British Chancellor of the Exchequer Rachel Reeves speaks at the Labor Party conference at the ACC Liverpool Convention Center in Liverpool, England, September 23, 2024.
Anadolu | getty images
LONDON — British technology business owners and venture capitalists are questioning whether the country can deliver on its bid to become a global artificial intelligence hub after the government announced plans to increase taxes on companies.
On Wednesday, Chancellor of the Exchequer Rachel Reeves announced moves to increase capital gains tax (CGT), levied on profits investors make from the sale of investments, as part of a wider announcement of the Labor government’s spending and tax plans. .
The lower capital gains tax rate was increased from 10% to 18%, and the higher rate was increased from 20% to 24%. Reeves said the increase would help bring 2.5 billion pounds ($3.2 billion) of additional capital into public coffers.
It was also announced that the lifetime limit for Business Asset Disposal Relief (BADR), which provides entrepreneurs with a reduction in the rate of tax they pay on capital gains from the sale of all or part of their business, will be £1 million. .
She added that the CGT rate applicable to entrepreneurs using the BADR scheme will rise to 14% in 2025 and 18% a year later. Despite this, Reeves said the UK would still have the lowest capital gains tax rate among the European G7 economies.
The increase was less severe than previously feared. But the push toward a higher tax environment for companies has raised concerns from several tech executives and investors, with many suggesting the move will lead to higher inflation and a slowdown in hiring.
In addition to the CGT increase, the government also increased National Insurance (NI) contribution rates, a tax levied on income. Reeves predicted the move would raise the economy by £25 billion a year. This is by far the largest revenue-boosting measure among several pledges made Wednesday.
Paul Taylor, CEO and co-founder of fintech company Thought Machine, said increasing NI rates would lead to an extra £800,000 in payroll spend for businesses.
“This is a significant amount for a company like ours that relies on investor capital and is already facing cost pressures and targets,” he said.
“Almost all emerging technology companies run on investor capital and this increase puts them back on the path to profitability,” added Taylor, who sits on the Unicorn Council for UK FinTech. . “The startup and entrepreneurial environment in the US is a model of where the UK should be.”
The chances of building the ‘next generation Nvidia’ are even slimmer
Another increase in taxation is through an increase in the tax rate on retained interest (the level of tax that applies to the share of profits a fund manager earns from private equity investments).
Reeves announced that the tax rate on held interest levied on capital gains would increase from the current 28% to 32%.
Haakon Overli, co-founder of European venture capital firm Dawn Capital, said the capital gains tax hike could make it more difficult for the next Nvidia to be built in the UK.
“If we build the next NVIDIA in the UK, it will be from a company born of venture capital investment,” Overli said in an email.
“The tax rebate from setting up such a company, now worth more than the FTSE 100 combined, would dwarf the benefits of today’s increased returns from venture capital.”
The government is conducting further consultations with industry stakeholders on plans to increase taxes on interest held. Anne Glover, CEO of venture capital firm Amadeus Capital, said this is a good thing.
“The Prime Minister has clearly listened to some of the concerns of investors and business leaders,” she said, adding that discussions on profit reform should also be “equally productive and participatory”.
The UK will also invest 70 billion won through the National Wealth Fund, a state-backed investment platform modeled on sovereign wealth vehicles such as Norway’s Government Pension Fund Global and Saudi Arabia’s Public Investment Fund. Committed to mobilizing investment of the pound.
“This is consistent with our belief that investments in technology will ultimately lead to long-term growth,” Glover added.
Nonetheless, she urged the government to seriously look at mandating pension funds to allocate to riskier assets such as venture capital. This is a common request from VCs to boost the UK tech sector.
Clarity welcome
Steve Hare, CEO of accounting software company Sage, said the Budget “poses a serious challenge for UK businesses, particularly small and medium-sized businesses, who will face the impact of increased employer National Insurance contributions and a higher minimum wage in the coming months.”
Nonetheless, he added that many businesses would still welcome “long-term certainty and clarity that allows for effective planning and adaptation.”
Meanwhile, Sean Reddington, founder and CEO of edtech company Thrive, said higher CGT rates meant tech entrepreneurs would face “greater costs when selling assets”, while increased employer NI contributions “could influence hiring decisions”. “There is,” he said.
“For a sustainable business environment, government support must go beyond these financial changes,” Reddington said. “Clearer tax communication is positive, but unlikely to offset the pressures of increased taxation and increased debt for small and medium-sized businesses and the self-employed.”
He added: “The critical question is how businesses can remain profitable amid rising costs. Government support is essential to offset these new burdens and ensure that entrepreneurship in the UK continues to thrive.”
Adam French, a partner at early-stage investor Antler, was less optimistic about Reeves’ tax plans, saying the impact of the changes on the UK tech ecosystem would be “minimal at best.”
“I don’t think this will make a big difference at all to entrepreneurship in the UK,” French told CNBC in an email. “I would be very surprised if this triggered a mass exodus of entrepreneurs. I think the community here is much more resilient than that.”
