There were not many things Gordon Brown got right in his 13 years in government. But one thing he can claim credit for is the entrepreneurs' rate of capital-gains tax (CGT). Introduced in 2008, it allowed anyone who sold a business they had started themselves to only pay 10% in capital gains tax on the proceeds compared with 20% on any other capital gains. It was one of the most generous tax breaks offered in the world. In many other countries, the state would take 30% to 40% of anything made by company founders. In France, the rate briefly went up to 75%, which made it hard to understand why anyone would bother.
But the entrepreneurs' tax break is starting to come under attack. The Institute for Fiscal Studies think tank has just published a report calling for it to be scrapped. It argues that the relief costs the government £2.4bn a year in uncollected tax. According to the study, all the tax break has done is encourage rich people to pay themselves through a company and pay a lot less on their earnings than they otherwise would have done. In short, it had turned into yet another tax scam. That was echoed last week in evidence to MPs from Sir Edward Troup, the former head of HMRC, who called for it to be abolished.
A simply ridiculous argument
As with any tax break, there is no question it is sometimes used by clever accountants to reduce tax bills. But it is relatively simple to tighten up on the rules to try and stop shell companies being used simply to exploit the scheme (and the rules on property and investment companies and share options are already quite tightly written to prevent that). In truth, every tax break is exploited by smart accountants in one way or another. If that is an argument for abolishing them, then very quickly there wouldn't be any left at all.
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Thanks to entrepreneurs' relief as well as the Enterprise Investment Scheme, which gives hugely generous tax relief to anyone investing in a new, small company; and the even more generous Seed EIS for really new businesses; and the "patent box", which allows those businesses to set the cost of researching and developing new products against their future tax bills the UK is arguably the most welcoming major economy for entrepreneurs. The result? Hundreds of thousands of new businesses and record employment rates as those companies start to employ people. It would be crazy to put that at risk now. Indeed, if we want to make a change, why not slash the CGT rate for company founders all the way down to zero? That would really send a signal that the UK was the best place anywhere in the world to start a company.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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