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Will the UK remain a tech hub after Brexit?

What a difference a week makes. Last week, London Tech Week was abuzz with enthusiasm as the next generation of UK tech entrepreneurs rubbed shoulders with potential backers.

Delegates were buoyed by the news that Twitter had just acquired London-based AI start-up Magic Pony, and optimistic about their prospects for securing investment funds for expansion -- and for good reason.

Britain has long been seen as a hub for creative excellence and tech innovation, and there has been huge interest over recent years, with angel investors, venture capitalists, and private equity houses all lining up to find the next big thing.

American investors particularly have been attracted to the UK tech scene, with $2.2bn (£1.5bn) of venture capital investment flowing into Britain’s technology sector from Silicon Valley last year, the highest level of any European nation.

These overseas investors have been drawn in part by the favourable corporate tax rates and reliefs but also because of the UK’s position as a bridge into the all-important European single market.

So just one week on, following the surprise result in the EU referendum, the landscape suddenly looks very different. So is it all doom and gloom for the UK tech scene or are there still reasons to be cheerful?

Brexit challenges

As it stands, there is undoubtedly much uncertainty. In the short term at least, there is bound to be a hiatus in UK tech investment. The real question is whether this will last in the longer term.

Much will depend on the result of the UK’s negotiated settlement with the EU.
Clearly, media and tech businesses in the UK rely on a pool of young creative talent, many of whom come from the EU. Depending on the outcome of the negotiations, any restriction on free movement could starve the creative industries of this much-needed expertise and talent.

The UK’s deal with the EU over access to the single market will also be a key factor in helping to inform investor decisions.

Pre-Brexit, the UK was still seen as the leading tech hub, America/Palo Alto aside. Post-Brexit, London may face increased competition from European cities that are keen to replicate what has been achieved here, such as the phenomenal success of Tech City in Shoreditch.

Berlin, which has a strong tech presence, could be seen as a favourable alternative to avoid complexities around trading with the EU. Already we have seen politicians in Germany manoeuvering to encourage talent to move across to Continental Europe.

Reasons to be cheerful?

In our view, cool heads are required. For the next two years at least, the UK retains its membership of the EU, giving some time for considered reflection.

Uncertainties aside, it is worth remembering that the UK has a lot to offer. London has a vast financial sector and flourishing media and tech industries. Its appeal includes easy access to back-up support from lawyers, accountants, bankers and fundraisers, who can help take start-ups to the next level and beyond.

The UK’s digital boom goes wider than London alone and is firmly embedded across the country. Tech city is being transformed into tech nation as lower rental costs and the rollout of superfast broadband lure young digital businesses outside of London.

These tech clusters, in cities such as Birmingham, Bournemouth, Cardiff, Edinburgh, Glasgow, Hull, Liverpool, and Manchester offer distinct digital specialisms. While London is widely seen as the centre for incubating FinTech, the North East focuses broadly on software and Health Tech, Liverpool for its gaming tech, Sheffield for Ed Tech and Greater Manchester for Media Tech.

The UK’s universities also play a key role in nurturing and incubating talent. Three UK universities – Cambridge, Oxford, and Imperial – are ranked in the QS world top 10 for Engineering and Technology. Again, it is hard to see how leaving the EU will lead to a decline in standards in UK higher education.

Outside the EU, the Government will be keen to ensure that the UK remains an attractive place to do business. The Chancellor this week noted that the UK has among the lowest and most competitive business tax rates in the world and that 'we are going to need these advantages more than ever'.

The UK tech sector could therefore stand to benefit from the UK having an independent tax system. Under current rules, when new tax reliefs are proposed, EU 'state aid' approval is needed. This applies to reliefs such as Enterprise Investment Scheme or Research and Development tax credits to ensure that such reliefs do not provide a disproportionate competitive advantage to UK companies. With the UK breaking away from EU regulation, the Government of the day could be free to introduce greater tax reliefs to benefit specific strategic industries, such as the tech sector.

Mindset challenge

There is no doubt that the current febrile environment has knocked confidence among tech companies and their backers, but as the political situation settles and we are into the Brexit negotiating period, normal service can start to resume.

The key for tech entrepreneurs is to avoid unnecessary distraction and focus on what they know best – developing new scalable technologies which make things more efficient and less labour intensive and which reduce costs. Investors will always be keen to speak to disruptive companies that offer something new in the market.

What is certain is that businesses in this space are resilient and will adapt to whatever the wider economy, and indeed a potential Brexit impact, has to throw at them.

David Blacher is UK Head of Technology, Media and Telecommunications at RSM

Image Credit: Shutterstock/Lucian Milasan