It’s a familiar refrain to both research practitioners and policy-makers in the UK and across Europe: “we’re great at science; but poor at innovation”.

Familiar, in fact, to the point of cliché: as far back as 1994, the European Commission was highlighting Europe’s “comparatively limited capacity to convert scientific breakthroughs and technological achievements into industrial and commercial successes”. Yet, almost two decades on, it is a highly similar tone which still permeates the EC’s ‘Innovation Union’ Flagship 2020 initiative – the Commission’s latest foray into innovation policy. In the UK, much the same hand-wringing is in evidence in innovation policy such as the Sainsbury review of 2007, or the Dyson review conducted in 2010 for the Conservative party.

Now, in its latest attempt to foster a more supportive environment for innovation, the UK Government has outlined a series of changes to a relatively little-known tax scheme called the Enterprise Investment Scheme (EIS), which has been designed to provide tax breaks to those willing to invest in early stage, risky companies. It’s a move which could strike at the heart of what has long been a financial bottle-neck for early-stage science and tech companies.

Risk is magnified at the earliest stage of investment

The environment for venture investment at present is sparse, if not entirely barren. Investor confidence in the US, riding the wave of the social networking boom, appears to be on the rise. But in Europe many venture firms are still suffering a hangover from the credit crisis, when early stage companies, struggling to stay afloat and raise finance, often had to take capital at knock-down prices and were devalued as a result. But there is no doubt that it has always been very difficult for science entrepreneurs to secure investment in their technology at the earliest stage. The problem is that however ground-breaking the technology, however compelling the market opportunity, and however brilliant the business team behind it, investing at the very outset of a company’s lifetime is an extremely risky proposition. During these first faltering steps of a new company’s infancy, there are simply too many unknowns to enable investment decisions to be made on a truly rational basis. In many, if not most, cases, the best guesses of companies and investors fall wide of the mark, and more often than not, that results in investors losing money.

Enter the angels…

These risks are well recognised, if not well understood, by the venture community. As a result, in the UK and Europe it is Business ‘Angels’ rather than venture capitalists, who, alongside universities and public funding sources, are increasingly stepping in to shoulder these risks and provide a financial bridge to emergent companies.

And it is these Angels which the Government’s newly enhanced tax scheme will specifically target. Under changes announced in the Chancellors autumn budget statement, the UK Government will establish a new ‘SEIS’ (Seed Enterprise Investment Scheme), designed to provide a higher rate of income tax relief – 50% the value of an investment – to individuals investing in ‘seed’ companies. By providing, in effect, a massive ‘discount’ on such investments, the scheme reduces the overall amount of capital put at risk, while offering the potential for outsize rewards.

Such a generous tax-dodge for wealthy individuals might seem at first glance an anathema to the mantra of frugality which has permeated both the Government’s and economists’ language in recent years – particularly against a backdrop of swingeing cuts to universities and research spending. But it is investment from these same individuals which can bridge the gap between scientific ideas and commercial outcomes – and that in turn helps make the case for the value of public investment in science and research.

It might not be a comfortable message for many of us, but these tax breaks could be good news for UK science.