Should we replace entrepreneurs’ tax perks with employee ownership?

The chancellor could well abolish entrepreneurs’ relief in the Budget. We could use some of the tax savings to create more worker-owned businesses, says Merryn Somerset Webb.

With a new chancellor and a new virus on the go, second guessing next week’s Budget is rather harder than usual. But one thing that appears to be becoming consensus is that entrepreneurs’ relief will be scrapped. 

The relief, which allows company owners to sell up and pay a reduced rate of 10% (against 20%) of capital gains tax on up to £10m of gains, costs the Treasury around £3bn a year in lost revenues. Detractors say that’s too much: it’s expensive and benefits very few people. 

There’s also little evidence that it encourages entrepreneurs to get started in the first place: 84% of those who claim the relief they were unaware of it before they started their companies; a mere 8% said it made a difference to their decision to get going in the first place; and the majority of those using it were selling up to retire (something they were going to do anyway!). 

Finally, while the relief has been tightened up several times, it does have a history of being exploited: there was a day when constantly starting and closing companies was a neat way for contractors to effectively avoid income tax.  

On the other hand, optics matter. Britain is supposed to be telling the world it is open for business. This doesn’t look great – and it isn’t nice for those who, as one protest letter to the chancellor put it, “have deprived themselves of salary and more importantly pension payments on the assumption that the exit of their business will yield a gain, and have based their plans on a 10% rate up to £10m”. 

You may say those people should never have let the tax tail wag the income dog. But still, one way out might be a grace period – something that would allow any deals in the pipework at the moment to work their way through under the old system. 

How about a year, says Chris Etherington of RSM? That “would provide enough time for most transactions to complete ahead of ER’s abolition and could result in a windfall year for the Treasury in revenue receipts as business owners will likely seek to accelerate the sale of their businesses.” Think of it being more like a signposted exit route than an unexpected trapdoor. 

How to get more employees owning their company’s shares

Bull has one other idea. Perhaps, he says, some of the entrepreneurs’ relief savings could be put behind a new drive to encourage employee ownership. We like his thinking, and I’ve written about it before

The idea is to consider the success of Margaret Thatcher’s privatisation campaigns. Their egalitarian spirit – most applications were limited to a few hundred shares in order that as many people as possible could participate – introduced popular capitalism to a generation. The number of individuals owning shares tripled to nine million in the 1980s. The success of pension auto-enrolment has built on that, making almost everyone in work a shareholder. 

We could take this further by adding an employee shareholder element into auto-enrolment – allowing a small percentage of the employer contribution of listed companies to be given in company shares paid directly into employees’ pensions, perhaps with an extra tax relief bung along the way. 

This would be relatively simple; inoffensive to employers (auto-enrolment has to be scaled up anyway); reasonably fair to employees (those at unlisted companies would still get the same pension contributions, just invested in the usual portfolio); and easy for employees (everyone loves a default benefit). It might also give all employees some sense of actual ownership of real shares, something that could really make a difference.

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