The UK’s ecosystem of high-growth businesses could be severely impacted by proposed changes to Capital Gains Tax (CGT), prompting founders to move their companies overseas.
This is according to a study by Beauhurst, the a UK database for fast-growth companies, revealing how tax reform could potentially affect British startups and scale-ups.
Ahead of the upcoming Budget announcement, the recommended increases by the Office of Tax Simplification would bring CGT in line with income tax, making the UK the highest rate of CGT in Europe.
Beauhurst’s survey of almost 500 British startup founders, investors and advisors found that 85% of founders would actively consider moving their company abroad if the proposed changes came into effect. These respondents cumulatively represent more than £1.6bn in funding, and include a number of businesses tipped to become future unicorns.
With factors such as Brexit and the increasing adoption of remote working strategies already prompting UK businesses to re-evaluate where they will be located, further disincentives to remain on British shores could seriously affect the country’s renowned collection of 40,000 high-growth businesses, which collectively employ 3.5 million people.
In fact, Beauhurst predicts that up to 90% of jobs at these companies would be at risk.
Additionally, nine out of ten founders (90%) responding to the survey said that it would be harder for them to attract top talent to their company, should these changes come into effect.
This is because changes to CGT would make options schemes less attractive – a key draw to skilled workers which supplements the often lower-than-market salaries offered by early-stage startups.
The investment community also cited major concerns, with 72% of angel investors responding that they would be less likely to continue funding UK companies as a direct result of CGT changes.
The impact of this extends far beyond short-term effects. For example, over two-thirds (68%) of founders admitted that they would be less likely to start another company in the future, as a result of changes to CGT. Of those that would start another company, an overwhelming 94% would consider doing so abroad.
British startups and scale-ups attracted £11.8bn of funding in 2020 and are responsible for the vast majority of job creation and international inward investment across the country. An exodus of these businesses would cripple the UK’s post-pandemic economic recovery prospects.
Henry Whorwood, Head of Research and Consultancy at Beauhurst, comments: “The impending changes to Capital Gains Tax could have a catastrophic impact on UK startups and scaleups. As the results indicate, the negative sentiment of the British entrepreneurial ecosystem towards the reform shows that it could directly result in our most promising businesses departing for more favourable rates abroad.
“If changes have to be made to Capital Gains Tax, it should come accompanied by a reinvigorated form of Entrepreneur’s Relief that protects the current tax treatment for genuine entrepreneurs. We must ensure that what is essentially a fundraising exercise to balance the books as we emerge from the Covid-19 pandemic does not have an adverse long-term effect on the innovative businesses that will fuel the future of the UK economy.”