“The art of taxation consists of so plucking the goose as to obtain the largest number of feathers, with the lowest possible volume of hissing.” - Jean-Baptiste Colbert
“Me and my co-founder are both American and our business is just people with laptops.” - an anonymous Series A founder
“Starmer earlier insisted the Budget would not drive entrepreneurs abroad because of the anticipated tax rises on businesses and the wealthy. The prime minister said, on the contrary, he was confident there would be various inward investment announcements by big companies in the run-up to Christmas.” - FT, 24th October
It’s budget week and we’ve got our big Startup Coalition interventions out today in both the Telegraph and Politico - so I thought I’d write something longer and more considered on what is happening, what it means for startups, and why there’s actually opportunity for the government in defending and building on the tech startup and scaleup ecosystem.
‘DO THEY GET IT?’
A few days ago, buried in a FT piece about the Prime Minister’s definition of ‘working people’ was the really rather telling news section above.
Now, for those who will read this from the startup community I’ll let you in on a dirty secret of politics. That’s called a ‘line to take’. There’s a hostile press question, you pivot to the positive news on investment. So far, so politics. But it’s also a reflection of priorities, of what comes to mind when business is raised: big businesses doing big investments.
It reflects a fear that I’ve heard from lots of founders recently - that there’s not a clear enough understanding of the role of entrepreneurship (as distinct from business as a whole) in the new Government.
That fear of lack of understanding is reflected in a lot of the frustration we’ve heard from founders in the past month as the noises from the Government around tax rises in Wednesday’s Budget have increased. It shows in the data from the Startup Coalition and Beauhurst covered today in the Telegraph. You can read the full data here.
We surveyed 713 founders & investors and found:
Founders really are worried about Capital Gains Tax increases. 97% of founders and investors think that increases to CGT up to an equalisation with income tax would have a 'somewhat negative' or 'very negative' impact on the UK's entrepreneurial ecosystem.
There is a risk of a ‘brain drain’. 89% of founders surveyed would consider moving themselves or their business abroad, and 72% have already explored this. 94% would consider starting a future company abroad if CGT was raised.
Founders will be disincentivised. 87% of founders would feel less motivated to build a large-scale business in the UK and 88% would take cash out of their business earlier instead of reinvesting for growth.
And there would be downstream effects on investment:
82% of founders would be less likely to undertake angel investment
85% of angels would be less likely to continue investing into UK companies
73% of institutional investors already investigated moving their fund’s focus away from the UK
It’s worth reflecting on what this would really mean. Just amongst the 524 founders (of the 713 total) surveyed there is:
£2.6bn of turnover at risk of moving abroad
22,000 jobs at risk of moving abroad
HOW MANY? REALLY?
Now, it’s important to set this data in context.
First, it’s a survey of folks vexed enough to fill in a survey.
Second, since we launched the survey around a month ago - HM Treasury has signalled a row back of its intentions for CGT (now seemingly in line for a rise of ‘several’ percentage points per HMT briefing - as opposed to anything more) which obviously is material to this conversation which asked about potentially larger rises.
Third, I don’t believe for one second that the sort of numbers we see in the data above will stand up post-budget unless lots of things go wrong at once.
But since we launched the survey there has also been more noise about a range of other measures that will matter to founders including the potential total removal of Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs Relief, and increases to Employer National Insurance Contributions (NICs).
The data from us and Beauhurst is just one of a number of signals that something is severely amiss in startup world - there have been large numbers of founders signing letters both on CGT (from our friends at The Entrepreneurs Network) and on BADR.
Founders are worried.
Should they be?
Let’s start with the obvious - yes taxes are going to go up, including (almost certainly) capital gains tax. This is bad. It will mean that some founders whose business may be the next great British company will be hamstrung at best and potentially up sticks at worst. We should be doing everything we can to get them to stay, build and invest here. But clearly how much it taxes go up will dictate how bad this is.
