UK tech sector faces challenges with potential CGT rise

Potential tax changes expected in the Autumn Budget could impact innovation within the UK's technology sector, according to a technology and media expert from Buzzacott.

Adam Chick, who specialises in technology and media at Buzzacott, has expressed concern over the implications of potential changes to Capital Gains Tax (CGT) rates. Chick predicts that an increase in CGT rates could significantly affect the technology and startup sectors, 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," he explained.

Chick also noted the potential impact on share schemes used by scale-up companies. "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," he said.

Speculation around the potential reduction of Business Asset Disposal Relief, formerly known as Entrepreneurs Relief, was also addressed by Chick. This relief currently permits entrepreneurs to pay a reduced tax rate upon selling their businesses. "If this relief is 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," Adam Chick commented.

He further warned that significant CGT increases could lead to a potential exodus of tech entrepreneurs from the UK, posing a risk to the country'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," Chick cautioned.

Despite these challenges, Chick identified potential opportunities within the Enterprise Investment Scheme (EIS) amidst CGT rate increases. "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," he noted.

Addressing tech entrepreneurs, Chick advised remaining calm and planning prudently in light of potential tax changes. "Don't overreact," he suggested. "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."

Furthermore, Chick warned against complicated 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," Chick counselled.