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The tax cut needed to stop Britain's businesses from flying the nest
We must support investors willing to back companies that float on the UK's markets
Alasdair Haynes, founder and Chief Executive Officer of Aquis Exchange Plc
As the global economy slows and the UK heads ever more surely towards a recession, it is imperative that the Government acts now to lay a more fertile ground for UK businesses - and particularly the home-grown success stories of tomorrow.
It is time to be innovative, brave and decisive, stripping back regulation that has for too long held back growth, business and local talent. We must start by changing the tax environment to incentivise public investment in businesses.
Tax cutting in a fiscally responsible and targeted manner can increase income tax receipts down the line, promoting economic growth and increasing the competitiveness of Britain against fast growing rivals across the European Union and further afield.
Between July and September 2022, only eight initial public offerings took place on the London Stock Exchange, far below the 33 achieved in the same period last year. They raised just £565m, putting the UK stock market on course for its worst year in a decade.
On the Aquis Stock Exchange, we have seen only 17 IPOs to date this year, just a tiny proportion of what could be possible, with the right framework.
Great British growth companies too often look to the US venture capital or US public markets to raise finance or "go public" in the scale-up of their businesses, a route taken last year by two of the UK’s life science stars, Immunocore Holdings and Vaccitech PLC, and aviation pioneer Vertical Aerospace.
This is a broadly acknowledged problem and it is of the utmost importance that policymakers and regulators work quickly to create the right investment environment in the UK to stem this flight.
The UK is incredibly successful at supporting investors willing to provide start-up capital, with innovative schemes like the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme. However, these schemes fall short when it comes to scale-up capital and are only available for investment in small companies with gross assets of less than £15m.
To keep our high-quality growth companies, the focus now needs to be on the scale-up stage: the funding our potential unicorns need to scale from seed to maturity.
The largest floats will continue to go to the US venture capital or public markets where they can obtain higher valuations, a dynamic that will not change in the near term. However, the unicorns of tomorrow are far more likely to stay in Britain if they are able to source scale-up capital in a more effective manner.
The current environment restricts the involvement of a critical and foundational source of capital provision via public markets: the public.
The public are not easily able to invest in growth companies when they float, or in secondary fundraises. Regulation is too restrictive and a precedent has developed that stifles access because of the financial promotion restrictions.
As work is done simultaneously through the secondary capital raising review and financial promotion reforms, I suggest that we look into additional tax relief for investors who are providing capital to UK companies at a scale-up stage: incentivising involvement and rewarding participation in this all-important line of funding for the companies that are, and can become, the engine room of our economy.
One such relief could be to offer a special capital gains tax (CGT) exemption to investors who provide capital to UK companies that trade in this country and list on a British stock exchange.
This could be narrowed yet further to provide support to the crucial ‘scale-up’ demographic of companies, by restricting it to businesses being admitted to a registered growth market (the UK has two: Aquis Stock Exchange and AIM); have gross assets and/or turnover of a sufficient size to support an established growth trajectory (while also falling below a maximum size); and have a permanent establishment in the UK.
Capital gains tax is a less significant contributor to the UK government than income tax and VAT, and in the last financial year 45pc of CGT was derived from approximately 3,000 taxpayers (1pc) with individual gains in excess of £5m each.
Adopting this scheme would be unlikely to have a material adverse effect on CGT receipts but rather help increase other tax receipts like income tax, National Insurance and VAT through the successful financing of new growth companies in the UK.
Fair and equal access to the public market gives individuals and fund managers equal opportunities to participate in and benefit from the many growth companies that exist in Britain today.
A healthy public market provides the pool of scale-up capital that we so desperately need in order to keep and develop our homegrown businesses and potential unicorns of tomorrow.
With the right policy and tax levers, it’s the perfect time for us to bring the public back into public markets and provide the scale-up growth the UK so desperately needs.
Liz Truss and Kwasi Kwarteng have shown a willingness to rewrite parts of the tax landscape. Let’s do this in a fiscally responsible way and reap the rewards via the UK unicorns of the future.
This article was originally published by The Telegraph