Should UK based startups vote LibDem? Probably not.

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Tomorrow the UK goes to the polls in one of the most hotly contested elections in years. Labour has been in power for 13 years and the Conservatives have been champing at the bit to get back in. But the third party, in the shape of the Liberal Democrats, has accelerated into the race on the back of the charisma of its leader, Nick Clegg, or “Cleggmania” as it’s now known.

But if you are a startup with a limited company in the UK (and this counts for many non-UK-born startups that have incorporated in the UK because of the business-friendly environment), how should you vote? Which party is going to do the most for technology startups?

The Labour party has proposed an increase in National Insurance. That’s not great for any company, and adds extra costs, especially in startups. The Conservatives plan to stop the NI increase.

However, what most entrepreneurs are interested in – admittedly after building an awesome product which gets traction and, hopefully, has a business model in sight – is the exit.

So the question is, which political party most favours exits?

Currently when you sell a large capital asset like a company in the UK you are taxed via Capital Gains Tax or CGT.

To sell a company means the company is worth something and it’s been paying employees, paid tax, national insurance, corporation tax etc. So CGT is not the same as income tax.

The Labour party increased CGT a couple of years ago, but plan to keep it at 10-18%.

Labour will also keep reductions in corporation tax, at 28 percent.

The Conservatives also plan no change to CGT, at least as far as we know so far. Unfortunately there is not a great deal of clarity about what the Conservatices propose. A party policy group set up by David Cameron and led by former Cabinet minister John Redwood recommended reducing business taxes and raising the threshold for higher rate income tax. But Shadow CHancellor George Osborne has been vague saying he’ll look at a “range of options”.

But under the LibDems CGT would suddenly be re-classed as “income” which attracts rates of up to 50% (and with a reduced annual allowance).

The Lib Dem leader has said that capital gains tax would be brought in line with income tax, with two rates: 20 per cent and 50 per cent. He also said he would slash the annual capital gains tax allowance from £10,000 to £1,000, raising £1.9bn to help fund the party’s promise to bring those earning less than £10,000 out of income tax altogether.

Of course what this means is that while bringing people out of tax, there is ultimately not much incentive for them to create something new. Just old fashioned cash / lifestyle businesses which never have a liquidity event.

Other LibDem plans include a mandatory pay audit for all firms that are listed in the UK, forcing them to publish the number of people they employ that earn over £200,000. What a great way to incentivise people – mark them out as pariahs.

So this LibDem attitude to CGT issue is a potentially huge problem for entrepreneurs who might want, eventually, to find an exit for their company. It is in fact the opposite of encouraging to anyone wanting to start or grow a business.

Mark Littlewood at TheBLN has some great info graphic pron to illustrate this.

The red is the Capital Gains Tax Rates, and the Blue the Income Tax. In the 1970s the Conservatives tended to keep CGT high while Labout governments kept it lower. Under the LibDems proposed policies it would jump dramatically updwards.

On the other side of the coin, early stage Angel investors, who generally have to take a large personal risk on a startup, are currently able to do so because their investment gains are taxed at 0% (if EIS relief is granted) to a standard rate of 18%.

Under the LibDems, investment gains would also be taxed at up to 50%.

Therefore, in one fell swoop the LibDems would remove all incentive to becoming an Angel investor, with the consequent knock-ons for innovation and entrepreneurship in the UK. The risks would no longer make economic sense so they wouldn’t invest in the first place.

Various business leaders have pointed this out, such as WPP’s Martin Sorrell.

Luke Johnson, the former Channel 4 chairman, says that angel investment is a vital source of capital for start-ups because of low interest rates and the reluctance of banks to lend. He actually says he is “frightened” by the Liberal Democrats’ “extraordinarily destructive” proposal to raise capital gains tax to up to 50 per cent in line with income tax and the effect it would have on entrepreneurship.

As The Times puts it “Wealth creators who have not been driven abroad by Mr Brown’s 50% income tax rate would rush for the exits if Mr Cable’s 50% capital gains tax were introduced.”

We could of course point out that the disaster that is the Digital Economy Bill, which Labour and Tories backed, was opposed for the most part by the LibDems (and one or two Labour MPs). Bully for them.

But this LibDem policy is a huge problem. Because currently growth is the only way out of the current economic mess, and without investment and entrepreneurs you don’t get growth. Or the new digital businesses which governments all over continually say they champion.

How will you vote? Leave you comments below.

Update: Some commenters on Twitter point out that Clegg said in a radio phone interview that there would be changes to the Entrepreneur relief which reduces CGT to 10% on the first £2 million in the entrepreneur’s lifetime. This allows then for very, very small exits but nothing that would pique the interest of an investor in a tech company.

  • John Wards

    LibDems are the only party that have committed to repealing the Digital Economy Bill which is a disaster for UK Tech companies.

