Will tax changes stall tech sector growth?

CGT changes: A cause for concern in the tech sector

A potential increase in CGT rates could have a significant impact on the technology sector, particularly concerning the sale of businesses. “We’re already seeing entrepreneurs feeling pressured to sell before they’re ready. The fear of rising taxes is driving them to close deals that might not be as favourable as they could have been in previous years.”

Additionally, CGT increases could impact share schemes. “Scale-ups have been relying on share schemes for many years as a way of incentivising and retaining employees, allowing them to benefit from the company’s growth at current CGT rates of 10% or 20%. If CGT rates rise, these schemes could lose their effectiveness, making it harder for companies to retain top talent.”

Business Asset Disposal Relief at Risk?

There has been plenty of speculation surrounding the potential reduction of Business Asset Disposal Relief (formerly Entrepreneurs Relief) which currently allows entrepreneurs to pay a reduced tax rate on the sale of their businesses.

“If this relief if scaled back, it could further discourage innovation and growth, particularly for tech entrepreneurs who rely on this relief as part of their long-term exit strategy.”

Impact on the UK’s Startup Ecosystem

Adam warns that significant CGT increases could lead to an exodus of tech entrepreneurs from the UK, which could jeopardise the UK’s startup ecosystem. “Many tech entrepreneurs may choose to relocate to countries with more favourable tax regimes, which would be detrimental to the UK’s status as a startup hub.”

EIS schemes more valuable than ever

Despite the potential challenges posed by CGT increases, there could also be opportunities, particularly with Enterprise Investment Scheme (EIS) investments. “EIS is a critical tool for attracting investment into scale-ups, and it becomes even more important if CGT rates go up. The CGT deferral relief on existing capital gains and the fact that EIS shares are CGT-free on exit will make them increasingly more valuable.”

Key advice for tech entrepreneurs – stay calm and plan thoughtfully

Although the potential tax changes might seem daunting, Adam urges business owners to take a measured approach. “Don’t overreact,” he advises. “Fundamentally if you have a strong business, the budget should not change that. Yes, you’ll need to factor in the potential increased costs, such as employers NIC, but don’t rush to sell just because taxes are rising if that wasn’t already part of your plan.”

Adam also warns against getting caught up in complex tax avoidance schemes. “Avoid overcomplicated tax planning – these schemes don’t often work and your business could become unsellable if tainted by tax avoidance. Instead, take advantage of the reliefs and incentives available, like R&D credits and emerging AI tools, and make sure to leverage any available EIS funding opportunities.”

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