British Chancellor of the Exchequer Rachel Reeves delivers a speech at the Labor Party conference held at the ACC Liverpool Convention Center in Liverpool, UK on September 23, 2024.
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LONDON — British tech bosses and venture capitalists are questioning whether the country can deliver on its bid to become a global hub for artificial intelligence, after the government laid out plans to increase taxes on companies.
On Wednesday, Chancellor of the Exchequer Rachel Reeves announced a move to increase capital gains tax (CGT) – a levy on the profits investors make from the sale of an investment – as part of a far-reaching announcement on Labour's fiscal spending and plans. government. .
The lower capital gains tax rate was increased from 10% to 18%, while the higher rate rose from 20% to 24%. Reeves said the increases will help bring £2.5 billion ($3.2 billion) of additional capital into the public purse.
It was also announced that the lifetime business asset disposal limit (BADR) – which offers entrepreneurs a reduced rate on the level of tax paid on capital gains arising from the sale of all or part of a business – £ would amount to 1 million. .
She added that the CGT rate applied to entrepreneurs using the BADR scheme will rise to 14% in 2025 and to 18% a year later. Yet Reeves said Britain would still have the lowest tax rate on capital gains of any European G7 economy.
The hikes were less severe than previously feared – but the push for a higher corporate tax environment fueled concerns from several technology executives and investors, with many suggesting the move would lead to higher inflation and a slowdown in hiring.
In addition to the CGT increases, the government has also increased National Insurance (NI) contributions, a tax on income. Reeves predicted the measure would raise £25 billion a year – by far the biggest revenue-raising measure in a series of pledges made on Wednesday.
Paul Taylor, CEO and co-founder of fintech company Thought Machine, said an increase in NI rates would lead to an extra £800,000 in wage expenditure for his company.
“This is a significant amount for companies like us, which rely on investor capital and are already facing cost pressures and targets,” he noted.
“Nearly all emerging technology companies run on investor capital, and this rise puts them back on the path to profitability,” said Taylor, who is a member of UK FinTech lobby group Unicorn Council. “The US startup and entrepreneurial environment is a model of where Britain needs to be.”
The chance that 'the next Nvidia' will be built is becoming smaller
Another tax increase through an increase in the tax rate on carried interest – the level of tax applied to the share of profits a fund manager makes from a private equity investment.
Reeves announced that the tax rate on carried interest, which is levied on capital gains, would rise to 32%, up from 28% currently.
Haakon Overli, co-founder of European venture capital firm Dawn Capital, said capital gains tax increases could make it harder for the next Nvidia to be built in Britain.
“If we want the next NVIDIA to be built in Britain, it will come from a company born from venture capital investment,” Overli said by email.
“The tax revenue from creating such a company, which is worth more than the FTSE 100 combined, would dwarf the gains from increasing venture capital returns today.”
The government is continuing to consult with industry stakeholders on plans to increase taxes on carried interest. Anne Glover, CEO of Amadeus Capital, an early investor in Arm, said this was a good thing.
“The Chancellor has clearly listened to some of the concerns of investors and business leaders,” she said, adding that talks on interest-bearing reforms must be “equally productive and engaged”.
Britain has also committed to mobilizing £70 billion of investment through the recently established National Wealth Fund – a state-backed investment platform modeled on state investment vehicles such as Norway's Government Pension Fund Global and Saudi Arabia's Public Investment Fund Arabia.
This, Glover added, “is consistent with our belief that investments in technology will ultimately lead to long-term growth.”
Nevertheless, she urged the government to seriously consider requiring pension funds to diversify their allocation into riskier assets such as venture capital – a common demand from venture capital funds to boost the UK technology sector.
Clarity welcome
Steve Hare, chief executive of accounting software company Sage, said the Budget would pose “significant challenges for UK businesses, especially SMEs, which will face the impact of rising employer national insurance contributions and increases in the minimum wage in the coming months.”
However, he added that many businesses would still welcome the “longer-term certainty and clarity, which allows them to plan and adapt effectively.”
Meanwhile, Sean Reddington, founder and CEO of education technology company Thrive, said higher CGT rates mean technology entrepreneurs will face “higher costs when selling assets”, while the rise in employer contributions to NI “could impact the hiring decisions.”
“For a sustainable business environment, government support must go beyond these tax changes,” Reddington said. “While clearer tax communication is positive, it is unlikely to offset the pressure of higher taxes and rising debt on small businesses and the self-employed.”
He added: “The crucial question is how businesses can maintain profitability at higher costs. Government support is essential to offset these new burdens and ensure the British entrepreneurial spirit continues to thrive.”
