UK Finance Minister Rachel Reeves speaks at the Labor Party conference at the ACC Liverpool Conference Center on September 23, 2024 in Liverpool, UK.
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LONDON — British tech giants and venture capitalists are questioning whether the country can achieve its goal of becoming a global hub for artificial intelligence after the government unveiled plans to increase corporate taxes.
On Wednesday, Finance Minister Rachel Reeves announced a rise in capital gains tax (CGT) – the tax levied on investors’ profits from the sale of their investments – as part of a far-reaching announcement of the Labor government’s fiscal spending and tax plans part.
The lower capital gains tax rate increased from 10% to 18%, while the higher capital gains tax rate increased from 20% to 24%. Reeves said the increase would help bring 2.5 billion pounds ($3.2 billion) of additional capital to the public finances.
It was also announced that there would be a lifetime limit of £1 million for Business Asset Disposal Relief (BADR), which provides entrepreneurs with a reduced rate of capital gains tax on the sale of all or part of a company’s assets.
She added that the capital gains tax rate applicable to entrepreneurs using the BADR scheme will increase to 14% in 2025 and to 18% a year later. Despite this, Levis said the UK’s capital gains tax rate remains the lowest among European G7 economies.
The tax hikes are less severe than previously feared, but the effort to provide companies with a higher tax environment has raised concerns among some tech executives and investors, with many believing the move will lead to higher inflation and slower hiring.
As well as increasing capital gains tax, the government has also increased the rate of National Insurance (NI) contributions, a form of income tax. Reeves expects the move to raise £25bn a year – the biggest revenue boost yet in a series of pledges made on Wednesday.
Paul Taylor, chief executive and co-founder of fintech company Thought Machine, said the increase in NI interest rates would result in an increase of £800,000 in salary bills for his business.
“This is a significant number for a company like ours that relies on investor capital and is already facing cost pressures and targets,” he noted.
Taylor, a member of the Unicorn Council, a UK fintech lobby group, added: “Almost all emerging technology companies operate on investor capital, and this growth puts them back on the path to profitability.” “The new business and entrepreneurial environment in the United States is The model Britain needs.”
The chance of building the “next Nvidia” is even slimmer
Another tax increase is through an increase in the carried interest tax rate, which is the level of tax levied on fund managers’ share of profits from private equity investments.
Reeves announced that the tax rate on carried interest on capital gains would rise to 32% from the current 28%.
Haakon Overli, co-founder of European venture capital firm Dawn Capital, said that raising capital gains taxes may make it more difficult to build the next Nvidia in the UK
“If we are going to build the next NVIDIA in the UK, it will come from a company born out of venture capital investment,” Overli said in an email.
“The tax returns of creating such a company would be worth more than the FTSE 100 combined and would dwarf the gains from increased venture capital today.”
The government is holding further consultations with industry stakeholders on plans to increase carried interest tax. That’s a good thing, said Anne Glover, chief executive of Amadeus Capital, an early investor in Arm.
“The chancellor has clearly listened to some of the concerns of investors and business leaders,” she said, adding that talks on carried interest reform must be “equally productive and participatory”.
The UK has also pledged to mobilize 70 billion pounds of investment through the recently established National Wealth Fund.
Glover added that this “is consistent with our belief that investments in technology will ultimately lead to long-term growth.”
Still, she urged the government to seriously consider forcing pension funds to diversify their allocations into riskier assets such as venture capital – a common demand from venture capital firms seeking to boost the UK’s tech sector.
Clarification welcome
Steve Hare, chief executive of accounting software company Sage, said the budget would mean “significant challenges for UK businesses, particularly small and medium-sized enterprises, who will face the impact of increased employer national insurance contributions and a rise in the minimum wage in the coming months.
Even so, he added, many companies would still welcome “the long-term certainty and clarity provided, allowing them to plan and adapt effectively.”
Meanwhile, Sean Reddington, founder and chief executive of education technology company Thrive, said higher capital gains tax rates meant tech entrepreneurs “will face greater costs when selling assets”, while increases in employer NI contributions “may will affect hiring decisions.”
“To achieve a sustainable business environment, government support must go beyond these fiscal reforms,” Reddington said. “While clearer tax communication is positive, it is unlikely to offset the challenges faced by small businesses and the self-employed Pressure from rising taxes and mounting debt.”
He added: “The key question is how businesses can maintain profitability amid rising costs. Government support is vital to offset these new burdens and ensure the UK’s entrepreneurial spirit continues to thrive.”
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