On Monday, British tech lobby group Startup Coalition warned in a blog post that there was a risk that Reeves' tax plans could lead to a “brain drain” in the tech sector. (Photo by Oli Scarff/Getty Images)
Oli Scarff | Getty Images
LONDON – Britain's Labor government announced plans on Wednesday to increase capital gains tax on share sales. The news provided some relief to tech entrepreneurs who feared a tougher tax crackdown on the rich.
Finance Minister Rachel Reeves on Wednesday increased capital gains tax (CGT) – a levy on the profit investors make from the sale of an investment – as part of her wide-ranging Budget announcement. The lower capital gains tax rate will increase from 10% to 18%, while the higher rate will rise from 20% to 24%, Reeves said. The tax rises are expected to raise £2.5 billion.
“We must drive growth, encourage entrepreneurship and support wealth creation, while increasing the revenue needed to fund our public services and restore our public finances,” Reeves said, adding that the UK is also committed to the higher rate “would still have the necessary funds.” lowest capital gains tax rate of all European G7 economies.”
Reeves maintained the £1 million lifetime cap on capital gains from the sale of all or part of a business under Business Asset Disposition Relief (BADR), allaying fears from business owners that the business tax relief scheme would be scrapped.
However, she added that the CGT rate, which applies to entrepreneurs who sell all or part of their business under the BADR, will increase to 14% in 2025 and to 18% a year later. She stressed that this still represents a “significant gap compared to the higher rate of capital gains tax”.
In a less welcome move for businesses, Reeves also announced plans to increase the rate of National Insurance (NI) – an income tax – for employers. The current rate is 13.8% on employee earnings above £9,100 per year. For salaries above £5,000 per year, this rate is set to rise to 15%.
The changes represent just a small part of the sweeping fiscal changes the recently elected Labor government set out in its debut budget on Wednesday to plug a multi-billion pound funding gap in the public finances.
“Brain drain” feared
Reeves' announcement came after speculation about capital gains tax changes led to a backlash from tech founders and investors. Even before Reeves' announcement, the expectation that CGT would rise had been causing concern among tech founders across the country.
On Monday, British tech lobby group Startup Coalition warned in a blog post that there was a risk that Reeves' tax plans could lead to a “brain drain” in the tech sector.
A survey of 713 founders and investors conducted by the Startup Coalition with private business database Beauhurst found that 89% of respondents would consider moving themselves or their business abroad, with 72% having already explored the possibility.
The survey data also showed that 94% of founders would consider setting up a future business outside the UK if the government increased the CGT rate.
Dom Hallas, executive director of the Startup Coalition, said that while the survey's results were bleak, he did not expect founders to “flee when things get tough” as they are “not naive about the role of taxes in the economy.” society concerns”.
After Reeves' Budget speech, Hallas told CNBC via text message: “Any Budget with increases in CGT and NI, gradual increases in BADR and increasing taxes for investors is never easy and today it will be difficult for founders to see taxes on their companies.” raise.”
However, he added: “We appreciate that the government has listened to ensure that entrepreneurs' worst fears have not been realized and some balance has been struck, including maintaining all important research and development.” [research and development] Investment.”
Barney Hussey-Yeo, CEO and co-founder of financial technology app Cleo, told CNBC last week he was considering a move to the US because of Labor's tax plans.
“There are so many founders who are already leaving or thinking about leaving – and they're excited to go to Silicon Valley,” Hussey-Yeo told CNBC last week on the sidelines of the venture capital firm's EMEA Fintech Summit Accel in London.
Hussey-Yeo did not respond to a request for comment on Wednesday about whether he still plans to move abroad. However, he told CNBC that the budget announcement was “better than I thought,” adding that it “seems like they listened to business owners.”
Paul Taylor, CEO of London-based fintech firm Thought Machine, said while it was reassuring to see the government listening to founders' concerns, increases in NI contributions would prove costly. This is expected to increase Thought Machine's UK payroll spend by £800,000.
“This is a significant amount for companies like us that rely on investor capital and are already under cost pressures and targets,” Taylor told CNBC on Wednesday. “Almost all emerging technology companies rely on investor capital, and this increase puts them back on the path to profitability.”
Focus on growth-oriented policies
Tech entrepreneurs and investors are calling on the government to refocus on driving growth and innovation in the UK – messages that were central to Labor's election manifesto ahead of the stunning victory that made Keir Starmer prime minister .
“We are already seeing start-ups in the UK struggling to secure pre-seed and seed funding, with VCs here having a lower appetite for risk. A higher CGT will act as a further deterrent,” said Phil Kwok, co-founder of EasyA, an e-learning startup, told CNBC via email.
“Given all these factors, we could see investors and the next generation of founders turning to other markets such as the US,” he added.
Hannah Seal, partner at Index Ventures, told CNBC that the government should “implement reforms that make it easier for startups to attract talent through employee ownership and ensure all regulators prioritize innovation and growth.”
“Startup-friendly policies like these will be crucial to signaling the UK’s commitment to remaining a globally competitive innovation hub, particularly in light of today’s announcements,” she added.
Edgar Randall, managing director for the UK and Ireland at data and analytics firm Dun & Bradstreet, told CNBC that to remain competitive, the government should “weigh the cumulative impact of policies that impact growth.”
These include policies affecting energy costs, employer social security contributions and tax structures on capital gains and dividends.
Ultimately, “business decisions are influenced by more than just financial policy,” Randall said, adding. “Entrepreneurs look at the ecosystems.” [as] a whole.”