Higher Taxes Threaten Britain's Tech Ambitions
Friday, Nov 1, 2024 5:05 am ET
2min read The UK's ambitious plans to become a global tech leader face a significant challenge as higher taxes threaten to deter investment in the sector, according to tech executives. In the wake of the UK Budget, concerns have been raised about the impact of increased capital gains tax and carried interest tax on venture capital investment, potentially hindering the creation of the next Nvidia.
The UK government's plans to raise taxes by an eye-watering £40 billion have targeted higher earners, wealthy foreigners, and businesses. A key component of this strategy is an increase in capital gains tax, which is paid on the profits made when selling investment properties and financial assets such as shares. This, along with the increase in carried interest tax, could have a chilling effect on investment in early-stage tech companies.
Haakon Overli, co-founder of European venture capital firm Dawn Capital, warns that higher capital gains tax could make it harder for the next Nvidia to be built in the UK. "If we are to have the next Nvidia built in the UK, it will come from a company born from venture capital investment," Overli said. "The tax returns from creating such a company, which is worth more than the FTSE 100 put together, will be reduced by higher capital gains tax."
Anne Glover, CEO of Amadeus Capital, shares these concerns and urges the government to mandate pension funds to diversify into riskier assets like venture capital. "Tax increases could discourage investment in early-stage companies," Glover said. "We need to ensure that the UK remains a competitive place to invest in tech."
The proposed changes to carried interest taxation could also impact the returns for private equity and venture capital fund managers, influencing their investment decisions. The increase in the tax rate from 28% to 32% could reduce fund managers' overall returns, potentially making it less attractive for them to invest in high-risk, high-reward startups.
The removal of tax reliefs and alignment of CGT rates with income tax rates could further influence the exit strategies of tech startup founders and investors. Higher CGT rates may deter founders from selling their shares, reducing liquidity and potentially hindering strategic business decisions. Investors might become more cautious, leading to reduced capital flow into businesses.
The potential reduction in investment capital flow into UK tech startups could impact their ability to scale and compete on a global stage. A reduced capital flow could lead to strategic shifts, deal vacuums, and fewer new incentives for small businesses, potentially stunting UK tech's growth and international competitiveness.
The UK government must consider the potential negative impacts of higher capital gains tax on venture capital investment and explore targeted incentives to mitigate these effects. Increasing the tax relief available under the Seed Enterprise Investment Scheme and Enterprise Investment Schemes, as well as introducing CGT relief for current investments in start-ups and small businesses, could encourage new investment in start-up and scale-up businesses.
In conclusion, the UK's ambitious plans to become a global tech leader face a significant challenge in the form of higher taxes. Tech executives warn that increased capital gains tax and carried interest tax could deter investment in early-stage tech companies, potentially hindering the creation of the next Nvidia. The UK government must consider the potential negative impacts of these tax changes and explore targeted incentives to maintain the UK's competitive edge in the tech sector.
The UK government's plans to raise taxes by an eye-watering £40 billion have targeted higher earners, wealthy foreigners, and businesses. A key component of this strategy is an increase in capital gains tax, which is paid on the profits made when selling investment properties and financial assets such as shares. This, along with the increase in carried interest tax, could have a chilling effect on investment in early-stage tech companies.
Haakon Overli, co-founder of European venture capital firm Dawn Capital, warns that higher capital gains tax could make it harder for the next Nvidia to be built in the UK. "If we are to have the next Nvidia built in the UK, it will come from a company born from venture capital investment," Overli said. "The tax returns from creating such a company, which is worth more than the FTSE 100 put together, will be reduced by higher capital gains tax."
Anne Glover, CEO of Amadeus Capital, shares these concerns and urges the government to mandate pension funds to diversify into riskier assets like venture capital. "Tax increases could discourage investment in early-stage companies," Glover said. "We need to ensure that the UK remains a competitive place to invest in tech."
The proposed changes to carried interest taxation could also impact the returns for private equity and venture capital fund managers, influencing their investment decisions. The increase in the tax rate from 28% to 32% could reduce fund managers' overall returns, potentially making it less attractive for them to invest in high-risk, high-reward startups.
The removal of tax reliefs and alignment of CGT rates with income tax rates could further influence the exit strategies of tech startup founders and investors. Higher CGT rates may deter founders from selling their shares, reducing liquidity and potentially hindering strategic business decisions. Investors might become more cautious, leading to reduced capital flow into businesses.
The potential reduction in investment capital flow into UK tech startups could impact their ability to scale and compete on a global stage. A reduced capital flow could lead to strategic shifts, deal vacuums, and fewer new incentives for small businesses, potentially stunting UK tech's growth and international competitiveness.
The UK government must consider the potential negative impacts of higher capital gains tax on venture capital investment and explore targeted incentives to mitigate these effects. Increasing the tax relief available under the Seed Enterprise Investment Scheme and Enterprise Investment Schemes, as well as introducing CGT relief for current investments in start-ups and small businesses, could encourage new investment in start-up and scale-up businesses.
In conclusion, the UK's ambitious plans to become a global tech leader face a significant challenge in the form of higher taxes. Tech executives warn that increased capital gains tax and carried interest tax could deter investment in early-stage tech companies, potentially hindering the creation of the next Nvidia. The UK government must consider the potential negative impacts of these tax changes and explore targeted incentives to maintain the UK's competitive edge in the tech sector.