(Bloomberg) -- Investors and entrepreneurs have warned Britain will lose fast-growing startups if the Labour government raises capital gains tax in its October budget.
The ruling party’s leadership has complained of a £22 billion ($28.9 billion) fiscal hole left by the previous Conservative administration, fueling speculation that capital gains will be targeted by the Treasury. Business leaders are increasingly worried about the unintended consequences of any such tax hikes.
“It doesn’t take a masters in finance to work out that if you significantly reduce the value on an exit of a successful investment, then you’re going to change people’s appetite to take risk,” said Tim Mills, a serial investor and managing partner of ACF Investor.
Chris Etherington, a private client partner at advisory firm RSM, said that lifting capital gains tax as high as income tax, with a top rate of 45%, would likely push some people abroad. Gibraltar and Dubai were options being considered.
Moving abroad is a lifestyle decision that may not suit all founders, he added, leaving some to take out smaller dividends over a longer period to avoid the one-off tax hit from a sale. “You might have more people thinking ‘I’ll just have a lifestyle business,’” he said.
Alex Hearn, founder of reinsurance tech firm Slipcase, said he has “spoken to many UK founders in the last year at different stages in their journeys that are actively exploring new homes for their companies.” He said Bermuda, the US and Dubai were top of the list.
Higher CGT would “no doubt push a lot of these people over the edge to either not set up at all, or shift to somewhere more welcoming,” Hearn said.
‘We Need Risk Capital’
Capital gains on assets are currently taxed at between 10% and 28%, lower than the range on income tax. There are also a series of incentives for entrepreneurs, including business asset disposal relief, previously known as entrepreneurs’ relief, which reduces the total amount of capital gains tax due.
Supporters of the tax benefit say it encourages entrepreneurs to take risks and invest more time and money in growing their business and hiring staff, gambling on a bigger pay day should they sell their business.
“The proportion of startups that fail is very high relative to those that succeed,” said Mills. “But the economic benefits of those businesses are huge. If we want to succeed as an economy, we need risk capital.”
Chancellor of the Exchequer Rachel Reeves has prioritized economic growth, promising to drive the UK to the top of the Group of Seven nations. Still, she has been coy over any potential changes to CGT.
In June, Reeves said Labour had no plans to raise the tax when she was quizzed on the campaign trail after months courting business leaders and the City of London. Last week, however, Reeves declined to give a definitive answer three times when asked if she could specifically rule out raising CGT or inheritance tax.
Having ruled out any increases to VAT, income tax and national insurance, capital gains is now seen as one of the likely levers Reeves will pull on Oct. 30. Labour-leaning think tanks such as the Institute for Public Policy Research have urged the party to stick to its guns, arguing that the current system exacerbates inequality and taxes workers’ wages more than unearned income from wealth.
Business Pressure
Among the business leaders lobbying for the preservation of incentives for entrepreneurs and business owners is Steve Rigby, co-chief executive officer of The Rigby Group, a private technology company and investor which made annual revenue of £3.3 billion in its most recently filed accounts.
Business owners could extract more money through dividends, he said. “The big risk is that people change behavior and they decide to hold on to equity, public or private, for longer.”
Rigby said he hoped the new Labour government didn’t undo the “good work” it had done while engaging with businesses in the run up to the general election in July.
The government should avoid “bad changes” in the autumn budget, added Craig Beaumont, chief of external affairs at the Federation of Small Businesses. He said small business owners “who have spent huge amounts of time and effort” on their companies should not be hit any harder if they choose to sell.
Investment
For Jonathan Milner, who co-founded the life sciences firm Abcam, there are strong risks to tinkering with the tax system. He said any changes to incentives through the Enterprise Investment Scheme, which offers tax relief on capital gains on investments, would make larger backers think twice. “The rewards are not going to be there for what is something really risky,” he said.
“Most of the things that I invest in will ultimately fail. You invest in enough that you know there’s going to be a few stars in there that are going to make up for the ones that fail. But if those stars deliver a return that gets hammered by CGT, then that disincentivises the investment.”
ACF’s Mills is less worried about business owners in the UK from moving abroad. He’s concerned they may just swerve the UK altogether. “What concerns me is the next crop of new founders that just aren’t coming to the UK,” said Mills. “They’re looking at other territories to establish where frankly it’s just more attractive to them.”
Revenue
The taxman is expected to reap £15.2 billion in CGT this fiscal year, according to the Office for Budget Responsibility. The tax is paid on gains above a threshold, which is already due to halve to £3,000 for individuals this year.
Revenues are predicted to grow to £23.5 billion by 2028/29, equating to 0.7% of GDP, up from 0.5% today. “My worry is that because they obviously do have to tackle this fiscal hole, that they’re just going to reach for that easy lever to pull because the benefits flow through pretty quickly,” said Lisa Gordon, chair of Cavendish investment bank.
Some founders and investors believe the prospect of higher taxes could bring forward a large number of sales. “The first thing they’re trying to do is accelerate transactions,” said Etherington from RSM. Some business owners may want to act fast; in 2010, an increase in the rate of CGT for high earners, from 18% to 28%, was implemented overnight following the coalition government’s emergency budget.
“The chancellor has been clear that difficult decisions lie ahead on spending,” a Treasury spokesperson said, in response to a request for comment on the prospect of higher CGT. “Decisions on how to do that will be taken at the budget.”
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