Here’s what private equity and venture capital need from Rachel Reeves
Changes to carried interest, non-doms and wealth tax rumours are putting investors under pressure. Time for Rachel Reeves to adopt a more pragmatic, pro-growth approach, says Michael Moore
In her October Party Conference speech, the Chancellor Rachel Reeves declared that ‘If growth is the challenge, investment is the solution’.
She is right.
The Chancellor has shown commitment to delivering that.
In recent months we have seen a boost to public sector investment and infrastructure, action on regulatory reform focused on growth, an Industrial Strategy that is clear on long-term priorities, and pension reforms to boost investment into private assets.
Private Equity and Venture Capital are ready to invest.
2024 saw a 44 per cent increase in private capital investment on 2023 in the UK to £29.4bn. Something which should be celebrated.
But we are approaching an inflection point where the question of whether this is only half the story will need answering.
At the Budget the Chancellor felt she needed to address the very real fiscal challenge she inherited. But the measures, however necessary, presented significant challenges to investor sentiment.
The changes to taxation of carried interest, whilst more pragmatic than many feared, must still be seen alongside other measures.
In its current form, the abolition of the non-dom regime, partially inherited from the previous government, risks making it harder for international investors to come into and out of the UK to do business.
Higher national insurance contributions for employers hit the profitability of many UK firms. And the increases to capital gains taxes and reductions in entrepreneurs relief sent negative signals to investors and founders.
Investors are feeling under pressure. The opposite of the intention which underpins much of the Chancellor’s agenda.
Everybody recognises the difficult fiscal position. And that working people’s incomes are tight, so the government must be mindful of the burden it places there.
Yet nobody, including in Downing Street, denies that growth needs investment funded by UK and international capital.
As we head into an awkward summer of Budget speculation, we urge a renewed focus on the pragmatic and the pro-growth.
In particular, loose talk of a ‘wealth tax’ is hitting investor confidence – for founders, entrepreneurs and their private equity or venture capital backers.
Open for business?
An ill-defined tax on assets cuts across the competitiveness message from government. To ensure that the UK is open for business, the government must find a way to make their rejection of this idea explicit.
And capital gains tax and entrepreneurs relief have already been targets of attempts to close the fiscal gap. If government keeps coming back for more, the outcome would be fiscally self-defeating.
Instead, the UK has a chance to go further in promoting investment both through continuing to drive forward reforms to pensions and wider capital markets, and through targeted tax changes.
Let’s start with the Enterprise Management Incentive (EMI) which allows SMEs to compete with larger firms by giving employees an interest in the company. Removing constraints on EMI reliefs at later growth stages and making it available to private capital-backed scale ups would boost precisely the type of business these schemes were designed to assist.
Other schemes, such as the Enterprise Investment Scheme, Venture Capital Trusts and Seed Enterprise Investment Scheme have not kept pace with inflation or international standards, causing high-potential companies to fall outside of eligibility.
Raising thresholds, particularly for knowledge intensive companies, and merging existing R&D tax relief schemes into a unified system with higher rates for R&D-intensive SMEs would support Government priorities to support science and technology scale ups and regional growth.
Removing tax uncertainty and focusing on these measures can be a route for the UK to invest its way out of its long-standing growth malaise – which remains the only sustainable path to fiscal and economic stability.
Michael Moore is chief executive of the British Private Equity and Venture Capital Association