Magic Sauce
Ok, so that headline was a little hyperbolic.
Beauhurst published results of a survey on the feelings of the Startup ecosystem in the UK with regards to possible government plans to overhaul CGT (Capital Gains Tax) on share disposal.
Currently, when a founder exits a business the first £1m of the proceeds is only subject to 10% tax, with the rest subject to 20% in most cases.
The government is proposing a 45% tax on disposal of those assets.
This would make it the highest in Europe, with all of the consequences that entail.
1. 85% of those surveyed said that they’d set up in another, more favourable location (in tax terms).
2. 88% said that jobs would move abroad.
3. 90% said that it would be harder to attract top talent.
4. 72% of Angels said they would be less likely to continue to invest in UK companies.
All of these scenarios would be catastrophic for the UK at at time when financial stimulus and innovation is needed most.
The high growth sector of the UK economy employs 3.5m people, all paying income tax, national insurance and VAT on whatever they buy.
Those companies would definitely have brought a proportion of inward investment to their businesses throughout their growth (which is then spent on staff, services provided by UK companies, etc.).
Let’s use back of a napkin maths. Let’s say that each person working for a high growth company (mostly well paid jobs) pays £16666 through the year in income tax, NIC and stuff like VAT.
That’s worth £58bn to the economy annually.
That doesn’t account for those fast-growing companies that have been acquired and now form part of a larger corporate machine.
This doesn’t account for the increase in spending a tech platform may encourage, or business efficiencies and productivity gains it may provide.
What none of these things mention is the risk that founders take to gain the potential high rewards that a tech platform scaling and then being acquired or going to IPO can bring.
Quite apart from the toll on mental health, it causes relationship break ups, debt, sleepless nights. It’s not a 9-5 job. People are putting their reputation, savings and everything else on the line (and the burden of responsibility that any good founder feels when they are invested in by outsiders).
To try and bracket that risk and the tax on the reward on the same level as an employee in a well paid 9-5 job is an insult, a deterrent and could stifle an entire generation of innovators (or force them to another country to try their luck).
Look across the pond to the US.
A tech founder could realistically exit their business and not pay a dime in tax on the first $10m of the sale of their shares in their own company. They’d pay 20% on the rest. That incentivises both investors and founders to innovate and scale a business.
Having the highest CGT in Europe does not.
It will harm more than just this current generation too.
Every founder I’ve ever met on my journey that’s made it to a pre-seed investment has a purpose of some kind. Ultimately, every single one of them wants to be an Angel investor themselves one day and ‘pay it forward’. That paying it forward is critical to the circular economy within the tech landscape. People get invested in, they grow a company, and if they have enough money they become an investor themselves to seed the next generation of tech companies.
Living in Norfolk, one of the things that caused a lag in the growth of the tech Startup scene here initially was the lack of exits. An ecosystem cannot exist without successful ex-founders who choose to reinvest in that cycle.
80% of the people surveyed by Beauhurst said that they would be unlikely to reinvest. Liquidity on disposal of a Startup is critical to the growth of further innovation and Startups in the UK.
We’ve already lost jobs from large companies due to Brexit, we’ve lost entire companies due to Brexit. If the government thinks it can rely on those corporates to maintain the country in a post-Brexit, post-Pandemic world, it’s deluded and smacks of the same overconfidence of many high street retailers who failed to change the way they do things and adapt to the new behaviours of its’ consumers.
We get that we have to reduce the borrowing that has spiralled thanks to the pandemic to offset the measures put in place to keep people in jobs. That money shouldn’t have been spent propping up ailing, dying giants in the form of large high street retailers that were going to die anyway. It should have been spent upskilling or helping people transition into better paid jobs in the digital sphere, for employers that would truly value them.
If anything, we need to seed the environment to create more high growth companies and the jobs that go with them. Imagine if we could double the amount of high growth companies in the UK over the next 5 years?
That would look like over £100bn in tax revenue for the UK, jobs created, inward investment pouring into the company paying for the growth of those companies, more confidence from the investment community to invest in those companies, more people paying it forward, more Angels, more people able to invest in VC funds and lending…
We also have to remember that a lot of the Angels that have helped grow the sector until now have been ex-corporates and landowners who’ve levied their assets to invest. That can’t go on forever, especially as we’re seeing more people turn to spread betting lower amounts via crowdfunding rather than getting involved.
The alternative is dwindling confidence that the UK is a hotbed of innovation that attracts more inward investment into Startups than any other country in Europe. People start to switch off, people lose the aspiration to do things that could improve processes, governance, the climate, stimulate consumer spending.
Don’t raise CGT.
Offer high growth companies (up to) the first £5m of their disposal free of ANY tax (on a disposal of £50m). Tax them at 20% for the rest. Sure, put a caveat in that the £5m is only tax free because it’s ringfenced for reinvestment.
If we tiered (the government likes loads of tiers, I’ve noticed that) that tax so that it represents 10% of the value of that disposal to an individual it means they’re likely to either start a new company with money behind them or invest in others.
At the bottom end, even if someone benefited from the sale of a company to the tune of £5m, they’d be tax free on the first £500k, with 20% being levied on the rest. The total tax to pay would be £900,000 (instead of £2,250,000). Would that encourage an entrepreneur to start again or invest in others at £25k a pop? Don’t sit there scratching your arse and thinking because the answer is yes.
The other thing that needs regulation is the amount of founder equity that some universities are taking in the UK. They should be capped at a maximum amount of 25% of dilutable equity. There is so much IP floating around the Universities that’s been left to rot due to ignorance/greed of Universities. No-one will invest in a startup that has 50% of the IP and founder equity belonging to a non-active partner. Stop it.
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