On July 4th, the UK voted for change and we saw the election of a Labour government for the first time in 14 years. Most people agreed we needed a change.
As Labour’s first Budget since its election, the Chancellor Rachel Reeves had a lot to live up to. (And by the way, not because she is a woman. It’s awesome to have our first female Chancellor, but let’s not forget we’ve already had three female Prime Ministers!)
However, sadly, in my view this Budget demonstrated a complete lack of understanding from the Government about the extent to which business owners and entrepreneurs support and drive forward the British economy – and therefore why they should be supported and protected at all costs..
With taxes raised, and reliefs diminishing fast, smaller businesses have been targeted from almost every direction. Conditions for existing businesses have been made immediately more challenging, and this will directly impact so-called “working people” (whatever they may mean by that, very few people know), who may well now not get the pay rise, bonus, or benefits they were hoping for from their jobs.
We need to incentivise people to start their own businesses, to employ people and contribute, not turn them off so badly that they actually consider leaving the country. Many founders and investors I know are looking seriously at the US, Italy, or Dubai. It’s all very depressing, and runs in contradiction to the Government’s apparent agenda for “growth”. How can we grow when business is stifled and our talent is heading elsewhere?
The motto of Reeves’s Budget was “invest, invest, invest” – but now the dust has settled and everyone has had a few days to evaluate the changes, how has it been received by the tech and investment ecosystem?
Below is our rundown of what our clients had to say about all of the major changes. To be fair, it’s not all doom and gloom, and I hope beyond hope that the Government will listen to us, and do what it can to work with our ecosystem and do what’s best going forward:
Ben Waterman, CEO and Co-Founder of Strabo – “Changes to capital gains tax, and employers’ national insurance contributions could have pernicious effects on small businesses in the UK. The Labour government has expressed a desire to place the largest burden on those with the “broadest shoulders” but I personally feel this shouldn’t necessarily include startups or small businesses, concessions for whom would encourage a greater proportion of young people to start companies.
“Of course, startup policies are only one very small facet of the wider budget, and I retain some optimism that we will continue to value some of the great companies that have emerged in recent years – the AI boom presents a particularly fruitful opportunity for a research and service heavy economy like Britain’s to thrive given the right opportunity. One must remain hopeful!”
Christiana Stewart-Lockhart, Director General of the Enterprise Investment Scheme Association (EISA) – “The UK is one of the best places in the world to start a business, largely due to schemes like the EIS and SEIS. It was encouraging to see the Chancellor mention the EIS extension in her budget as part of the government’s commitment to supporting growth and entrepreneurship and to see that they have continued to back these crucial sources of funding for entrepreneurs.”
“With growth at the top of the government’s agenda and a focus on plugging the gaps in public finances, investment is crucial. Last year alone, EIS-backed companies accounted for nearly 400,000 jobs across the UK.”
Daniel Hulme, Co-Founder and CEO of Conscium – “The UK needs to build tech giants if it is to compete in the modern world. The American tech giants comprise around a third of the US stock market, and are responsible for around half of its remarkable economic growth.
“Prioritising innovation is the only way the UK can build a technology giant of its own, and it is encouraging to see supportive policies in the budget. We are only at the beginning of the AI revolution, and so far its main industrial impact has been to transform advertising. There is much more to go. The race is far from over.
“The UK has world-class researchers that can enable it to rejoin the global leaders in emerging technologies. Government has an important role to play in supporting innovation and creating an environment that encourages investment into the startups that will become the tech giants of the future.”
David Baverstock, Partner, Marriott Harrison, said: “The uptick in mid-market M&A activity over the summer was a direct result of the leaked policies in this budget as many pre-empted tax increases and rushed to sell assets and complete deals. Now that a 4% increase in CGT has been confirmed, we anticipate this to mean business as usual across the M&A, venture capital and private equity spaces. My view is that many of these deals would not have been rushed through, had they known the percentage increase was to be this small. All signs continue to point to a continued revival of the M&A market.”
David Bettis, Partner, Marriott Harrison, said: “Time will tell how the CGT increases will affect the M&A market, particularly lower-mid cap deals where the proportionate impact on founders is likely to be higher. Over the next 18 months, it will be interesting to see whether the CGT increases (including the staggered increase to BADR) creates misalignment between founders and their investors on acceptable exit valuations – investors continue to seek liquidity but come April 2025 a founder will need a higher valuation in order to receive the same net proceeds as they would have before this budget.”
Diane Gilpin, founder and CEO of Smart Green Shipping – “If today’s increase in CGT de-incentivises VCs that invest in environmentally damaging products then I am OK with that. This increase isn’t going to stop the entrepreneurs building for the future of our planet. We need to find ways to channel more ‘good’ money into the UK that supports job and wealth creation, while also being better for the planet.”
Jason Teng, Partner, Potter Clarkson – “The news that UK founders are seeking to sell their startups as a result of the budget is no surprise. What we aren’t seeing so much of, however, is a discussion of the consequences of this.
“Investors may look to invest in overseas startups. As a result, UK startups could have to move their base of operations overseas, which results in a loss of jobs that would otherwise have been created locally. This might lead to an undesirable situation where the UK taxpayer funds the early-stage growth of startups that have to move overseas, removing the long-term financial benefit to the UK economy.”
Mark Woolhouse, CEO and Co-Founder, Treble Peak – We’ve been saved from the worst case scenario, but any increase in capital gains tax (CGT) will inevitably diminish investment by UK investors and drive private market managers to invest elsewhere. This is counterintuitive at a time when the UK has the opportunity to differentiate itself from its European neighbours and drive innovation and growth through UK private companies.”
