Entrepreneurs are crucial to growth: the tax system must support them

PAUL GEDDES, CEO of Evelyn Partners

At this week’s International Investment Summit at the Guildhall, the Prime Minister vowed to do everything in his power to “galvanise growth”, correctly recognising that “private sector investment is the way we rebuild our country and pay our way in the world”.  These are views which will be widely welcomed by businesses, the City and international investors. 

Consistent with this commitment, it is important that the Government protects the UK’s global reputation as a place where entrepreneurs feel empowered to launch and invest in small and growing businesses.

The Government undoubtedly faces some very difficult fiscal choices at the Budget on 30 October and tax raising measures are rarely popular - but it is vital that tax reform must not undermine the economic dynamism which the Government has placed at the centre of its agenda.

We point the Chancellor towards our new research among owners of UK businesses with turnover of over £5 million who were surveyed just a fortnight ago. It reveals that higher rates of capital gains tax would deter 46% of business owners from starting a new business in the UK, and that an even higher proportion (48%) would consider moving abroad if the UK tax environment becomes harsher.

This is why we would urge caution in respect of increases to CGT to avoid stifling entrepreneurialism and investment, and we urge the Government to ensure that the UK remains a globally competitive country for setting up businesses. This is especially the case because the potential gains in revenue from raising CGT are suspect. HM Revenue and Customs itself has estimated that a small CGT rate rise would draw in minimal amounts and a 10 percentage point increase would actually reduce revenues by about £2 billion by 2027/28.

The Government is putting measures in place to drive greater institutional investment into UK growth businesses, infrastructure and equities, including the creation of a National Wealth Fund, bolstering the Office for Investment and through pension reform. But the thousands of small and medium-sized businesses that sit at the heart of communities up and down the UK are in many cases fueled by personal investments, often from founders themselves. The entrepreneurial spirit drives owner-managers and investors to take creative risks and put their own money into growth projects – but that spirit must be carefully nurtured and not stifled. 

It’s crucial to recognise that capital gains are not the same as income. Investors commit resources to creating businesses and often shoulder years of uncertainty and potential losses, before seeing a return on the risks that they have taken. During those years, inflation significantly erodes the real value of assets and the capital gain from them. The reward for this currently is a lower tax rate when they come to sell their assets than on the regular, defined, low-risk income that many of us enjoy from salaried work. Without that reward the risks might not be taken in the first place.

Our survey results confirm what we know from the business owners that Evelyn Partners advises: that a significantly higher rate of CGT could have a number of damaging effects. It would not just disincentivise many entrepreneurs from investing in the first place, it would deter many from selling up and reinvesting in more productive ventures and could also drive some to leave the UK for lower-tax jurisdictions.

Many businesses and their owners are now globally mobile, far more so than even five years ago. Any nation that sharply raises taxes on investment returns must recognise it could export growth potential to more business-friendly destinations. This would prove self-defeating for the economy and ultimately the tax receipts necessary to fund vital public services. 

Our suggestions to nurture business owners and spur UK growth are threefold:

• Consider very carefully the wider effects on the economy and productivity of raising the rate of CGT. If there is to be any increase, CGT rates must be kept well below income tax rates in order to remain globally competitive.
• We would encourage the Chancellor to consider reforms that support entrepreneurialism and long-term investment, such as reintroducing indexation of capital gains so that investors are taxed only on real gains after inflation.
• If Business Asset Disposal Relief is to be scrapped or diluted, then it must be replaced with alternative protection for owners and investors who have grown and built firms over many years and then realise a substantial capital gain.

We applaud the pledges of investment that the Government obtained at this week’s summit, but a commitment to boosting growth requires an environment that supports domestic business creation as well as attracting large, global investors. Entrepreneurs will not take risks that create wealth and jobs if we tax away the rewards of doing so.