Wednesday 3 March 2021 4:06 pm

Corporation tax hike: Rishi Sunak is on the way to creating a tax environment to stifle innovation

Co-founder and CEO, Railsbank

Last week, Rishi Sunak rightly said that fintech is one of the UK’s big success stories, and that the growing industry needs access to talent, finance and support.

I had therefore hoped for more good news for the sector in today’s Budget. However, it’s been announced that from 2023, the rate of corporation tax, paid on company profits, will rocket to 25 per cent. 

The focus for most fintech start-ups is growth, with profits seen as a longer-term goal. But COVID-19 is changing this dynamic. These companies need to produce profits to act as a buffer in case investment dips and there is less liquidity in the market. 

Although the Chancellor has created a ‘Small Profits Rate’ to ensure only businesses with profits of over £250,000 will be taxed at the 25 per cent rate, the issue is that in two years’ time, many successful fintechs will only just be growing into that bracket and their fledgling profits will be hit hard.

Future tax rises to balance the government’s financial support packages were inevitable. The government borrowed a record £280 billion from April to November 2020, with this figure set to rise significantly to £355 billion next year as a result of the new measures announced in the Spring Budget, such as the extension of the furlough scheme to September 2021.

But Mr Sunak’s announcements do little to limit the impact tax rises will have on those industries that have best weathered the ongoing pandemic. It’s all well and good that fast-track tech visas have been sketched out, but they will only help if the tax environment can help nurture new businesses to host that talent.

The Chancellor went to great lengths to paint the corporation tax hike as a small, pain free bill, which is merely the cost of doing business in a pandemic. Only 10 per cent of all companies will pay the full higher 25 per cent rate. This will still drum up around £47 billion from businesses. Many of them will be those who have had to draw on Government support during the pandemic the least.

The Kalifa Review, published last week, revealed that the UK now holds more than 10 per cent of global market share in the fintech sector, which is worth more than £11 billion a year to the nation’s economy. It has continued to operate without the need to furlough staff, embraced the challenges of home working, and continued to grow against a tide of reduced GDP. I know of fintech companies that have employed up to five times more people, at a time when unemployment has risen sharply, in order to meet the growing demand for digital products and services. 

The government must absolutely avoid stifling an environment that fosters entrepreneurism and digital innovation. It needs to encourage ambitious founders and help start-ups to succeed. Proposed changes to Capital Gains Tax reportedly being considered for Autumn, for example, would see entrepreneurs paying more tax when selling a company or shares, a move that would put off many.

To continue to attract global talent, we must be prepared to invest at grassroots level to enable exceptional people who will continue to cement the UK’s place as the best country to base a fintech. We can do this through grants to universities for fintech-based degrees, additional tax relief for those able to work from home, who have reduced the carbon footprint through less travel to work, and other tax mechanisms which encourage investment and growth in the UK.

The UK is still, and will remain, a good base from which a fintech company can grow globally with the support of the government’s Trade Commissioners. London is also the smart place to float a fintech thanks to the global investor base still active in the City, but the government has to ensure the UK tax environment is attractive to founders so that the talent that starts fintech companies also remains and thrives. 

Sunak’s Budget has attempted to flesh out the government’s “build back better” slogan; the government needs to be careful that it doesn’t destroy some of its most useful building blocks.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.