Backing "British" business: what does it really mean?
Last month’s industrial strategy paper from the UK government is a reminder of how much time, energy and taxpayer money is spent trying to get British companies growing. Growth is the “number one mission” of Keir Starmer’s administration. There’s just one problem: we haven’t agreed on what a “British” company actually is.
There are more definitions flying around Whitehall than even The Thick of It could do justice to. Incorporated here? Tax registered? Some kind of “HQ”? Listed here? Employees here? Primarily “British” owned? Some combination of these factors? Something else entirely? We gathered some contenders in the table below.
Policies to support business and their definitions of “British”
This matters because billions of taxpayer pounds and thousands of hours of civil service time are spent on a set of interventions that are at best piecemeal, and at worst self-contradictory:
Listing and ISA rules are being overhauled to push savings into London-listed stocks, even though many of these companies are BRINO: BRitish In Name Only.
Startup subsidies trying to achieve the same things have different qualifying criteria because they are provided by different parts of government.
Mansion House reforms are pushing pension funds to invest in private “British” companies, where the only requirement is a UK-registered entity.
Creating “homegrown champions” is a key target of the new industrial strategy, but the phrase goes undefined.
The foundational problem is a lack of clarity about what policy is actually trying to achieve: jobs, investment, tax revenues, exports? Any definition of “British” is a proxy for those downstream goals. But before we turn to that, here are five examples of where the inconsistency creates confusion and conflict.
Example 1: startup subsidies
The taxpayer provides tens of billions of subsidies to startups through schemes like (S)EIS, R&D tax credits, grant funding (e.g. through Innovate UK) and investment programmes run by the British Business Bank.
All understandably require the recipient company to be “British” in some sense, so that the support flows into UK economic activity. But the same startup can be eligible for some schemes and not others, depending on its quirks.
(S)EIS requires “Permanent establishment”, a torturously-defined concept derived from international (OECD) rules. This looks at the physical British presence of the company and how long it’s been here. Whereas R&D tax credits don’t require permanent establishment, but they do require registration for UK corporation tax, and the R&D must be carried out here. Innovate UK grant funding just requires a company entity registered at Companies House.
The British Business Bank has a wide set of definitions, all different from the tax and grant schemes. Its Regional Funds require recipients to have “a significant operating presence” or an “HQ” in a region, while its Life Sciences Investment Programme needs half of a recipient fund’s underlying portfolio companies to be “UK based”.
Its Enterprise Capital Funds programme, a mainstay of early stage startup funding (and the structure of Form’s Fund II), until recently required a “demonstrable benefit” to the UK economy, but has been updated for future funds to a four-part test including Principal Place of Business (a concept borrowed from VAT law), and two-thirds of the exec managers being tax resident in the UK. Neither test feature in any other startup policy definition, and make it by far the tightest definition across Whitehall. The new ECF scheme also rules out any company without a UK topco.
This latter point matters because there is an increasingly strong trend of “British” startups putting an administrative topco in the US (usually Delaware) for fundraising purposes. This recognises that US capital dominates startup funding, and that providing easier access to US investors can make sense even if the company only has plans to operate in the UK. The UK’s most prolific company creator, Entrepreneur First, now runs its demo day exclusively in the US and encourages US incorporation for all of its UK teams.
Example 2: Mansion House pension reforms
A lot of policy time and effort has gone into getting UK pension funds to invest more in private assets. The Mansion House Compact is a broad a commitment from DC schemes to allocate at least 5% of their default funds to unlisted equities, including venture and growth equity, by 2030. The 2025 Mansion House Accord is a more specific pledge by 17 schemes to invest at least 10% of their defined contribution (DC) default funds in private markets by 2030, with 5% of the total allocated to the UK.
How is “UK” defined? By both Pensions UK, which is leading the Accord, and the FCA in its new Value for Money framework (applying to broader pensions reform) as “UK registered private companies or partnership”. So the only criteria is a UK entity, which is different to R&D tax credits, (S)EIS, and most of the BBB criteria.
The FCA specifically states that disclosure of the split of UK and non-UK assets invested in by pension schemes will “allow policymakers and analysts to monitor how much firms are investing in the UK economy.”
But a UK registered company could have one employee in the UK, pay virtually no tax here, carry out all of its operations and economic activity elsewhere, and be almost entirely foreign owned. Is this really investment in the UK economy? While the inverse - an entirely otherwise-British company which happened to have a US topco - is not qualifying under ECF and some other definitions.
Example 3: listing in London
The “British” question also rears its head at the other end of the spectrum, when companies decide to list. We’ve had a vexed debate in the UK about the decline of London as a listing venue for tech firms, who increasingly favour the Nasdaq. The idea, presumably, being that once a company like Wise switches from the LSE to New York, it is no longer “British”. There’s lots of talk of “losing” companies, and lots of policy focused on ways to “keep” them “British”.
