Should UK based startups vote LibDem? Probably not.

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.