Britain's Finance Minister Rachel Reeves delivers a speech during the Labor Party Conference held at the ACC Liverpool Convention Center in Liverpool, United Kingdom on September 23, 2024.
Anadolu | Getty Images
LONDON – British tech bosses and venture capitalists are questioning whether the country can live up to its goal of becoming a global artificial intelligence hub after the government unveiled plans to increase corporate taxes.
On Wednesday, Finance Minister Rachel Reeves announced an increase in capital gains tax (CGT) – a levy on the profit investors make from the sale of an investment – as part of a wide-ranging announcement on the Labor government's budget spending and tax plans.
The lower capital gains tax rate increased from 10% to 18%, while the higher rate increased from 20% to 24%. Reeves said the increases would help inject 2.5 billion pounds ($3.2 billion) of additional capital into public budgets.
It was also announced that the lifetime limit on disposal of business assets relief (BADR), which offers business owners a reduced rate of tax on the amount of tax on capital gains arising from the sale of all or part of a business, will be set at £1 million would lie.
She added that the CGT rate for business owners using the BADR system will rise to 14% in 2025 and to 18% a year later. Nevertheless, Reeves said Britain would still have the lowest capital gains tax rate of all G7 European economies.
The increases were less severe than previously feared – but the push for a higher tax environment for companies fueled concerns among several technology executives and investors, with many suspecting the move would lead to higher inflation and a slowdown in hiring.
In addition to the corporate tax increases, the government also increased the rate of National Insurance Contributions (NI), an income tax. Reeves predicted the move would raise £25bn a year – by far the biggest revenue-raising measure in a series of pledges made on Wednesday.
Paul Taylor, CEO and co-founder of fintech company Thought Machine, said an increase in NI rates would result in an additional £800,000 in wage expenses for his company.
“This is a significant amount for companies like us that rely on investor capital and are already under cost pressures and targets,” he noted.
“Almost all emerging tech companies rely on investor capital and this surge is putting them back on the path to profitability,” added Taylor, who is a member of UK FinTech lobby group Unicorn Council. “The US startup and entrepreneurial environment is a model for where the UK needs to be.”
The chances of building “the next Nvidia” are slimmer
A further increase in taxation comes from an increase in the carried interest tax rate – the amount of tax levied on a fund manager's share of profits from a private equity investment.
Reeves announced that the carried interest tax rate levied on capital gains would increase to 32% from the current 28%.
Haakon Overli, co-founder of European venture capital firm Dawn Capital, said increases in capital gains tax could make it harder for the next Nvidia to be built in the UK
“If we want to get the next NVIDIA built in the UK, it will come from a company that emerged from venture capital investment,” Overli said by email.
“The tax revenue from setting up such a company, worth more than the FTSE 100 combined, would dwarf any gains from increasing venture capital participation today.”
The Government is continuing to consult with industry representatives on plans to increase taxes on carried interest. Anne Glover, CEO of venture capital firm Amadeus Capital, said that's a good thing.
“The chancellor has clearly listened to some of the concerns of investors and business leaders,” she said, adding that conversations about carried interest reforms needed to be “equally productive and engaging.”
Britain also committed to mobilizing £70 billion of investment through the recently launched National Wealth Fund – a government-backed investment platform modeled on sovereign wealth vehicles such as Norway's Government Pension Fund Global and Saudi Arabia's Public Investment Fund.
Glover added: “This is consistent with our belief that investment in technology will ultimately lead to long-term growth.”
Still, she called on the government to seriously consider requiring pension funds to diversify their allocation into riskier assets such as venture capital – a common demand from VCs to boost the UK's tech sector.
Clarity welcome
Steve Hare, CEO of accounting software company Sage, said the budget would “pose significant challenges for UK businesses, particularly SMEs, which will face the impact of rising employers' national insurance contributions and increases in the minimum wage in the coming months.”
Still, he added that many companies would still welcome the “longer-term certainty and clarity that will allow them to plan and adapt effectively.”
Meanwhile, Sean Reddington, founder and CEO of education technology company Thrive, said higher CGT rates mean tech entrepreneurs face “higher costs when selling assets”, while the rise in employer contributions to NI “could influence hiring decisions”.
“For a sustainable business environment, government support must go beyond these fiscal changes,” Reddington said. “While clearer tax communication is positive, it is unlikely to offset the pressures of increased taxation and rising debt on small businesses and the self-employed.”
He added: “The key question is how companies can maintain profitability despite rising costs. Government support is essential to offset these new pressures and ensure entrepreneurship continues to thrive in the UK.”
Adam French, partner at seed-stage investor Antler, was less optimistic about Reeves' tax plans, saying the impact of the changes on the UK tech ecosystem would be “modest at best”.
“I don’t think this will make much of a difference to the UK entrepreneurial scene,” French told CNBC by email. “If this led to a massive migration of founders to other shores, I would be very surprised. I think the community here is much more resilient.”