Tax hikes and changes to a relief scheme on exit earnings could damage the UK’s standing as an attractive place to start a business — but the latest Budget avoided a worst-case scenario for the country’s tech sector, say founders and VCs.
Earlier today, UK finance minister Rachel Reeves announced increases to capital gains tax (CGT) on the sale of shares and employers’ national insurance (NI) contributions, as part of a range of measures aimed at raising £40bn. Over the next two years, the amount of tax founders will pay when they sell their business will also rise.
While some in the sector argue those moves could encourage founders to relocate overseas and make would-be entrepreneurs think twice about launching ventures in the UK, others are more restrained in their criticism of the government.
The Budget was “bad, but not disastrous”, says Dom Hallas, Executive Director of the Startup Coalition.
“[It] will be hard for founders seeing taxes on their businesses rise,” he tells Sifted. “But we appreciate that the Government has listened to ensure that entrepreneurs’ biggest fears have not materialised and some balance has been struck including maintaining all important R&D investment.”
Over the past few hours, Sifted has heard from dozens of people in the UK startup community to gauge their reaction to the Budget.
Damaging UK tech
Many in the sector believe tax increases announced in the Budget could damage the prospects of the country’s entrepreneurial scene.
“Increasing CGT creates an immediate barrier to both company formation and scaleup investment, particularly affecting early-stage technology and AI ventures where risk capital is essential,” says Muj Choudhury, CEO and cofounder of London-based sales automation startup RocketPhone. “This won’t just stifle investment — it threatens to halt new business creation entirely, particularly in high-risk, high-reward sectors like technology.”
“[It’s] a kick in the teeth to Britain’s entrepreneurs,” says Andreas Adamides, CEO of Helm, a membership community and network for founders, who adds that entrepreneurs often forego a high salary because they’re betting on being able to sell their company.
“Many who have been considering selling their business are much more likely to put off a sale as too much of what they built up will go directly to tax. They sacrificed to build up a business, went without, and were counting on this to be their retirement plan.”
Increases to CGT could cause founders to think twice before starting a business in the UK, says Imran Ghory, general partner at VC Blossom Capital.
“[The] flow of talented entrepreneurs choosing to start their business in the UK may be impacted by the upcoming tax changes,” Ghory tells Sifted. “This comes at a pressing time in the UK, when other countries in Europe, such as France, are in a battle for talent and investing heavily to make their cities attractive places to found and grow a business.”
Will founders relocate?
Before the Budget, many founders said they would consider moving abroad should taxes like CGT rise substantially — with tax advisors reporting a big increase in the number of enquiries about relocation from startups.
Some fear a founder flight now that CGT has been hiked.
“UK founders will absolutely relocate overseas as a result of tax rises, especially those who have digital-based businesses,” says Sarah Malter, founder of Kapitalise, a company which helps startups claim R&D tax credits.
Others say they’ll consider relocating if further tax increases are announced.
“If the government continues to raid the pockets of those of us who back themselves to win, leaving the country might well be an option,” says UK-based Paul Barnes, who is the cofounder of US-headquartered startup Overe.io. “This Budget further tightens the noose around the already strangulated startup environment in Britain.”
But not everyone is convinced it’ll be easy for founders to up sticks and leave.
“While the allure of a new location and potentially lower taxes can be tempting, moving isn’t as simple as it sounds,” says Andy Aitken, founder of London-based mobile network Honest. “There are complex legalities and hefty fees involved in getting the right legal and financial advice. Plus, even after relocating, there’s a strong chance they’ll still encounter similar taxes and regulations in their new country and be subject to many of the UK ones too if they still trade in the UK.”
Will changes impact hiring?
Some tell Sifted that increases in employers’ NI contributions will cause startups to halt hiring plans.
“The proposed changes to the NI threshold will make it harder for large companies like ours to grow and hire more people in the UK,” says Paul Taylor, CEO and founder of London-based fintech Thought Machine, which has 550 employees.
He tells Sifted that his startup’s payroll spend will increase by £800k as a result. “This is a significant amount for companies like us, which rely on investor capital and already face cost pressures and targets.”
Increases to CGT could also hamper startups’ abilities to hire top talent, says Philip Salter, founder of The Entrepreneur’s Network. “Many fledgling startups give employees stock options or shares as part of their compensation package as they cannot compete with the higher salaries offered by established big corporates.”
“Today’s changes will reduce this incentive, making it even harder for startups to attract the talent they need to scale, while denying workers the chance to own a piece of Britain’s growing companies,” he adds.
Not so bad?
But there is also a sizable cohort in UK tech that’s feeling more positive about the measures announced in Reeves’ budget.
“While there will be the inevitable disappointment within the private sector regarding CGT and employer’s NI tax rises…the chancellor has clearly listened to some of the concerns of investors and business leaders and adapted plans in a pragmatic way,” says Anne Glover, CEO of Amadeus Capital Partners.
Adam French, partner at VC and accelerator Antler, tells Sifted that CGT increase won’t hugely impact the UK’s entrepreneurial scene.
“I think the impact these changes will bring to the ecosystem will be modest at best,” he says. “The higher rate of CGT rising to 24% is a good outcome considering how high it could have gone. The rising rate on VC carry is only 4%, not a huge impediment either when our fund management scene is so strong.”
Business Asset Disposal Relief (BADR) — which limits the tax that founders pay when they sell their business — not being scrapped will mean the scheme continues to be a “boon” for UK founders, he adds. “My honest take is this is the best we could have hoped for, and I think the UK will carry on being an extremely attractive option for tech founders.”
“The news [that BADR won’t be scrapped] is a victory for thousands of workers with access to equity-linked rewards like employee share schemes,” says Ifty Nasir, founder and CEO of London sharetech platform Vestd.
“The Chancellor has delivered an incredibly measured budget with necessary cuts and increased investment,” says Owen Ensor, CEO and founder of Meatly.
Ensor points to the retention of the BADR scheme, investment in sectors like life sciences and maintaining R&D tax credits as measures that will encourage UK startups.
“Although fellow entrepreneurs may grumble, it is worth remembering that an effective tax system is the financial cornerstone of a civilised society, and making sure everyone pays a fair amount of tax is critical,” he adds.
Brent Hoberman, executive chair of Founder Forum Group and former CEO of travel site lastminute.com, tells Sifted the Budget will bring “increased certainty” for founders. “[We] are pleased overall that the government has listened to the voices within the tech and startup sector regarding not damaging the UK’s competitiveness globally.”
Read the orginal article: https://sifted.eu/articles/uk-tech-budget-2024-reaction/
