On Monday, the UK tech lobby group Startup Coalition warned in a blog post that Reeves’ tax plans risked leading to a tech “brain drain”. (Photo by Oli Scarff/Getty Images)
Oli Scarff | Getty Images
LONDON — Britain’s Labor government on Wednesday announced plans to raise the rate of capital gains tax on share sales, news that offered some relief to tech entrepreneurs who had feared a sharper tax crackdown on the wealthy.
Chancellor of the Exchequer Rachel Reeves on Wednesday increased capital gains tax (CGT) – a levy on profits made by investors on the sale of an investment – as part of her sweeping budget announcement. The lowest capital gains tax rate will rise to 18% from 10%, while the top rate will rise to 24% from 20%, Reeves said. The tax increases are expected to bring in £2.5bn.
“We need to drive growth, promote entrepreneurship and support wealth creation, while raising the revenue needed to fund our public services and restore our public finances,” Reeves said, adding that even with the higher rate, the UK will “continue to have the lowest capital gains tax rate of any G7 European economy”.
Reeves retained the £1m lifetime cap on capital gains from the sale of all or part of a company under business asset relief (BADR), allaying fears from entrepreneurs that the business tax relief scheme would be scrapped .
However, it added that the CGT rate applicable to entrepreneurs who sell all or part of their business under the BADR will rise to 14% in 2025 and 18% a year later. He stressed that this still represented a “significant gap compared to the higher rate of capital gains tax”.
In a less welcome move for business, Reeves also announced plans to increase the rate of National Insurance (NI) – tax on wages – for employers. The current rate is 13.8% on an employee’s earnings of more than £9,100 a year. This is expected to rise to 15% on salaries above £5,000 a year.
The changes are just a small part of sweeping fiscal changes the newly-elected Labor government unveiled in its debut budget on Wednesday in a bid to close a multibillion-pound funding gap in the public finances.
A “brain drain” was feared.
Reeves’ announcement comes after speculation about changes to the capital gains tax sparked backlash from tech founders and investors. Even before Reeves’ announcement, the prospect that CGT would rise had caused anxiety among tech founders across the country.
On Monday, the UK tech lobby group Startup Coalition he warned in a blog post that there was a risk that Reeves’ tax plans would lead to a technological “brain drain”.
A survey of 713 founders and investors conducted by the Startup Coalition with private company database Beauhurst found that 89% of respondents would consider relocating themselves or their business abroad, with 72% already exploring the possibility .
The survey data also showed that 94% of founders would consider setting up a future company outside the UK if the government were to increase the CGT rate.
Dom Hallas, executive director of the Startup Coalition, said that while the survey’s findings were bleak, he doesn’t expect founders “to run away if the going gets tough” as they are “not naïve about the role of taxes in society.” .
After Reeves’ budget speech, Halas told CNBC via text message that, “any budget with increases in CGT and NI, gradual increases in BADR and a tax increase on investors, is never easy and today will be difficult for founders to see taxes on their businesses. increase.”
However, he added: “We appreciate that the government has listened to ensure that business people’s worst fears have not been realized and that some balance has been struck, including keeping all important R&D [research and development] investment.”
Barney Hussey-Yeo, CEO and co-founder of financial technology app Cleo, told CNBC last week that he is considering moving to the US as a result of Labor’s tax plans.
“There are so many founders who are already leaving or already thinking about leaving — and they’re excited to go to Silicon Valley,” Hussey-Yeo told CNBC on the sidelines of venture capital firm Accel’s EMEA Fintech Summit in London last week .
Hussey-Yeo did not respond to a request for comment Wednesday on whether he still plans to move overseas. But he told CNBC that the budget announcement was “better than I thought it would be,” adding that “it looks like they listened” to businessmen.
Focus on development oriented policy
Businesses and technology investors are urging the government to return to its focus on promoting growth and innovation in the UK, messages that were central to Labour’s election manifesto before the landslide victory that saw Keir Starmer become prime minister.
“We already see early-stage companies in the UK struggling to secure upfront and seed funding, with VCs here having a lower risk appetite. A higher CGT will act as a further deterrent,” Phil Kwok, co-founder of EasyA, a e-learning startup, he told CNBC via email.
“With all the factors at play, we could see investors and the next generation of founders looking to other markets like the US,” he added.
Hannah Seal, partner at Index Ventures, told CNBC that the government should “pursue reforms that make it easier for start-ups to attract talent through employee ownership and ensure that all regulators prioritize innovation and growth ».
“Startup-friendly policies like these will be essential to signal the UK’s commitment to remaining a globally competitive innovation hub, especially in light of today’s announcements,” he added.
Edgar Randall, UK and Ireland managing director at data and analytics firm Dun & Bradstreet, told CNBC that to remain competitive, the government will need to “weigh the cumulative effect of policies that affect growth.”
These include policies affecting energy costs, employer National Insurance contributions and tax structures for capital gains and dividends.
Ultimately, “business decisions are more influenced by fiscal policy,” Randall said, adding that. “Entrepreneurs are looking at ecosystems [as] a whole”.