such as ageing western populations and rising regional and intergenerational inequality) to the technological (like the rise of artificial intelligence, automation, under-employment, the power of Big Tech and the appropriate antitrust response).”

A fair COP
On Monday we released Green Entrepreneurship with the Enterprise Trust. We launched it to coincide with when COP26 was supposed to take place in Glasgow, but we want it to influence the environmental policy agenda between now and next year's meeting.

Innovation has been key in the UK’s success over recent decades. As Business Secretary Alok Sharma explained this week: “Over the last 30 years, the UK economy grew by 75%, and yet we also cut our emissions by 43%. We were the first major economy to legislate for achieving Net Zero emissions by 2050.”

Despite positive action by multiple governments, the report argues that incentives still aren't aligned as well as they could be to spur entrepreneurs to innovate. I won’t go through all twenty recommendations, but one of my favourites is perhaps broadest and something we have argued for in the past: making the Annual Investment Allowance unlimited.

The Annual Investment Allowance allows businesses to write-off the costs of new plants and machinery, but currently those who exceed the limit have a reduced incentive to invest in energy efficiency. The report also suggests further thought could be given to broadening out the qualifying lists.

As I write in Forbes, Green Entrepreneurship also has some inspiring case studies of UK entrepreneurs whose innovations will help the environment. Businesses like Too Good To Go, the Uber for unwanted food; Electron, whose platform helps optimise the network capacity for renewable energy; Ryse Hydrogen, which is at the forefront of Britain’s green hydrogen industry; and Saturn Bioponics, which uses fewer resources by growing food vertically in 3D hydroponic towers.

If you want to find out more, we also have a couple of events to launch the report with Bim Afolami MP and Luke Pollard MP that you’re welcome to attend.

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Wage Against the Unseen

With the Office for Budget Responsibility predicting that unemployment will surpass the peak of joblessness in the 1980s, over the next few months this issue will come to dominate politics.

We aren’t in the same world as we were before the pandemic hit. Through no fault of our own, on net we have become less productive – particularly anyone working in sectors like retail and hospitality. This is simply a result of customers’ understandable reluctance to shop and eat out, and restrictions like the Rule of Six, Tier Two measures, and curfews that are aiming to stymie the pandemic.

Sadly, the National Living Wage could exacerbate the problem, with the weight of evidence suggesting minimum wages around the world cause unemployment. This isn’t a surprise as it’s predicted by the theory, and it’s why we have a Low Pay Commission to advise the government of the level we should set it to avoid too much damage.

The Living Wage is set to rise in April, but the Low Pay Commission may soon suggest an emergency break in an effort to reduce unemployment. However, the government may choose to increase it anyway. And you can understand why. On the face of it, it looks very mean-spirited and the disemployment effects aren’t easily observable.

But there is a way out of this impasse. As Research Director Sam Dumitriu argues for CapX, there is a third way: the taxpayer could split the difference. Drawing on the work of Prof David Neumark, Sam suggests creating a Living Wage credit to reduce the unwanted side-effects of a higher minimum wage.

Sam explains: “What if employers got a refundable Living Wage credit worth up to half the difference between the National Living Wage and what the National Minimum Wage was in 2016. It would be a significant subsidy to employers, but it could prevent job losses and allow businesses to stay open when trading under significant restrictions. To reduce the cost of the scheme, it could be targeted at certain sectors facing restrictions, similar to the Job Support Scheme Open. phased suggests limiting the subsidy to people without a university education. The subsidy would be phased out gradually as workers move up the wage scale.”

I think it’s a cracking idea, not least because it’s something people across the political spectrum could back due to its progressivity. As well as increasing unemployment, National Living Wages can lead to lower profits for business owners. But this isn’t just hitting the wealthy, but also the many marginal business owners struggling to get by. In contrast, the tax system is more progressive, meaning the richest will pay relatively more. Also, as we come out of the recession, it could be better targeted at people who really need it, such as the long-term unemployed.

Charter schooling
Our friends at the Small Business Charter have got in touch to share news of an initiative to help small and medium-sized businesses survive and thrive beyond COVID-19 which they’re running with the Department for Business, Energy & Industrial Strategy.

The Small Business Leadership Programme is free to participants and will be delivered by top business schools across England. The programme will support senior leaders to enhance their business’s resilience and recovery from the impact of COVID-19, and develop their potential for future growth and productivity. Find out more here.

In the SheEO
SheEO is looking to give away some cash to women-led businesses turning over between £40,000 and £2m. You would join a portfolio of 73 other ventures in Canada, the US, New Zealand and Australia. The deadline is Monday and all the details you need are here.

Late payments
The Government has opened a consultation on increasing the scope and powers of the Small Business Commissioner. They are seeking views on strengthening the Commissioner’s ability to provide small businesses with mechanisms for redress, in respect of late payments. The consultation will remain open until 24 December 2020 and you can respond here. If there is enough interest from the network, we could coordinate this to save time. Just let me know if you would respond to a survey from us on this – if there is enough interest I’ll let you know how this will work next week.

Folk tales
Were you born outside of the UK, have settled in Norfolk or Suffolk and subsequently created a thriving business? If so, Warren Page would like to hear from you. He is embarking on a photographic project and wants to illustrate the diversity of sectors and nationalities involved to show the positive effect migration in his area. The project is backed by Suffolk/Norfolk Director magazine and they will run it as a feature early next year. I appreciate this opportunity is quite niche, but even if it’s not one for you it would be great if you could pass it onto someone who might be able to help. Warren can be contacted here.

A fair COP
Next week was supposed to be COP26 in Glasgow. The pandemic has put paid to that, but not the need to protect the environment. Alongside the Enterprise Trust, we’ll release a report on Monday on how entrepreneurs can solve – nay, are already solving – the biggest environmental challenges we face. It’s got 20 policy recommendations so that we can speed this up and properly align the interests of business and the environment.

I can’t say anymore for now, but if you would like me to send it to you on Monday morning, just let me know. If you’ve already told us that you're interested in the environment when you signed up, we will send it to you. And if you’ve not let us know what you’re interested in yet – let us know here.

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