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Mar 8, 2020

The Tories can’t be serious if they scrap entrepreneurs’ relief

written by Lisa Eason

It seems the government plans to scrap entrepreneurs’ relief in the budget on Wednesday. This would be a damaging move that sends a terrible message to risk-takers — especially those running scale-up companies that add the most economic value.

The tax break, which allows founders to pay 10% capital gains rather than 20% on up to £10m, was introduced by a Labour government 11 years ago. If the current administration abolishes it, I would question whether the Tories actually want to encourage investment and business at all.

There is a specious theory that the tax break “costs” the exchequer £2.4bn a year — not a vast sum in state spending terms. Moreover, entrepreneurs’ relief arises only on the disposal of a business asset, which almost invariably involves discretion around timing. Many entrepreneurs simply do not sell their companies if the capital gains tax is too high, so no relief is paid. Or they devise other mechanisms, such as becoming tax exiles, to avoid it altogether. I believe that cancelling entrepreneurs’ relief would end up raising less tax, not more — rather like the fatuous increase of top-rate stamp duty on housing transactions to 12%, which paralysed the market for house sales of more than £2m.

Entrepreneurs frequently make big sacrifices to build their companies: they forgo salaries, pensions and dividends, they provide personal guarantees, they invest to expand. They defer shorter-term rewards in the hope of a long-term benefit — which now may be snatched away by the taxman.

I have no personal stake in this: I used up my entrepreneurs’ relief some years ago. However, many other founders I know have worked for years — sometimes decades — hoping to benefit ultimately from the sale of their businesses. I imagine many will change their behaviour, leading to less overall tax revenue, less investment, fewer jobs and diminished innovation.

A large proportion of the proceeds received by entrepreneurs thanks to this tax break is channelled straight back into new ventures. Serial entrepreneurs are much more common than 20 years ago. They are a vital part of the enterprise ecosystem, providing not just funding but experience to growing companies, making them more likely to succeed.

Unfortunately, civil servants in the Treasury pay too much attention to left-leaning think tanks such as the Resolution Foundation, which has criticised the tax break. I suspect I know more about how entrepreneurs behave than these critics do. A letter from 167 entrepreneurs objecting to the possible change was sent to the chancellor recently. In their election manifesto, the Tories promised a consultation on changes — they owe it to entrepreneurs to conduct that process.

Sadly, HM Revenue & Customs and civil servants seem obsessed by alleged “abuses” of the tax system. They fail to see the big picture. Entrepreneurs create the jobs and pay the tax that make the economy function — without their innovations and willingness to take the plunge, we would all be significantly impoverished.

A key part of the entrepreneurs’ relief scheme is the enterprise management incentive arrangement for employee share options. If a company has fewer than 250 staff and less than £30m in assets, these options will suffer only 10% tax on any gain. This enables early-stage ventures to attract the best talent and compete for highly-skilled recruits with corporates that can offer higher salaries. This element must be preserved if Britain is to retain its crown as champion of Europe’s tech venture scene.

A number of countries have no capital gains tax — New Zealand, Switzerland and Taiwan among them. None is a tax haven. No one is lobbying to scrap the levy: entrepreneurs understand that they receive a special tax break because their efforts to develop new companies generate the wealth that enables the entire system of welfare and redistribution to operate. The bureaucrats whispering in ministers’ ears do not understand the fundamental concept of high risk/high reward. This is the bargain every founder strikes. Of course, most are not only motivated by the financial prize, but snatching it away now would have a chilling impact on the entrepreneurial ecosystem and possibly provoke an exodus of talent and capital abroad. The government should be boosting our enterprise culture — not impeding it.

I hope the chancellor demonstrates that he is on the side of the wealth and job creators.