The chancellor has 'missed an opportunity' to stimulate business growth by hitting investors with a rise in capital gains tax (CGT), it has been claimed.
In his first Budget as chancellor, George Osborne
announced a number of measures to support entrepreneurs, including a National Insurance holiday for start-ups outside of London and the South East, and plans to reduce the small firms rate of corporation tax from 21% to 20%.
Furthermore, following widespread concern that the rate of capital gains tax (CGT) would be increased to 40-50% to tackle the deficit,
which sparked a number of petitions from entrepreneurs, the chancellor announced that CGT for higher rate taxpayers would increase from 18% to 28%.
Osborne, who said he was "acutely aware of how important it is to protect the incentives to succeed in business and to innovate" and had "listened to everyone's views" also increased Entrepreneurs’ Relief from £2m to £5m, giving business owners a rate of 10% on their first £5m of gains over a lifetime.
However, the government has come under fire for failing to offer any concessions for the investors that support business growth as well as entrepreneurs themselves.
Jos White, co-founder of email security business Message Labs and a partner at investment and advisory firm Notion Capital told Growing Business: “The government has been far more restrained than everyone expected on CGT, but it also hasn’t done a great deal to actually improve things for entrepreneurs.
“Putting the lower rate of lifetime earnings at £5m may be a good headline and nice sweetener for entrepreneurs themselves, but I’m not wholly convinced that it will do much to drive real business growth. Entrepreneurs will still focus on the CGT increase rather then the exemption as they are very ambitious people and will look beyond the £5m figure when weighing up the UK versus other markets as a good place to start a business.”
White added the government should have incentivised venture capital and early stage investors, which "provide important fuel to growing businesses", rather than "lumping them in with private equity and hedge funds, which are about financial engineering rather then economic growth".
“Overall, the budget is not as bad as I had feared and it does provide some nice protections and incentives for entrepreneurs. But the main problem is that entrepreneurialism and small business growth doesn’t just come from the entrepreneurs – the investors who enable their businesses to come to market are equally as important for economic recovery,” he said.
“If you sweeten the pill for entrepreneurs but punish those who invest in them you aren’t going to help businesses grow, in fact you are more likely to stifle them. This is the second CGT rise in three years, hitting investors with an overall tax rise of 18%.”
White said he was concerned that this rise, combined with strict regulations coming out of Europe, risked pushing investment into other areas and funds overseas.
“The government should have looked at the complete picture in order to build the ecosystem required to support smaller and growing businesses. In taking a piecemeal approach which penalises early stage seed and venture capital investors, the government has sucked some of the life out of entrepreneurial growth and success.”
Askar Sheibani, CEO of IT and telecoms repair service Comtek, agreed that hitting investors with a CGT rise was potentially damaging to the UK economy.
“The chancellor says he wants to show that Britain is ‘open for business’, but increasing capital gains tax will only frighten off investors and lead to further stagnation in both the economy and the jobs market,” he said.
“If George Osborne had set CGT at the low levels seen in the world’s most vigorous job creating economies, the government could have attracted early stage seed capital and venture capital investors to the UK. Keeping CGT low would have attracted equity, created jobs and ultimately generated more revenue for the government.”
Sheibani also disputed Osborne’s claim that the Emergency Budget was “progressive” and questioned whether the package of spending cuts and tax rises would lead to economic recovery.
“It is clear that the budget is a very naive one that fails to address the complexities of the situation Britain finds itself in today. There’s nothing innovative about cutting costs and raising taxes,” he said.
© Crimson Business Ltd. 2010