Martin Jacob, Professor of Accounting and Control, IESE Business School; Member of Scientific Advisory Board, German Ministry of Finance – “The decision to raise capital gains tax will adversely affect startups and investors, as well as many companies that don’t sit on piles of idle cash. This will damage the economy. Moreover, increasing CGT is unlikely to have the impact the government hopes, as it will likely drive investors away from the UK, thereby reducing tax revenues. If the UK government needs tax revenue, it should consider raising VAT or personal income tax instead, but that has been ruled out for political reasons, not economic ones.”
Paul Barnes, CEO & Co-Founder, Overe.io – “This budget further tightens the noose around the already strangulated startup environment in Britain. Raising Capital Gains further skews the risk/reward equation. An entrepreneur with a young family, starting my own business was not a choice I made lightly. I took the chance because I calculated that the potential payday at exit would be worth the stress and risk. 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. With a number of options emerging which make it easy to list in Delaware, for example, UK startups could now be considered a flight risk.”
Richard Davies, UK Managing Partner at Netcompany – “Modernising HMRC and a commitment to invest in public sector technology is a welcome announcement from the Chancellor. Greater investment in digitising government services will create net economic benefits, as we have seen in countries across Europe like Denmark.
But addressing the productivity problem is one of the keys to unlocking UK growth. We can successfully boost productivity in the UK but it needs to be at the top of the Government’s stimulus for growth plan. This requires fostering job creation and investment across our key sectors such as technology and life sciences, and having the necessary apprenticeships and competitive salaries so that skilled people want to work and remain here. Doing so will enable us to create national champions that not only attract top talent but also the right investment. We need a wealth of homegrown job opportunities that help the UK to stay at the forefront of the global stage for innovation, and in turn, I am confident we will see the right economic growth for the country.”
Royden Greaves, CEO and founder of Jarvis – “Maintaining Business Asset Disposal Relief encourages people to take calculated risks, which drives economic growth. Innovation must remain at the forefront of the government’s agenda if the UK is to maintain its status as a global tech leader. Our strength lies in our access to top talent, world-class universities, and bold entrepreneurs. If we start to stifle that belief by changing policy, we will stifle the fabric of long-term economic growth.”
Sarah Turner, Home Grown Ambassador and CEO of Angel Academe – “We can breathe some relief that CGT did not increase as much as we first thought, but the government’s decision to increase CGT isn’t the pro-growth, pro-entrepreneurship and investment signal we were looking for. It is not just big businesses that will have to pay up – SMEs will be affected just as much. If this government is committed to growth, they need to start listening to SMEs.”
Sean Kane, Chair and co-founder of F6S – “Capital Gains Tax isn’t just about rich investors, it is one of the primary ways that smart entrepreneurs help the next generation of founders to grow. If the UK wants to stimulate growth and emulate the success of Silicon Valley, exited founders will be crucial. Government, pension and other funds can help, but successful ecosystems need these founders to help grow the next generation.
“Business Asset Disposal Relief (BADR) is the force multiplier that generates the most powerful venture funds in any economy, including the United Kingdom. While there are good arguments for raising CGT in general, to bring it more in line with income-based taxation, BADR should have been increased back towards the original £10 million allowance. Changing one without reviewing the other will suffocate entrepreneurship in the UK and could result in a powerful drag on job creation and innovation. These moves will only disincentivise the most value-add investors from joining the UK’s economic growth engine.”
Sebastian Peck, Founding Partner, KOMPAS VC – The UK remains the most vibrant startup ecosystem in Europe, in part due to the clever incentive structure implemented by historic governments. However, Labour’s decision to increase the rate of capital gains tax (CGT) risks the status of the UK’s investment ecosystem, which is the envy of Europe.
“Capital is mobile, and these changes will trigger the relocation of investment firms to countries with more advantageous tax regimes. The signal the Labour Party sends by increasing CGT (in particular, changing the rules around Business Asset Disposal Relief) is absolutely counterintuitive to the mantra of encouraging investment and growth.
“The prospect of life-changing wealth creation encourages the best entrepreneurs to start their companies in the UK. Levelling the rate of CGT with other European countries for the sake of a modest short-term boost in public finances risks losing the significant competitive advantage the UK has. The Government should do everything in its power to nurture the entrepreneurs who are building world-leading companies in the UK.”
Sid Pourfalah, CEO and co-founder of Concrete4Change – “The startup ecosystem can be affected by broadstroke legislation that is intended to target other capital gain ecosystems. When this is forgotten, we risk collateral damage to the UK startup scene. The increase to capital gains taxes will likely reduce the flow of new investment into UK-based venture capital funds.
“If the UK wants to lead in private investments, whereby startups are supported with domestic capital from inception through to either exit or listing on a UK stock market, then increasing capital gains on venture capital is counterintuitive. Initiatives like the Enterprise Investment Scheme (EIS) and Business Asset Disposal Relief (BADR) are great incentives, but we need more inflows into early-stage venture creation rather than less. UK tech startups have a vital role to play in the growth of the wider economy.”
Stuart Mellis, CFO, Optalysys – “Slashing the reward for risk-taking entrepreneurs through the increase in capital gains tax (CGT) will negatively impact entrepreneurs, employees and investors. The government should be laser-focused on restoring growth and productivity within the UK economy. The current schemes for entrepreneurs, introduced by previous governments, have been an incentive for some of the UK’s brightest minds to set up and scale their businesses here with a willingness to make the sacrifices this often requires.
“The current state of the economy means that the government needs to raise taxes, however, the Chancellor needed to balance this with policies that would foster growth and wealth creation. The UK is still the best place in Europe to start a business, so let’s hope the government begins to look more favourably at the entrepreneurs whose companies will be the future of the UK economy.”
