UK Chancellor of the Exchequer Rachel Reeves speaks at the Labor Party conference at the ACC Liverpool Convention Center on September 23, 2024 in Liverpool, UK.
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LONDON — Heads of British technology companies and venture capitalists are questioning whether the country can achieve its goal of becoming a global artificial intelligence hub after the government announced plans to increase taxes on companies. are.
On Wednesday, Chancellor of the Exchequer Rachel Reeves announced moves to increase capital gains tax (CGT) – the tax on profits investors make from the sale of their investments – as part of the Labor government’s wider spending and tax announcements. did. .
The lower tax rate on capital gains increased from 10% to 18%, while the higher tax rate increased from 20% to 24%. Mr Reeves said the increase could bring in 2.5 billion pounds ($3.2 billion) of additional capital to the public purse.
It was also announced that the lifetime limit for Business Asset Disposal Relief (BADR), which reduces the level of tax that entrepreneurs pay on capital gains from the sale of all or part of a company, will be £1 million. Ta. .
He added that the CGT rate applicable to entrepreneurs using the BADR scheme will increase to 14% in 2025 and 18% a year later. Still, Reeves said Britain’s capital gains tax rate would still be the lowest among Europe’s G7 economies.
Although the tax hikes were not as severe as previously feared, the push for a higher tax environment for companies has raised concerns among several tech executives and investors, with many believing the measures could lead to higher inflation and slower employment. He suggested that there might be a connection.
In addition to increasing CGT, the government has also increased contribution rates for National Insurance (NI), a tax on income. Mr Reeves expects the measure to raise £25bn a year, making it the biggest revenue-raising package yet among a raft of pledges made on Wednesday.
Paul Taylor, co-founder and CEO of fintech company Thought Machine, said the NI rate hike would add an additional £800,000 to his business’ staff costs.
“This is a significant amount for a company like ours that relies on investor capital and is already facing cost pressures and targets,” he noted.
“Nearly all new technology companies are run on investor capital and this increase will put them back on the path to profitability,” said Taylor, a member of the Unicorn Council, a UK fintech lobbying group. he added. “The US startup and entrepreneurial environment is a model for what the UK should be like.”
Potential for building a leaner “next Nvidia”
Further increases in taxation due to increased tax rates on carried interest (the level of tax applied to fund managers’ distribution of profits from private equity investments).
Mr. Reeves announced that the carried interest tax rate on capital gains would increase from the current 28% to 32%.
Haakon Overy, co-founder of European venture capital firm Dawn Capital, said higher capital gains taxes could make it harder to build the next Nvidia in the UK.
“If the next NVIDIA is built in the UK, it will come from a company born out of venture capital investment,” Overy said in an email.
“The tax return of setting up such a company would be worth more than the FTSE 100 combined, dwarfing the gains from increasing the stake from venture capital today.”
The Government is holding further consultations with industry stakeholders on plans to increase taxes on carried interest. Ann Glover, CEO of venture capital firm Amadeus Capital, said that’s a good thing.
“The Prime Minister has clearly listened to some of the concerns of investors and business leaders,” he said, adding that consultation on carried interest reform must be “equally productive and engaged”. .
The UK has also committed to mobilizing £70bn of investment through the recently established National Wealth Fund. The fund is 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.
This is “consistent with our belief that investing in technology ultimately leads to long-term growth,” Glover added.
Still, she urged the government to seriously consider requiring pension funds to diversify their allocations into riskier assets such as venture capital. This is a common request from venture capitalists to revitalize the UK’s tech sector.
clarity is welcomed
Steve Hare, chief executive of accounting software firm Sage, said the budget would be a “big deal for UK businesses, particularly small and medium-sized enterprises, which will face the impact of higher employer national insurance contributions and minimum wage increases in the coming months. He said it meant “a serious issue.”
Still, he added that many businesses would still welcome the “long-term certainty and clarity that will be provided, allowing them to plan and adapt effectively.”
Meanwhile, Sean Reddington, founder and CEO of education technology company Thrive, said that while higher CGT rates meant technology entrepreneurs faced “increased costs when selling assets”, It said an increase in employers’ NI contributions “could impact hiring decisions”.
“For a sustainable business environment, government support must go beyond these fiscal reforms,” Reddington said. “Although clearer tax communication is positive, it is unlikely to offset the pressures of higher taxes and debt on small businesses and the self-employed.”
He added: “The key question is how businesses can remain profitable despite increased costs. Government support is essential to guarantee this.”
Adam French, a partner at seed-stage investor Antler, was less pessimistic about Reeves’ tax plans, saying the impact of the changes on Britain’s tech ecosystem would be “modest at best”.
“I don’t think this will change much in the UK entrepreneurial world at all,” French told CNBC via email. “I would be very surprised if this prompted a mass exodus of founders to other shores. I think the community here is much more resilient than that.”