But based on all the conversations we’ve had over recent months - the real worry I’ve heard from founders is actually in the cumulative impact of a wave of tax rises and changes in policy:
CGT increases
Removal of BADR
Increases to Employer NICs
Carried Interest reform & Non-Dom status changes hitting investors
Further negative changes to R&D Tax Credits policy or implementation
Employment Rights changes
That’s the list of ‘bad policy things’ I’ve heard on rotation from founders. Naturally, the particular area of concern tends to be linked to particular interests/position. If you’re a scaleup founder (or indeed early employee) sitting on capital gains to tax - turns out that CGT really matters. If you’re raising right now, especially from angels, you might have to care about non-dom status whether or not you’d typically give a hoot. Everyone is scared about NIC increases.
So, given it’s almost certainly going to be quite bad, what would *really bad* look like?
Answer: The pulling of almost all those levers in a negative direction at the same time, or pulling one of them (like cap gains) so hard it outweighs everything. Even at small negative increments, when taken all together, those changes risk building up - becoming the metaphorical straw that breaks the camel's back.
If we see this on Wednesday, it would be a huge mistake.
HARNESS, NOT HANDICAP
The last time Labour were in Government, we didn’t really have a startup ecosystem. Tony Blair, for all his laudable advocacy of the technologically enhanced state today, left office having barely sent an email. Our own organisation, then named The Coalition for a Digital Economy, was founded to help the then-pockets of founders growing up around Old Street roundabout in Shoreditch in the dying embers of Gordon Brown’s premiership.
This is important because there’s a new kind of business that simply didn’t exist before. They’re different in two ways: one that creates huge risk for the Government, another that creates huge opportunity.
The first is that this kind of business is far more mobile than in the past. So whilst there are members of the Government very familiar with the old-fashioned ‘business fears centre-left government’ trope who will roll their eyes at the coverage of founders’ concern of tax rises - this time there are genuine differences:
most of the founders we’re talking to don’t have capital investments in the UK
they’re being courted by virtually every jurisdiction in the world who look enviously at what we’ve built on tech
in many cases they aren’t even from the UK to begin with, they moved here precisely because it was a good environment in the first place
But, there’s also another aspect of these companies (which came out in our founders focus group with Politico last week covered here - behind a paywall (apologies!)) that can serve as a note of optimism. These founders give a shit. They won’t flee if things get hard, they aren’t naive about the role of taxes in society. Whilst some on the furthest reaches of the left might paint them as such, they’re not small state libertarians. They will stay and pay their taxes as long as they feel that it’s a fair share. They want to fix things, not break them. They certainly don’t begrudge the Government trying to mend the foundations of our economy and society. They know that things haven’t been working in Britain and they want to help in the mission. In fact, they can be harnessed to do it.
So that’s what we can and must do. Yes - after Wednesday tech startups and scaleups will almost certainly be paying more in taxes. Yes - how much more matters. But this isn’t the end of the story - what comes next matters just as much.
How do we ensure that those who want to put the shoulder to the wheel and fix our public services are able to be procured to do so?
If (as HM Treasury fear) BADR isn’t really incentivising starting growth producing businesses, what would and how do we do it?
If our tax rates are starting to feel more ‘European’ - how do we ensure our regulatory systems don’t - using the Regulatory Innovation Office as a lever?
If CGT is going up and BADR is being cut - how do we make sure that not only founders, but staff too are motivated to take the risk and join an early-stage tech company that could transform our economy and get share options in reward, not just take the larger base salary at a comfy corporate?
That’s the challenge and the opportunity for this Government. Harness the economic success story of the past decade and you might be able to get your vision for a decade of renewal for the next ten. Handicap it, and you’ll lose the most dynamic opportunity to deliver the growth and progress we need - and probably see some of the UK’s most exciting tech founders in the Heathrow departure lounge.
Well said. It’s been the topic in just about every Founder focused WhatsApp group and other platforms.
So yeah. Founder’s are built to take decisions and optimize things, move quickly — they are a low inertia group. Many could start making the jump sooner than people assume.