As Brexit negotiations potentially jeopardise our links with important trading partners there’s an urgent need to give our economy a boost – and SMEs are a vital domestic engine for growth.
As a nation we should be making the most of our entrepreneurs’ drive, not putting the brakes on. But arguably this is just what the government are doing by taxing their success.
Addressing the tax on growth
Originally introduced as a tax on gains from short term share trading, capital gains tax now means those who’ve grown a successful British business are taxed when they want to realise the value they’ve created.
Lack of clarity on the purpose of capital gains tax means it is prone to be change from one budget to the next, often in increasingly complex ways. It means entrepreneurs do not feel consistently supported by government. It makes it difficult for business owners to plan beyond the next autumn statement. And one could argue the amount raised is relatively small when you take into account the cost of administration and its affect on small businesses.
Supporting the courageous
Entrepreneurs paying capital gains tax are often individuals who’ve thrown their all at a business while it grows, economically and emotionally.
Rather than carving out a regular dividend to support a comfortable lifestyle, they reinvest their profits into the business – growing staff numbers, increasing trade, and creating the success stories that are part of the lifeblood of the UK economy.
Breaking the barrier to building businesses
Taxing those who’ve taken these financial and personal risks to grow great businesses will inevitably discourage them. Their gains are hard fought and it weakens entrepreneurial confidence if they don’t feel encouraged to fight for them.
As long as we penalise entrepreneurs in this way, they will be encouraged either to take dividends out of growing businesses rather than reinvest them, or simply invest their capital elsewhere. At the same time they are discouraged from seeking external investment in their businesses to accelerate growth, as any stake they sell is liable to the same tax.
Encouraging the serial entrepreneur
Capital gains tax discourages entrepreneurs from going on to start another company as their profits are eroded each time they realise them, giving them less to reinvest. This may be one of the reasons that the UK is felt to have a shortage of serial entrepreneurs. By actively encouraging entrepreneurialism, the UK could also become a global nerve centre for exciting new businesses, attracting innovative founders from elsewhere.
A shot in the arm for post Brexit growth
SMEs contribute 47% of all private sector turnover, and 60% of all private sector employment according to the DTI. And they will need to shoulder more of the burden as larger companies take longer to adjust to the UK’s new global position.
Smaller companies are well placed to outperform larger organisations during recessions. Entrepreneurs are used to taking risks and making swift decisions and smaller firms can be more flexible in enacting them. And it is the larger companies which are more prone to reduce staff numbers during economic downturns. Government workplace surveys showed that during the last recession, nearly 30% of large companies brought in compulsory redundancy, over 20% voluntary redundancy and nearly half enacted a temporary freeze on recruitment. In comparison 25% of SMEs made compulsory redundancies, fewer than 10% voluntary redundancies and a quarter enacted a temporary freeze.
The next decade is not going to be easy, whatever direction Brexit takes. Removing capital gains tax for entrepreneurs during these challenging times will provide a boost for SMEs and a mechanism for buoying up the rest of the economy. The UK is lucky enough to have a broad and deep vein of entrepreneurial talent, ready and willing to exploit the opportunities that inevitably arise from dislocations such as this one. Let’s do what we can to help them.
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