Sep 4, 2024

Entrepreneurs and investors fear Labour government will squeeze venture capital and start-ups UK start-ups raised $21.3bn last year. © Andy Rain/EPA/Shutterstock Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. UK venture capitalists and entrepreneurs have warned that the Labour government’s signal that it will raise taxes risks stifling the country’s technology industry. Executives and investors are worried that chancellor Rachel Reeves will raise capital gains tax and tighten the tax treatment of carried interest, the performance fees that fund managers receive from asset sales. “The societal worry around a major change to capital gains tax is a disincentive for building new businesses and taking risk, which is the very thing this country needs to improve its economic health,” said Matthew Scullion, founder of UK software group Matillion, which has been valued at over $1bn. “If anything makes the UK less attractive for talent — and increasing taxes will do so — the country as a whole will end up losing,” added Taavet Hinrikus, the co-founder of London-listed fintech Wise who now runs European tech investor Plural. Prime Minister Sir Keir Starmer’s warning last week that the wealthiest “should bear the heavier burden” gave the strongest signal yet that the government will seek to raise taxes in the October Budget. Capital gains and inheritance taxes are the most likely to go up, according to tax advisers. Reeves has ruled out hiking other taxes that are the UK’s main revenue raisers, such as income tax, national insurance and VAT. A Treasury spokesperson said: “Following the spending audit, the Chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and address the £22bn hole in the public finances left by the last government. Decisions on how to do that will be taken at the Budget in the round.” Capital gains tax for business disposal is at a rate of 20 per cent, while carried interest is currently taxed as a capital gain at a rate of 28 per cent, rather than the highest bracket of income tax, which is 45 per cent plus national insurance. The new government had already put the private equity industry on notice with a call for evidence that closed on Friday about plans to change the tax treatment of carried interest. Private equity executives have warned that radical action could spur an exodus of dealmakers from Britain. Venture capitalists typically make minority investments in early-stage companies, in the expectation that a small number will become breakaway successes. Rising taxes on carried interest would slice the share of profits that venture investors take home from successful deals, while an increase in capital gains tax would hurt founders who sold stakes in their businesses. These investors argue that they should be treated differently to private equity managers, who tend to borrow money to acquire more mature companies and make operational improvements. “We are reliant on these very few hits,” said Haakon Overli, co-founder of UK venture investor Dawn Capital. Overli said that bringing capital gains tax in line with income tax “would hit us so hard . . . if suddenly 45 per cent of it goes away our economic model ceases to work.” Recommended Hinrikus said that a distinction needed to be made between venture capital and private equity. “We need to think about the long-term horizon and risk nature of venture capital, which should not be taxed in the same way as the buyout of a bakery chain. We’re investing in innovation and bringing capital into the UK,” he said. Scullion at Matillion said that while he could “tolerate” and “understand” a small increase in capital gains tax, if it went up in line with income tax “there’d be a very material feeling of you’re taking the mick.” In such a scenario “I will very materially consider leaving the country,” he said. “I don’t want to do it and it would make me sad but there’s at least a 50 per cent chance that we will leave.” The UK is the venture investing capital of Europe, and worldwide behind only the US and China. UK start-ups raised $21.3bn last year, according to researcher Dealroom. The majority of VC investment in the UK has come from sources outside of Europe. Investors warned that Labour’s mooted tax hikes — which come on top of the abolition of the non-dom regime that allows foreigners to avoid tax on their overseas income — comes as other countries are trying to make themselves more attractive to higher earners and entrepreneurs. “It’s a globally competitive world and you can’t have the UK be uncompetitive,” said Brent Hoberman, one of the UK’s most prominent tech investors, noting that the abolition of the non-dom regime was already making the UK less attractive for foreigners. Copyright The Financial Times Limited 2024. All rights reserved.