'Acquisitions will be difficult' - Channel reacts to purported tax hikes

As the government considers significant raises on business, the channel ponders on what it might mean for consolidation and for entrepeneurs

Marian McHugh
@MarianMcHughCRN
07 September 2020

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A potential increase in capital gains tax could hamper M&A in the channel, industry experts have told CRN.

Chancellor of the Exchequer Rishi Sunak is reportedly contemplating hiking corporation tax from 19 per cent to 24 per cent to shore up £12bn in the public purse, as well as reforming capital gains tax so that it is paid at the same rate as income tax, The Times has said.

Some channel figures accept that taxes will need to be increased in order for the economy to recover but are wary of the numbers being bandied about.

Stuart Fenton, founder and chairman of Microsoft partner QuantiQ, told CRN that the rumoured tax increases could hamper his own firm's M&A plans.

"If capital gains tax increases on business activities, M&A will slow," he elaborated.

"It will be more favourable to set up businesses outside the UK, and entrepreneurs will not want to sell their companies because of the tax levels. Conversely, other businesses won't be able to buy businesses, because they will not be for sale. This will stifle investment and growth.

"For QuantiQ, this means acquisitions will be difficult. We have performed brilliantly over the last years including the pandemic period; our cash reserves are strong, plus we can raise cash incredibly easily now.

"VCs and PE firms are awash with cash and spending like crazy. So we and these investment firms will find it more difficult to acquire because proceeds from sales will no longer be interesting to business owners."

Increasing taxes is a "key" way to raise government revenues but there are other ways of raising taxes that wouldn't hinder business growth, Fenton continued.

"I feel that other measures available to Rishi Sunak are more preferable because they do not stifle the economy," he stated.

"For example, capital gains tax on second homes may increase home sales before November. This could give more people the opportunity to buy their own home and increase tax yields after that time."

Darren Spence, MD of Boost Performance Technology, agreed with Fenton's assessment that any ramped-up levies will hamper M&A activity in the channel and suggested that raising taxes over a period of years, rather than a sudden spike, would be more effective in economic recovery.

"While the economy is still very fragile at the moment, it is even more important than ever to make sure that there is sufficient liquidity to see us through any kind of future downturn," he said.

"But if you start taking money out of companies by way of corporation tax, all you're doing is taking that money away from other uses, such as investment in employees or in other growth initiatives, whether that be through sales, marketing activities or acquisition.

"It seems a bit premature. On the one hand, we've got rising unemployment and there's a big ask from the government to make sure that organisations are doing everything they can to retain and hire new staff. But by the same token, they're taking away the mechanism to do those things, which is access to cash."

Simon French, chief economist at corporate investment bank Panmure Gordon, said that the reported levies would be "headwind" for the country, suggesting one alternative to the increases would be to place a tax on those companies that saw profits soar as a result of the pandemic.

"The impact of increases in the marginal rate of tax on profits and/or capital gains is to reduce the incentive to grow/ enhance margins through increased productivity," he told CRN.

"As such increasing the tax take across these two levies when these are already under pressure due to the disruption of COVID would be headwind to the UK economic recovery - and stifle investment in a sector we know is likely to create much-needed jobs.

"[It would be] much better - if the government is seeking to raise revenue - to introduce a windfall tax on those companies that have made supernormal profits due to the disruption of COVID."

Taxing big tech

Dan Bailey, co-founder and director of Leeds-based Altinet - which was recently sold to Arrow - believes that tax increases are a necessary evil for economic recovery but that a "balance" needs to be struck in how the Treasury intends to divvy out these hikes.

"There are no two ways about it, we're going to have to pay for some of the very expensive measures from COVID and the only way to do that is to is to raise taxes," he told CRN.

"If you're an entrepreneur, then you have the best chance of being successful if you have an economy that is strong and has the most people in employment. That for me would be the number one goal - to make sure that we've got an economy that's on a strong foundation in recovery.

"I think we're going to have to put some trust in the government that they will increase taxes but not in a way that is too onerous and stifles too much of that entrepreneurial spirit that will help us to get out of this situation."

The government must also consider the difference in small, homegrown UK businesses and the large multinational organisations that operate in the UK but pay little in direct tax, he added.

"I really don't like the argument that these large tech firms might have paid very little in corporation tax, but look at all the money they paid or contributed in tax indirectly, in terms of income tax to their employees and things like that," he explained.

"We contribute income tax for our employees by creating jobs, but we still pay corporation tax to a much higher rate, percentage-wise. I think that this can be a good opportunity to find a better balance and to look at some of those multinational companies and ask ‘Does that reflect what is fair now?'"

An increase in capital gains tax shouldn't hamper the entrepreneurial spirit of the channel, he added, citing that the levy wasn't a factor when he and his co-founder were setting up Altinet.

"I don't think when we started the company we were looking too much at the rates of capital gains tax we would have to pay if we sold the business," he stated.

"I don't think that an increase in capital gains tax should or would deter people from being entrepreneurial. The thing that would do that more, at the moment, is the uncertainty around what the future looks like in the economy because you definitely do take a big risk when you start a business.

"The only way that you can really have a successful business in the UK and be entrepreneurial is because we have the society that allows you to do it and part of that is giving back in taxes."