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The UK Finance Minister's tax changes raise concerns in the tech sector

The UK Finance Minister's tax changes raise concerns in the tech sector

On 23 September 2024, Rachel Reeves, UK Finance Minister, delivered a significant speech at the Labor Party Conference held at the ACC Liverpool Convention Centre. His speech outlined the Government's latest tax proposals, which have raised eyebrows among tech leaders and venture capitalists over the UK's ambitions to establish itself as a major global hub for artificial intelligence.

Reeves revealed plans to increase capital gains tax (CGT), which is the tax levied on profits made from the sale of investments. The changes include increasing the lowest CGT rate from 10% to 18% and increasing the highest rate from 20% to 24%. These adjustments are expected to generate an additional £2.5 billion (around $3.2 billion) in public revenue.

Additionally, the lifetime Business Asset Disposal Relief (BADR) allowance, designed to give entrepreneurs a lower rate of tax on capital gains from the sale of their businesses, will now be capped at £1 million. From 2025, the CGT rate for business owners benefitting from BADR will rise to 14%, with a further increase to 18% in 2026. Despite these increases, Reeves said the UK will still maintain the lowest CGT rates compared to other G7 economies in Europe.

While the increases were less drastic than some had predicted, they still raised concerns among tech executives and investors. Many fear that such tax increases could lead to higher inflation and a slowdown in hiring in the sector.

In addition to the changes to CGT, the Government has announced an increase in contributions to National Insurance (NI), which is a tax on earnings. Reeves estimated that this change would generate an additional £25 billion a year, making it the largest revenue-generating measure in the recent budget.

Paul Taylor, CEO and co-founder of fintech company Thought Machine, highlighted the significant financial impact of rising NI rates, estimating an additional £800,000 in payroll costs for his company. He pointed out that many emerging technology companies are heavily dependent on investor funding and that these tax increases could hinder their progress towards profitability. Taylor, who sits on the Unicorn Council for UK FinTech, stressed that the UK needs to model its environment after the thriving startup culture seen in the US.

The prospect of cultivating the next big tech company, similar to Nvidia, appears increasingly challenging. The new tax reforms also include an increase in the tax levied on carried interest, which is the portion of profits that fund managers earn from private equity investments. The tax on carried interest will increase from 28% to 32%.

Haakon Overli, co-founder of Dawn Capital, a European venture capital firm, said rising capital gains tax could stifle the emergence of a global tech leader in the UK. He noted that the potential revenues generated by a successful venture capital-backed company would significantly outweigh any immediate financial benefits from the current tax structure.

The Government is conducting further consultations with industry stakeholders regarding the increase in the carried interest tax. Anne Glover, chief executive of Amadeus Capital, stressed that the Chancellor recognized investor concerns and highlighted the need for productive discussions on interest rate reform.

Additionally, the UK Government has committed to mobilizing £70 billion in investment through the new National Wealth Fund, drawing inspiration from sovereign wealth funds such as Norway's Government Pension Fund Global and Saudi Arabia's Public Investment Fund. Glover believes investing in technology sectors will boost long-term growth, but has also called for pension funds to diversify their investments into riskier assets, such as venture capital, to strengthen the UK's tech landscape.

Despite the challenges posed by the new tax landscape, Steve Hare, CEO of accounting software company Sage, noted that while UK businesses, particularly small and medium-sized enterprises (SMEs), will face obstacles, the clarity provided by the budget it could help them plan and adapt for the long term.

Sean Reddington, founder and CEO of education technology company Thrive, warned that the rise in CGT means tech entrepreneurs will face higher costs when selling their businesses, which could affect hiring decisions due to the increase of employers' NI contributions. He argued that sustainable business growth requires government support that goes beyond simple fiscal adjustments. While clearer communication on tax changes is beneficial, he believes it may not sufficiently alleviate the pressures faced by small businesses and the self-employed.

Adam French, partner at early stage investor Antler, expressed skepticism about the potential impact of Reeves' tax reforms on the UK's tech ecosystem, suggesting the changes would likely have minimal effect. He doubted these tax rises would prompt a significant exodus of entrepreneurs seeking more favorable conditions abroad, saying the resilience of Britain's tech community would prevail.

Ultimately, while the UK government's tax increases are aimed at supporting public finances, they have sparked significant debate among tech leaders about the future of the sector. The challenges posed by these changes raise important questions about how the UK can continue to foster innovation and attract investment in a competitive global market.

By Lucas Perry

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