It’s hard to understand what this means. It’s certainly not about their ownership. For at least a decade, UK-listed companies have been majority owned by overseas investors (see chart below). Based on the trend, it’s probably over 60% now. It’s almost certainly below 10% for UK individuals.
Many of these companies, irrespective of their ownership, don’t have a meaningful UK HQ, nor an economic footprint here, nor British management, so it can’t be those things either. In what sense does their London listing make them “British”? Many “foreign” firms have London listings (our BRINOs), and many “British” firms have one or more non-London listings.
The proportion of UK-quoted shares held by location of investor
Maybe over time investment decisions might be made in favour of the country of listing, but there’s scant evidence for this home bias, certainly among tech firms. Tax revenues is another potential concern, but ongoing global tax reform is - albeit slowly - connecting revenues more closely with the location of economic activity, not topco domicile.
A more abstract concern might be the soft power that comes with being able to, indirectly, exert control over large companies by subjecting them to British company law, corporate governance and other formal and informal rules. The fact that the UK is reforming (read: relaxing) its listing rules to make them more like those in the US suggests otherwise, for example on issues like dual class shares.
If we had a functioning definition of “British”, it might turn out that the intense time and effort spent on keeping companies listed in London is best spent elsewhere. Or at least, we’d know what it is we’re actually worried about if and when companies don’t list in the UK.
Example 4: retail investment
Rachel Reeves, the embattled UK Chancellor, is considering reducing the ISA tax-free cash allowance to encourage more savings to move into stocks and shares ISAs, in the hope that this will mean more “British” retail investment in “British” companies, as reported by the FT and elsewhere. This can be seen as the retail equivalent of the pressure being exerted on pension funds through the Mansion House process.
What is it about UK listed equities that the Chancellor is trying to “boost”? Would higher share prices lead to more investment by those companies in the UK? More jobs for global managers at Rio Tinto’s London office?
ISA tax relief for retail investment into UK-listed stocks is, in principle, very close to EIS tax relief for retail investment into UK “permanently established” startups. But none of the concern about how “British” a company is applies to the former, beyond its London listing. Why is a taxpayer pound deployed as a subsidy to a small business far more demanding of its Britishness than the same pound supporting a global Plc? Instinctively, it should be the other way around.
Example 5: inward investment policy
A large part of Whitehall is concerned with improving Foreign Direct Investment (FDI) into the UK. An annex of the excellent Harrington Review of FDI, published in 2023, sets out why in some detail, including that: FDI recipients are more productive, they spend more on R&D, they employ more people, do more capex, have better management practices and increase competition in the markets they operate in.
It won’t be lost on readers that this argument directly contradicts concerns that domestic ownership of British companies is dwindling in the face of foreign ownership - a successful FDI policy will actively make that “worse”.
But the more troubling point is that we have yet another definition of “British” in the context of businesses. A company is defined as foreign owned by the ONS if it has had an 11% stake bought by a foreign owner, but is not considered foreign owned for almost all other purposes.
If it is permanently established in the UK, it might have been British enough to have had taxpayer support via EIS; but it won’t have been eligible for ECF support if it had a topco elsewhere, or if half of the exec management were not UK tax resident. But that same management team wouldn’t make it “non UK” for any other purpose including company law, listing rules or pensions reform. It would still get ISA relief if it remains listed in London, even if 99% foreign owned. Is it a British company? We are into the quantum realm: it is and isn’t, all at the same time.
We need to talk about “British”
We could go on - we find alternative definitions in merger control rules, subsidy law (state aid), national security screening, tax rules, company law, corporate reporting.
But if you’re still reading by this point, you probably get the point. Thousands of civil servants, billions of taxpayers’ pounds, and millions of hours of effort are being poured into promoting “British” businesses and economic activity without anything close to a settled view of what that means.
The UK government needs to establish a definitive account of what “British” is, and isn’t, when it comes to business. At the core of this, it needs to spell out what it is really getting at: jobs, sales, management decisions, productivity growth, tax revenues, the exercise of soft power via company law, investment, GDP growth, exports? Why and in what ways does “British” matter? Answer that first and the definition follows.
Our view is that what policymakers really mean, and care about, is the economic footprint of a company, in particular three things: jobs, business investment and tax revenues. Jobs for obvious reasons, business investment because it’s a literal component of GDP growth, and revenues because the defining constraint on government is the fiscal envelope, as our current government is learning the hard way.
One theoretical approach would be to establish a “British” quotient for each of the three on some proportional basis: if a certain amount of your activity (according to the things we decide we care about) is British, then you’re British. If it isn’t, you aren’t. There are obvious issues, such as what happens when this inevitably changes over time. But at least there would be a connection between policy effort, company eligibility and the underlying outcomes policymakers are interested in.
Either way, the definition needs to be settled, otherwise the policy mess will continue.
Note: this blog focuses on the term “British”, because it is the one most often used by policymakers and, in our view, usually meant by those policymakers as the demonym for the United Kingdom, including Northern Ireland. It is not intended to collapse the distinction between Great Britain and the United Kingdom.