British Finance Minister Rachel Reeves speaks during the Labor Party conference held at the ACC Liverpool conference center in Liverpool, UK on September 23, 2024.
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LONDON – British technology chiefs and venture capitalists are wondering whether the country can deliver on its bid to become a global artificial intelligence hub after the government laid out plans to hike corporate taxes.
On Wednesday, Finance Minister Rachel Reeves announced a move to increase capital gains tax (CGT) – a tax on the profits investors make from the sale of an investment – as part of a far-reaching announcement on the Labor government's fiscal spending and tax plans. .
The lower capital gains tax rate was increased to 18% from 10%, while the higher rate rose to 24% from 20%. Reeves said the increases would help bring £2.5 billion ($3.2 billion) of additional capital into the public purse.
It was also announced that the lifetime cap on Business Asset Disposal Relief (BADR) – which offers entrepreneurs a reduced rate at the level of tax paid on capital gains arising from the sale of all or part of the business – will be up to £1 million.
She added that the CGT rate applied to entrepreneurs who use the Badr program will rise to 14% in 2025 and to 18% a year later. However, Reeves said the UK would still have the lowest capital gains tax rate of any G7 European economy.
The increases were less severe than previously feared – but the push for a higher corporate tax environment has alarmed many tech executives and investors, with many suggesting the move will lead to higher inflation and slower hiring.
On top of the increases in CGT, the government has also raised the rate of National Insurance (NI) contributions, a tax on profits. Reeves expected the move to raise £25bn a year, the biggest revenue-raising measure ever among a raft of pledges made on Wednesday.
Paul Taylor, CEO and co-founder of fintech firm Thought Machine, said raising NI rates would see his company spend an extra £800,000 on salaries.
“This is a significant amount for companies like ours, which rely on investor capital and are already facing cost and target pressures,” he noted.
Taylor, who is a member of lobby group Unicorn Council for UK FinTech, added: “Almost all tech startups run on investor capital, and this raise puts them back on their path to profitability.” “The startup and entrepreneurship environment in the US is a model of what the UK should be like.”
The chances of building the “next Nvidia” are slim
A further increase in taxes by raising the carried interest tax rate – the level of tax applied to the share of profit a fund manager makes from investing in private equity.
Reeves announced that the tax rate on carried interest, which is levied on capital gains, will rise to 32%, up from the current 28%.
Haakon Overlei, co-founder of European venture capital firm Dawn Capital, said increases in capital gains tax could make it harder to build the next Nvidia in the UK.
“If we are to build the next NVIDIA in the UK, it will come from a company born from venture capital investment,” Overley said via email.
“The tax returns from creating such a company, worth more than the FTSE 100 combined, would dwarf any gains from an increased share of venture capital today.”
The government is conducting further consultations with industry stakeholders on plans to increase taxes on carried interest. That's a good thing, said Anne Glover, CEO of Amadeus Capital, an early investor in Arm.
“The Chancellor has clearly heard some of the concerns of investors and business leaders,” she said, adding that talks on carried interest reforms should be “equally productive and engaged.”
Britain has also committed to mobilizing £70 billion of investments through its recently established National Wealth Fund – a state-backed investment platform modeled on sovereign wealth vehicles such as Norway's Global State Pension Fund and Saudi Arabia's Public Investment Fund.
Glover added that this “is consistent with our belief that investing in technology will ultimately lead to long-term growth.”
However, she urged the government to seriously consider requiring pension funds to diversify their allocations to riskier assets such as venture capital – a common request from venture capital firms to boost the UK technology sector.
Clarity welcomed
Steve Hare, chief executive of accounting software company Sage, said the budget would mean “significant challenges for UK businesses, particularly SMEs, who will face the impact of rising employer National Insurance contributions and minimum wage increases in the coming months”.
However, he added that many companies would still welcome “longer-term certainty and clarity, allowing them to plan and adapt effectively.”
Meanwhile, Sean Reddington, founder and chief executive of educational technology company Thrive, said higher CGT rates meant tech entrepreneurs would face “greater costs when selling assets”, while higher NI employer contributions “could influence decisions”. Employment.
“For a sustainable business environment, government support must go beyond these financial changes,” Reddington said. “While clearer tax communication is a positive, it is unlikely to offset rising tax pressures and rising debt on small businesses and the self-employed.”
He added: “The crucial question is how businesses can maintain profitability as costs increase. Government support is essential to offset these new burdens and ensure UK entrepreneurship continues to flourish.”
