Startup founders worried about proposed capital gains tax changes

The tax raises close to £10bn a year for HM Treasury, but in September 2020 the Office for Tax Simplification (OTS) published a review of the capital gains tax after being commissioned by the chancellor to look at how the tax could be reformed, suggesting four changes for an overhaul.

This included aligning capital gains tax rates with income tax levels – which currently stand at 20%, 40% and 45% for basic, higher and additional rate taxpayers respectively – and reducing the annual gains allowance from £12,300 to between £2,000 and £4,000, effectively widening the number of people who would be paying the tax.

According to the survey results, two-thirds (68%) of startup founders said they would be less likely to start another company if the changes came into effect, with 94% of those that would start another company saying they would consider doing so abroad instead.

A further 90% of founders also responded that it would be harder for them to attract talent, as it would make options schemes – which are used to supplement the often lower-than-market salaries offered by early-stage firms – less attractive.

Aside from reluctance to form new enterprises and potential issues with talent, those surveyed believed the proposed changes to capital gains would also affect the early-stage investment landscape. For example, 72% of angel investors said they would be less likely to continue funding UK companies as a direct result of changes to capital gains, while 80% of founders indicated they would be less likely to engage angel investors as well.

Given that 53% of angel investors surveyed funded their investments via the sale of shares from their previous companies, Beauhurst claimed this could significantly impact the pipeline for future investment.

Overall, 81% of respondents thought the proposed changes would have a very negative impact on the high-growth ecosystem.

In terms of the startup cohort surveyed, around a fifth were founded less than two years ago, while startups between two to five and six to ten years made up a third of respondents each. Only a very small portion (3.3.%) had an annual turnover of more than £50m, with the largest portion (37.3%) having an annual turnover of up to £500,000.

Only 19.6% of respondents were from startups with an annual turnover of £500,000 to £2m, while 26% had an annual turnover of £2m to £10m. The remaining tenth had turnovers between £10m and £50m.

Despite the uncertainty related to Brexit and the pandemic, technology startups in London raised near-record levels of venture capital investment in 2020, receiving a quarter of all European technology funding that year.

UK tech firms outside of London raised a further $4.5bn, bringing the country’s total tech investments to $15bn – a significant proportion of the $43.1bn raised by European companies throughout 2020. 

However, despite the upward investment trajectory, most of the investments made during the pandemic went to already established firms.

For example, an analysis conducted by coworking and innovation space company Plexal and Beauhurst found that, between March and September 2020, just £458m of the £5.37bn raised in venture capital went to first-time fundraisers, representing a 55% year-on-year decrease.

This trend has been present since the start of the pandemic, with previous research by the two firms from May showing that only £52m of just over £1bn raised at that point was going to early-stage startups and entrepreneurs who had never raised money before.