Tax breaks to boost hi-tech investment

THE GOVERNMENT is considering a wide-ranging package of tax breaks to boost investment in information technology and drug companies and to help them fund the early development of their products.

Under plans being studied by the Treasury, investors in high technology companies will be exempted from capital gains tax if they hold shares for more than five years. In addition, companies will receive tax rebates to ease the pressure of their large research and development budgets on the balance sheet. And directors of hi-tech firms will enjoy special tax treatment on their shares and options in a bid to attract high-flying entrepreneurs to fledgling companies.

The proposals are contained in a little-noticed report by a working group of industry figures and venture capitalists, released with the Chancellor's pre-Budget report last week. A Treasury spokesman said the Government was looking at the plans and could use some of the recommendations in future Budgets.

The group, chaired by Sir Peter Williams, the head of the precision instrument maker Oxford Instruments, carried out a year-long study of ways to improve the financing of small hi-tech companies. The report argues that the UK venture capital industry is lagging behind its US counterpart in backing fledgling enterprises.

The high R&D spending and the long development times of most of these companies' products seriously hinder their fund-raising. The situation is exacerbated by the risk-aversion of UK venture capitalists compared with US investors, the report says. In 1997, US backers invested pounds 5.8bn in "early stage" companies, compared with just pounds 349m in the UK, the report shows.

The report, delivered to the Paymaster General, Geoffrey Robinson, last week, urges the Government to scrap CGT for investors who hold shares in start-up companies for at least five years. The working group, which included Keith McCullagh, the controversial former chief executive of British Biotech, suggests that the zero CGT rate should be applied to investors such as "business angels" who back different companies for shorter periods.

Directors of hi-tech companies should be taxed only when they sell their shares and the proceeds should be taxed as capital gains, not as income, the Williams committee recommends.

It says: "This change would remove the perverse incentive to sell shares to pay the Inland Revenue" at a time when senior managers should show their commitment to the company by retaining a "significant shareholding".