For months, speculation has been building as to how The Treasury will fund the effects of COVID-19. With Coronavirus initiatives costing tens of billions of pounds, an 11.3% fall in GDP, national debt on the rise and the beginning of an unemployment surge, the Government are compelled to raise taxes. But which taxes?
Capital Gains tax has been widely mooted as one such tax, given the disparity with Income Tax rates and the path of least resistance that an increase in Capital Gains Tax rates could offer. Earlier this month the Office of Tax Simplification issued their proposals to the Government suggesting that a rise in the rate of Capital Gains Tax to the levels of Income Tax could generate £14bn per year.
With the shadow of Brexit looming, the Government can ill afford further disincentives for UK business. The proposed Capital Gains Tax rate of up to 40% would be amongst the highest in the world.
Implications for UK Tech
In 2018 the technology sector accounted for 7.7% of the UK economy, from 7.1% in the previous year. Since 2015 the sector has exponentially outperformed the general economy, which clearly demonstrates the direction of travel for the future UK economy.
A rise in Capital Gains Tax has repercussions. The sector is reliant on private investment to fund research and development and to create intellectual property. On the face of it, a Capital Gains Tax rise is counter-productive and will only serve to disincentivise UK investors. However, while Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) reliefs remain in place, a company can raise up to £12m from investors without any Capital Gains Tax implications. For smaller tech business, this should be sufficient for fundraising purposes.
For larger, more established, tech businesses, the risk is that investors might be looking to sell off their tech investments in the short term and take advantage of the lower rates of Capital Gains Tax. This clearly depends on the growth prospects of the business relative to any proposed tax increase.
For tech entrepreneurs and future industry leaders, they have already lost 90% of the benefit of Entrepreneurs’ Relief. With a potential rise in Capital Gains Tax rates, this could make the UK an unattractive place to setup their new tech business. The long-term effect on the UK’s employment and GDP could be significant. The Government should recognise the balance at play with regard to the tech sector and implement counter incentives accordingly. The additional £14.6bn made available for Research & Development tax credits in the Chancellor’s Spending Review is a welcome start.
Would you like to know more?
If you would like to discuss any of the above, please contact Rick Behan using the details on this page.
You can also visit our Technology Hub for more information.