    For example we now run the risk of our internet being cut off which we share with hot deskers if they torrent. We could offend multiple times but take action each time but the offence could be from different hot deskers.

    This is more important than greedy VCs worrying about not making a little bit more money.

  • Mark Littlewood

    Hey Mike, Thanks for the mention.

    You should also take a look at the rough example we worked out for an entrepreneur who builds a business over 15 years before getting an exit. It is scary to think that entrepreneurs who slave away to create jobs, pay taxes, National Insurance etc etc would then get screwed when they get an exit.

    I have a real issue with this being pronounced ‘fair’ by the Lib Dems. A lottery Winer doesn’t pay tax. That seems less fair but I cannot imagine there are too many votes in marginal constituencies for suggesting that they should.

    • Allix

      Mark Littlewood,

      Re: “It is scary to think that entrepreneurs who slave away to create jobs, pay taxes, National Insurance etc etc would then get screwed when they get an exit.”

      I strongly doubt that many entrepreneurs “slave away to create jobs, pay taxes, National Insurance etc etc[…]”. Many I know slave away to avoid those aspects of the business.

      While I do not necessarily disagree with the rest of what you say, let’s not kid ourselves about our motivations here…

      • Joshua March

        Allix – if entrepreneurs aren’t creating jobs or paying tax, then it’s extremely likely that they’re unsuccessful. Most successful businesses require people, and paying people requires tax.

      • Allix

        Joshua – I’m not disagreeing with you at all, just drawing attention to disingenuous phrasing.

      • Mark Littlewood

        That wasn’t disingenuous phrasing, merely crap and sloppy English. Apologies.

        Entrepreneurs work and slave away to do what they feel they have to do and often create jobs etc in the process. I fully agree very few of them set out to create jobs etc.

  • Scott Allison

    This is definitely the weakest point for me in the Lib Dem manifesto, but all the parties have some barmy element in their policies.

    A few weeks ago I thought I would not be voting this time round, thinking “they are all as bad as each other”.

    But I have decided that there is still much to gain from a stronger third party. It looks very likely we will have a hung parliament, and in that situation I want there to be a third voice in those debates that can put forward a different point of view. Their position on CGT is crazy, but let’s have another opinion. I feel confident that, as with the DE bill, the Lib Dems will provide meaningful scrutiny and a voice of reason. As both the other parties would strongly opose any massive hike in CGT then you ought to feel safe voting Lib Dem.

    In the end I have decided that as all the parties have some stupid ideas – ideas which I strongly disagree with – I have to vote with the party which I am most aligned with in terms of their outlook, values and past history.

  • azeem

    So Cameron’s plans for no NI for smaller companies etc are all excellent. Tories have best small company plans
    The LibDems will never get this policy through. Why not?
    They can’t be the largest party in government. They can only form part of a coalition. As part of that, they’ll put some of their demands on the table. The number one demand is for a better voting system (something akin to PR), which shd result in better societal outcomes for all.
    So my view is that Lib Dem’s tax policies will play second fiddle to them being able to get some electoral reform. Tax policies will then be judged against the reality of our deficits; and the need to close that gap.
    My take: the rationale that small enterprise drives growth is one that can be demonstrated empirically; as can the importance of the right tax breaks. And that as part of a coalition, the case can be made and the policy (absurd that it is, reversed).
    What you can achieve with a Lib Dem vote is nudging the Tories towards electoral reform. And if you believe, as I do, that we can make good laws (debill not withstanding), then the likelihood of these absurd anti-enterprise policies can be eliminated.

    The risk that the LibDem’s would be able to foist their entire policy agenda onto a ‘biggest minority’ Tory party is pretty remote.

  • David Coveney

    Uhm, venture capitalists and get-rich-young exit strategies are, generally, not where the real value comes from. Usually hype and bubbles inflate valuations and lead to stories that, like lottery winners, appeal to the gambling sensibilities of many.

    I don’t believe raising CGT to 50% is, particularly, a good idea, but it’s worth mentioning that for many it’s used as a vehicle for tax avoidance. Ultimately, whichever way you make your first million (salary or big pay-off) it’s still your first million and you should contribute more or less equally to society.

    Our tax system is a complex mess, full of Brown’s regular tweaks, and with a mess of loopholes. What needs to be done is to work out what tax system leads to the lowest level of evasion along with the maximum level of fairness. What fairness actually constitutes is, of course, a complex thing to work out.

    I suspect that flat rate tax systems probably work best, but sadly I’m not an economist so I can’t back that up with anything other than sentiment. But like many, I can spot unfairness a mile away.

  • Joshua March


    I agree wholeheartedly with your comments. Entrepreneurs don’t risk it all and pay themselves less than any other staff to then split the proceeds with the government equally.

