Britain’s entrepreneurs and business innovators get generous tax breaks. They should keep getting them.
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
This is madness. Sure, the tax break is generous, but the idea that it does nothing to promote genuine entrepreneurship is simply ridiculous. The IFS claims that it doesn’t make much difference to entrepreneurs one way or another. Really? How do they know? People start a new company for a whole series of reasons, often quite complex, and we will never know for sure what motivates each individual to start out on what is often a very arduous and difficult journey. But the prospect of making a lot of money is definitely part of the mix. More importantly, the lower tax rate is a sign of society’s approval. It is a statement that company founders are doing something socially useful, and we want to encourage them – and that approval also helps persuade many people to try their luck.
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.
Our booming start-up culture
The fact is that since it was introduced the UK has created a booming start-up culture. The number of companies operating in the UK has almost doubled over the last two decades. There are now more than five million private companies, and another half a million new ones are being created every year. In cities such as London, Manchester and Bristol new companies are now among the main drivers of growth and there are hundreds of venture-capital funds willing to give them money. We don’t know to what extent those entrepreneurs have been motivated by the tax break. But given that we don’t know, why risk taking it away?
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.