Sigh of relief for UK tech founders as Labour hikes capital gains tax by less than feared
On Monday, British tech lobby group Startup Coalition warned in a blog post that there was a risk Reeves’ tax plans could result in a tech “brain drain.”. (Photo by Oli Scarff/Getty Images)
Oli Scarff | Getty Images
LONDON — Britain’s Labour government on Wednesday announced plans to raise the rate of capital gains tax on share sales, news that offered some relief for technology entrepreneurs who feared a more intense tax raid on the wealthy.
Finance Minister Rachel Reeves on Wednesday hiked capital gains tax (CGT) — a levy on the profit investors make from the sale of an investment — as part of her far-reaching budget announcement. The lower capital gains tax rate will be increased to 18% from 10%, while the higher rate will climb to 24% from 20%, Reeves said. The tax hikes are expected to bring in £2.5 billion.
“We need to drive growth, promote entrepreneurship and support wealth creation, while raising the revenue required to fund our public services and restore our public finances,” Reeves said, adding that, even with the higher rate, the U.K. would “still have the lowest capital-gains tax rate of any European G7 economy.”
Reeves maintained the £1 million lifetime limit on capital gains from the sale of all or part of a company under business asset disposal relief (BADR), quashing fears from entrepreneurs that the tax relief scheme for entrepreneurs would be scrapped.
However, she added that the rate of CGT applied to entrepreneurs selling all or part of their business under BADR will be increased to 14% in 2025 and 18% a year later. She stressed that this still represented a “significant gap compared to the higher rate of capital gains tax.”
In a less welcome move for businesses, Reeves also announced plans to increase the rate of National Insurance (NI) — a tax on earnings — for employers. The current rate is 13.8% on a worker’s earnings above £9,100 per year. This is set to rise to 15% on salaries above £5,000 a year.
The changes form only a small part of sweeping fiscal changes the recently-elected Labour government laid out in its debut budget Wednesday in an attempt to close a multibillion-pound funding gap in public finances.
‘Brain drain’ feared
Reeves’ announcement comes after speculation over capital gains tax changes caused a backlash from tech founders and investors. Even prior to Reeves’ announcement, the anticipation that CGT would increase had caused angst for tech founders across the country.
On Monday, British tech lobby group Startup Coalition warned in a blog post that there was a risk Reeves’ tax plans could result in a tech “brain drain.”
A survey of 713 founders and investors conducted by Startup Coalition with private company database Beauhurst, showed that 89% of those polled would consider moving themselves or their business abroad, with 72% having already explored this possibility.
The survey data also showed that 94% of founders would consider starting a future company outside of the U.K. if the government were to raise the CGT rate.
Dom Hallas, executive director of Startup Coalition, said that while the survey findings were grim, he doesn’t expect founders will “flee if things get hard” as they “aren’t naive about the role of taxes in society.”
Following Reeves’ budget speech, Hallas told CNBC via text message that, “Any budget with increases to CGT and NI, gradual increases to BADR and taxes on investors going up, is never easy and today will be hard for founders seeing taxes on their businesses rise.”
However, he added: “We appreciate that the Government has listened to ensure that entrepreneurs’ biggest fears have not materialised and some balance has been struck including maintaining all important R&D [research and development] investment.”
Barney Hussey-Yeo, CEO and co-founder of financial technology app Cleo, told CNBC last week he was considering a move to the U.S. as a result of Labour’s tax plans.
“There’s so many founders already leaving, or already considering leaving — and they’re excited to go to Silicon Valley,” Hussey-Yeo told CNBC on the sidelines of venture capital firm Accel’s EMEA Fintech Summit in London last week.
Hussey-Yeo didn’t respond to a request for comment Wednesday on whether he still plans to move abroad. However, he told CNBC that the budget announcement was “better than I thought it would be,” adding it “seems like they listened” to entrepreneurs.
Paul Taylor, CEO of London-headquartered fintech firm Thought Machine, said that though it was reassuring to see the government listening to founder concerns, increases to NI contributions would prove costly. Thought Machine’s U.K. payroll spend is expected to spike by £800,000 as a result.
“This is a significant amount for companies like us, which rely on investor capital and already face cost pressures and targets,” Taylor told CNBC Wednesday. “Nearly all emerging tech businesses run on investor capital, and this increase sets them back on their path to profitability.”
Focus on growth-oriented policy
Tech entrepreneurs and investors are urging the government to return to its focus on fostering growth and innovation in the U.K., messages which were key to Labour’s election manifesto prior to the landslide win that saw Keir Starmer become prime minister.
“We’re already seeing early-stage firms in the UK struggle securing pre-seed and seed funding, with VCs here having a lower risk appetite. A higher CGT will act as a further deterrent,” Phil Kwok, co-founder of EasyA, an e-learning startup, told CNBC via email.
“With all the factors at play, we could see investors and the next generation of founders looking to another markets like the U.S.,” he added.
Hannah Seal, a partner at Index Ventures, told CNBC that the government should “pursue reforms that make it easier for startups to attract talent through employee ownership and ensure all regulators prioritise innovation and growth.”
“Startup-friendly policies like these will be essential to signal the U.K.’s commitment to remaining a globally competitive hub for innovation, especially in light of today’s announcements,” she added.
Edgar Randall, managing director of U.K. and Ireland at data and analytics firm Dun & Bradstreet, told CNBC that in order to remain competitive, the government should “weigh the cumulative effect of policies impacting growth.”
These include policies impacting energy costs, employer National Insurance contributions, and tax structures on capital gains and dividends.
Ultimately, “business decisions are influenced on more than just fiscal policy,” Randall said, adding that. ‘entrepreneurs look at the ecosystems [as] a whole.”
