If changes to the Capital Gains Tax (CGT) regime are announced by the Chancellor in his forthcoming Budget Statement, tech firms may be forced to rethink their business plans. This could have a limiting effect on the economy, just as the post-pandemic bounce back is gaining momentum. Wider corporate tax increases could have a similar effect.
As CGT is being reviewed currently, many businesses are concerned that the Chancellor, Rishi Sunak, could decide to raise the rate of tax applicable to certain gains as high as 45%. Such tax increases could have a disproportionately negative impact, primarily affecting business owners and those investing in growing businesses. Causing some entrepreneurs to accelerate plans to sell their businesses or even explore way to move them overseas.
Just ahead of the March budget, concerns were raised around a potential increase in the rate of CGT. The impact was startling, as tech entrepreneurs south advice on bringing forward plans to sell their businesses. While some sales were completed at the time, others were persuaded by their advisors to hold out, in the hope that the tax increase would not materialise and an increase in trading activity would bring new opportunities to increase the value of the business. Those that held out in the most part have been proved right. Economic growth in the first half of 2021 has been stronger than many experts had predicted this time last year, and growth opportunities in the tech sector have been more evident than in other sectors, largely due to the shift to doing more things online during the pandemic.
As the second Budget of the year nears, tech sector entrepreneurs are concerned that this time around, they may not be so lucky. Certainly, increases in CGT rates at some stage would seem inevitable, as the Government is seeking to recoup some of the money spent on supporting businesses through the pandemic. However, it is still worth bearing in mind that they may not come all at once and they may not be announced before next year.
The current main rate of CGT is set at 20% for higher and additional rate taxpayers, which compares favourably with the rate of income tax applicable to this group. The tax is payable on gains earned by individuals from the sale of assets, such as shares and property. For entrepreneurial business owners, the comparatively low rate of tax that applies to gains from the sale of their shares is regarded as ‘payback’ for the time and money they put in to getting their business up and running, not to mention the jobs created for others along the way. Increasing this tax to anything over and above 38%, which is the rate that currently applies to share dividends, would disincentivise entrepreneurial investment and have a damaging effect on the economy as a whole.
Will London remain the digital capital of Europe?
As corporation tax is scheduled to increase to 25% in 2023, it’s already becoming clear that the corporation tax landscape in the UK is becoming less inviting to entrepreneurs, that may be looking to establish and grow tech-led businesses in areas such as London, that is know as the digital capital of Europe. Compounding this, if the Chancellor decides to abolish Business Asset Disposal Relief, at the same time as increasing CGT rates, the effect could be to drive entrepreneurial investors overseas.
Instead of taking this approach, the Chancellor should be speculating to accumulate, by incentivising entrepreneurial investment and encouraging businesses to spend more on skills development, in order to give the economy the further boost it needs. Underlining the value that such an approach could bring, the think-tank, NESTA, has predicted that, if left unaddressed, the digital skills gap could cost the UK economy upwards of £2 billion annually.
New digital skills tax credit?
A recent report published by TechUK, entitled Fast Forward for Digital Jobs, calls for the introduction of a new digital skills tax credit, perhaps modelled on the R&D tax relief scheme, to incentivise small and medium-sized businesses to invest more in training their workforce. Now would seem the right time for the Chancellor to make this happen. In addition to this, he could also consider ways to make the apprenticeship levy work in a more flexible way, so it can provide more support for employer-backed training initiatives.
Tech sector growth in the UK has been a success story to date, and the corporate tax landscape has certainly helped by incentivising entrepreneurial investment and keeping corporate taxes lower than in many other jurisdictions. Changing this now, just as businesses are facing challenges in the form of rapid price inflation and shortages, could limit growth and damage the economy in the longer term.