Organisations in this sector which are often reliant on external investment to fuel innovation, may experience shifts in investor behaviour with investors becoming far more reluctant to make high risk investments, resulting in new challenges to securing crucial funding.
In their manifesto, Labour pledged not to increase the taxes that affect employees —income tax, national insurance, VAT, and corporation tax—which account for the majority of current tax revenue. This in turn means that, if the government adheres to this commitment, but wishes to increase the tax take they will need to rely more on other taxes such as business rates, council tax, capital gains tax, stamp duty, inheritance tax, alcohol duty, and fuel duty. Looking at CGT specifically, there has been considerable speculation about whether the rates will increase on 30th October, potentially increase so much that they could align with income tax rates. While this might seem like a way to boost revenue, without a broader reform of the tax system, it could also discourage capital investment, leading to lower-than-expected returns.
As noted, higher CGT rates could discourage investors from high-risk investments, such as putting capital into tech startups and R&D-intensive organisations. STEM companies often rely on angel investors to scale early-stage ideas. A steeper CGT rate could deter potential investors and push them towards lower-risk options with more predictable returns. Founders and employees of STEM companies often hold share options through schemes such as EMI as part of their remuneration. A CGT hike could reduce the financial reward associated with selling or exiting the company, diminishing the appeal of entrepreneurship in the sector which may slow innovation as fewer individuals feel inclined to form or join high-growth tech companies.
Further, STEM companies often reinvest profits into research and development, if CGT rates increase, there potentially will be less available capital for reinvestment, as companies would need to account for larger tax liabilities. This could slow down the pace of technological advancements and limit the competitive edge of STEM companies in the UK compared to their competitors worldwide.
While the government may increase CGT to boost public revenue, this move could stunt investment and innovation in the UK’s STEM sector. Reduced incentives for investors and entrepreneurs might slow down the growth of tech-driven industries, potentially impacting the country’s global competitiveness in fields like AI, biotechnology, and renewable energy. STEM companies will need to adapt by exploring new funding models and it remains to be seen the true impact that this potential change will have within the sector.
We will need to wait for the budget to discover whether there are significant changes to the CGT regime and analyse the potential consequences.
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