How fear of change drives business behaviour

We often note that people react to financial incentives faster and more efficiently than governments seem to think possible.

Anyone in any doubt need only look to Scotland, where one poll that puts separation on the cards has already led to what appears to be extensive capital flight from Scotland. But I noticed another very clear example this week.

The Times ran an article headlined “Election jitters make it time to sell up”. The story wasn’t about the referendum. Instead, it was about entrepreneurs’ relief.

Under the current government, anyone who starts a company and then sells it on gets a preferential capital gains rate of 10% (against 28%) on the first £10m they make. Under the last Labour government (which actually introduced the relief), that number was £2m.

The worry now is that if Labour wins the next election (pretty much a given if David Cameron gets the blame for losing Scotland), they will cut back to the original rate.

The result? There are “a large number of deals in the pipeline that will be completed in the next 6-9 months”, says Jonathan Boyer of KPMG. “For many, the election is a deadline, because they fear a loss of entrepreneurs’ relief”.

Labour says there is nothing to worry about. Maybe there isn’t and maybe there should be (giving relief without a time-scale doesn’t encourage the build up of long-term holdings or family companies).

But either way, the story works as a nice reminder that it isn’t just changes to a tax regime that shifts behaviour, the mere threat of those changes can do the same.

Which (going back to Scotland) might be why a series of property experts turned up on BBC Radio Scotland today (about 01.06 in), noting that a large number of property deals in Scotland are now coming with contracts complete with a clause allowing cancellation on a Yes vote.