CEO of Nvidia, Jensen Huang, speaks during the launch of the supercomputer Gefion, where the new AI supercomputer has been established in collaboration with EIFO and NVIDIA at Vilhelm Lauritzen Terminal in Kastrup, Denmark October 23, 2024.
Ritzau Scanpix | Mads Claus Rasmussen | Via Reuters
Nvidia is replacing rival chipmaker Intel in the Dow Jones Industrial Average, a shakeup to the blue-chip index that reflects the boom in artificial intelligence and a major shift in the semiconductor industry.
Intel shares were down 1% in extended trading on Friday. Nvidia shares rose 1%.
The switch will take place on Nov. 8. Also, Sherwin Williams will replace Dow Inc. in the index, S&P Dow Jones said in a statement.
Nvidia shares have climbed over 170% so far in 2024 after jumping roughly 240% last year, as investors have rushed to get a piece of the AI chipmaker. Nvidia’s market cap has swelled to $3.3 trillion, second only to Apple among publicly traded companies.
Companies including Microsoft, Meta, Google and Amazon are purchasing Nvidia’s graphics processing units (GPUs), such as the H100, in massive quantities to build clusters of computers for their AI work. Nvidia’s revenue has more than doubled in each of the past five quarters, and has at least tripled in three of them. The company has sginaled that demand for its next-generation AI GPU called Blackwell is “insane.”
With the addition of Nvidia, four of the six trillion-dollar tech companies are now in the index. The two not in the Dow are Alphabet and Meta.
While Nvidia has been soaring, Intel has been slumping. Long the dominant maker of PC chips, Intel has lost market share to Advanced Micro Devices and has made very little headway in AI. Intel shares have fallen by more than half this year as the company struggles with manufacturing challenges and new competition for its central processors.
Intel said in a filing this week that the board’s audit and finance committee approved cost and capital reduction activities, including lowering head count by 16,500 employees and reducing its real estate footprint. The job cuts were originally announced in August.
The Dow contains 30 components and is weighted by the share price of the individual stocks instead of total market value. Nvidia put itself in better position to join the index in May, when the company announced a 10-for-1 stock split. While doing nothing to its market cap, the move slashed the price of each share by 90%, allowing the company to become a part of the Dow without having too heavy a weighting.
The switch is the first change to the index since February, when Amazon replaced Walgreens Boots Alliance. Over the years, the Dow has been playing catchup in gaining exposure to the largest technology companies. The stocks in the index are chosen by a committee from S&P Dow Jones Indices.
Charles Liang, chief executive officer of Super Micro Computer Inc., during the Computex conference in Taipei, Taiwan, on Wednesday, June 5, 2024. The trade show runs through June 7.
Annabelle Chih | Bloomberg | Getty Images
Super Micro investors continued to rush the exits on Friday, pushing the stock down another 9% and bringing this week’s selloff to 44%, after the data center company lost its second auditor in less than two years.
The company’s shares fell as low as $26.23, wiping out all of the gains for 2024. Shares had peaked at $118.81 in March, at which point they were up more than fourfold for the year. Earlier that month, S&P Dow Jones added the stock to the S&P 500, and Wall Street was rallying around the company’s growth, driven by sales of servers packed with Nvidia’s artificial intelligence processors.
Super Micro’s spectacular collapse since March has wiped out roughly $55 billion in market cap and left the company at risk of being delisted from the Nasdaq. On Wednesday, as the stock was in the midst of its second-worst day ever, Super Micro said it will provide a “business update” regarding its latest quarter on Tuesday, which is Election Day in the U.S.
The company’s recent challenges date back to August, when Super Micro said it would not file its annual report on time with the SEC. Noted short seller Hindenburg Research then disclosed a short position in the company and wrote in a report that it identified “fresh evidence of accounting manipulation.” The Wall Street Journal later reported that the Department of Justice was in the early stages of a probe into the company.
Super Micro disclosed on Wednesday that Ernst & Young had resigned as its accounting firm just 17 months after taking over from Deloitte & Touche. The auditor said it was “unwilling to be associated with the financial statements prepared by management.”
A Super Micro spokesperson told CNBC that the company “disagrees with E&Y’s decision to resign, and we are working diligently to select new auditors.” Super Micro does not expect matters raised by Ernst & Young to “result in any restatements of its quarterly financial results for the fiscal year ended June 30, 2024, or for prior fiscal years,” the representative said.
Analysts at Argus Research on Thursday downgraded the stock in the intermediate term to a hold, citing the Hindenburg note, reports of the Justice Department investigation and the departure of Super Micro’s accounting firm, which the analysts called a “serious matter.” Argus’ fears go beyond accounting irregularities, with the firm suggesting that the company may be doing business with problematic entities.
“The DoJ’s concerns, in our view, may be mainly about related-party transactions and about SMCI products ending up in the hands of sanctioned Russian companies,” the analysts wrote.
In September, the month after announcing its filing delay, Super Micro said it had received a notification from the Nasdaq indicating that its late status meant the company wasn’t in compliance with the exchange’s listing rules. Super Micro said the Nasdaq’s rules allowed the company 60 days to file its report or submit a plan to regain compliance. Based on that timeframe, the deadline would be mid-November.
Though Super Micro hasn’t filed financials with the SEC since May, the company said in an August earnings presentation that revenue more than doubled for a third straight quarter. Analysts expect that, for the fiscal first quarter ended September, revenue jumped more than 200% to $6.45 billion, according to LSEG. That’s up from $2.1 billion a year earlier and $1.9 billion in the same fiscal quarter of 2023.
WATCH: I don’t know if Super Micro is guilty or innocent, says Jim Cramer
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