    If this policy came in, there is a very high chance that I would leave the UK to go the states or another more entrepreneur friendly country – and many of my fellow entrepreneurs agree with me. This is a serious enough issue to make these more than hollow threats.

    This policy would be a distaster for the UK economy and would create a dearth of entrepreneurship as founders and investors flock elsewhere.

  • Danvers


    The info graphic on the rate of CGT is slightly misleading as when it was reduced from parity with Income Tax, various reliefs (based on time over which the investment were held) were also abolished – so previously the real rate for investments held for several years was in fact much lower than 40%. In some respects, simplification was a good thing, but it removed the distinction between people who had held investments for the longer term (to build value etc) as opposed to those who made a quick profit by flipping investments. Arguably, this was not such a great move, but probably pretty good for the fast moving tech sector.

    If you are analysing the parties for electoral benefit to tech start ups, the Conservative plans to stop the NI increase surely merit a mention – as the marginal cost of employing staff is a massive issue for start ups and SMEs in general.

    • Mike Butcher

      Good point.

  • sean

    As there is no chance of the libdems getting this policy through, your point is moot. There are however many good reasons to vote for them. Looks to me like you may have other motivations for posting this…

    • Mike Butcher

      Actually not, I just thought it worth while pointing out. As you can see I don’t particularly favour either Labour or Tory as an alternative.

    • Allix


      re ‘other motivations’: I thought so too when I first glanced through – but I think that that was my own bias prickling.

      On thorough reading, however, I thought it was well balanced and rational. Mike was clearly worried that people would assume bias, hence all the disclaimers and careful on-the-other-hand’s. That said, he may well have thought to write it because of an anti-LibDem political view, but the writing seems unbiased and honest to me.

      Of course, he may well be lying through his teeth, but I’m sure people like Danvers would be all over any factual errors.

      And on the other hand, there’s more to life than start-ups :)

      • Danvers

        Since I’ve been appointed to jump on any factual errors :-) and following Mike’s update I’d just like to point out that the entrepreneurs’ relief only applies to the first £2m of capital gains in an entrepreneur’s lifetime – not the lifetime of the company and as far as I recall (I have not double checked this) it is NOT available to investors (the clue being in the name).

        The way the relief works is that the first four ninths of the gain is taxed at 0% and the rest at the full rate of 18%, which currently gives an effective rate of 10% on the whole lot, so Clegg could be misleading if he means he will keep the 0% rate on the first part but that the remainder will be taxed at the new rate of 50%. Someone should ask him this – but he probably has not really thought about it.

        On the other hand, no one is talking about abolishing EIS, and since when did tech VCs pay CGT in the UK anyway – they are mostly structured off shore?

      • Sean

        So that sounds like it was actually an error.
        I accept that there may have been no ulterior motive, however I still think this posting on a tech blog was ill thought out and inopportune. The timing is questionable and I absolutely agree that there was a need to look at the whole picture in terms of the political choice facing the electorate (notably in terms of whether the UK would like finally to become a democratic state). Additionally, not only the pottyness of the policy but also the likelihood of its ever being implemented should have been considered.
        It seems to me that Nick is a smart guy who’s behind the real economy. Thus even if he called this one wrong and in the highly unlikely event that the LibDems got an absolute majority at the election, he would be open to argument and revise his ideas, because the dynamic efficiency argument is obvious and straight from Econ 101.

      • Mike Butcher

        Next time I will get Danvers to write this post.

      • Danvers

        Heh, would your budget stretch that far? ;-)

  • David Whitewood

    Mark, Nick Clegg has stated NO CHANGES to Entrepreneur Tax Relief.

    The proposed changes to Capital Gains are to deal with those paying CGT on share dealings.

    You might like to check your facts!

    • Scott Allison

      That’s good. Have you got a link for more info on their position on this?

    • Ben Godfrey

      There is no specific mention of Entrepreneur’s Relief in the Lib Dem manifesto, so it’s difficult to verify or invalidate this claim. Contrast that with Labour’s specific pledge to raise the Entrepreneur’s Relief limit to £2M.

      I don’t particularly love this policy, but I think it’s important to see it in a broader context. CGT is indeed abused as a tax evasion technique by many. Right now the biggest threat to entrepreneurs is a severely beaten economy. Labour plans to spend on expensive boondoggles (Trident, biometric passports), while the Tories will slash public spending. The Lib Dems represent a third, more pragmatic approach which reduces spending by rationalising a lot of the public sector.

    • Mark Littlewood

      I am taking that from the Lib Dem manifesto. Just because you heard him say it on a Radio 2 programme, doesn’t mean it is policy…

  • Paul Smith

    “And on the other hand, there’s more to life than start-ups :)”


  • Paul Lomax

    If you think you’re going to be rich, then it’s probably right that you vote Tory.

    If you think you or a loved one will ever be poor, sick, old (or harbour a desire to operate in Europe), maybe you shouldn’t…

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