What do venture capitalists need to know about the UK government's policies?

The UK's Labour government, having passed its 100-day mark and earlier announcing its legislative programme in the King's Speech, published its Autumn Budget last month. The Budget signalled tax rises of £40 billion and government investment (funded by borrowing) of £100 billion over the life of the Parliament – and included further significant policy announcements around tax, employment, growth and industrial strategy for venture capital (VC) and businesses with or seeking venture investment.

CGT changes

One of the most prominent announcements in the Budget was the increase in the main capital gains tax (CGT) rate from 20% to 24% and the lower rate from 10% to 18% for disposals from 30 October 2024. A potential rise had been signalled well in advance leading to a surge in disposals to beat the Budget; however, in the end, the amount of the rise (4%) was not as much as feared.

The expected rise in CGT for carried interest from 28% to 32% from April 2025, and its subsequent full taxation within the income tax framework from April 2026 (albeit with reliefs that will keep it taxed at a similar effect rate), will further impact the profitability of VC funds. Funds that are in a position to pay carried interest – or accelerate disposals to trigger carry payments before April 2025 –  may wish to bring forward their plans.

For managers, there were changes to Business Asset Disposal Relief (formerly known as entrepreneurs' relief). The lifetime limit was maintained at £1,000,000 but the rate will rise from 10% to 14% from 6 April 2025 and to 18% from 6 April 2026.

EIS and VCT extension

The extension of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) scheme by 10 years from 2025 to 2035 provides long-term certainty for venture capitalists and entrepreneurs. These schemes are crucial for encouraging investment in high-risk startups by offering tax reliefs, thus making the UK an attractive destination for venture capital.

Corporation tax and R&D incentives

The decision to cap corporation tax at 25% while maintaining full expensing, the annual investment allowance, and current research and development (R&D) rates is a mixed bag for the VC community. While the tax rate remains unchanged, the continued support for R&D is positive, encouraging innovation and investment in technology startups.

Non-dom status abolition

Replacing non-dom status with a residence test could deter international investors who previously benefited from favourable tax treatment. This change might reduce the attractiveness of the UK as a hub for global venture capital.

Employers' NI and NMW rises

Looking forward, the most significant tax impact on VC-backed businesses will be the rise in employers' National Insurance (NI) and the national minimum wage (NMW) that will come into effect in April 2025. The employers' NI rate will rise from 13.8% to 15% and the threshold at which it becomes payable will be lowered from £9,100 to £5,000. At the same time, for those aged 21 and over, the NMW will rise 6.7% from £11.44 to £12.21 an hour. Combined, these measures are likely to have a significant impact on the employment costs of businesses, particularly those in sectors which have large numbers of workers at low wages.

Employment Rights Bill

This bill was presented before Parliament on 10 October and is stated to bring forward 28 individual employment reforms which cover a broad range of issues. The most high profile is the removal of the two-year qualification period for protection from unfair dismissal so that all workers have a right to this protection from "day one", which will be coupled with a light-touch dismissal process during a worker's probationary period. Other reforms include changes to support family-friendly working practices, changes to zero-hours and low-hours contracts and changes to statutory sick pay.

While there is no firm time frame for when the changes will come into effect, the government has stated that it anticipates that the majority of reforms will take effect no earlier than 2026, with reforms of unfair dismissal taking effect no sooner than autumn 2026. VC-backed businesses will need to ensure the impact of these reforms are reflected in their business plans.

Energy transition and the NWF

In common with all businesses, the VC community is interested in the opportunities available to them under the government's growth plans and its new industrial policy. The centrepiece of the growth plan is the creation of the National Wealth Fund (NWF) – a realignment of the UK Infrastructure Bank and the British Business Bank.

The NWF will have an overall capitalisation of £27.8 billion and a broader mandate than those institutions to support delivery of the government's wider industrial strategy in sectors and regions where there is an undersupply of private finance.

The government has already announced that at least £5.8 billion of the NWF’s capital will focus on green hydrogen, carbon capture, ports, gigafactories and green steel. The focus on investment in the energy transition is followed through in other policy announcements, such as the establishment of Great British Energy and the increase of the Energy Profits Levy on oil and gas firms from 35% to 38% coupled with the removal of the 29% investment allowance but the retention of the 80% decarbonisation investment allowance. VC businesses focused on the energy transition will benefit from the government's focus on this sector.

'Invest 2025' strategy

In terms of broader vision, this October, the government released its green paper "Invest 2035" that sets out the government's commitment to developing a long-term and targeted industrial strategy.

It identifies eight growth-driving sectors: advanced manufacturing, clean energy industries, creative industries, defence, digital and technologies, financial services, life sciences, and professional and business services

The full strategy will be published next year and will include individual plans for each of the eight growth-driving sectors.

In the meantime, the Budget announced support for many of these sectors including aerospace (£1 billion), automotive (£2 billion), life sciences (£520 million) and telecoms (£500 million) and tax reliefs for creative industries (worth £15 billion). The government will also shortly be publishing an artificial intelligence (AI) action plan setting out a roadmap to capture the opportunities of AI to enhance growth and productivity.

Osborne Clarke comment

The UK government's recent policy announcements present a mixed landscape for the venture capital community. While increased taxes and the abolition of non-dom status pose challenges, the extension of the EIS-VCTs, continued R&D incentives and significant investments in clean energy and other sectors that attract venture capital investment offer substantial opportunities.

Venture capitalists should closely monitor the implementation of these policies and adjust their strategies to leverage the opportunities presented by the government's commitment to innovation, sustainability, and economic growth.