Read an interesting piece in the Financial Times today. Headline: ‘The capital gains tax change will not deter enterprise’. The cover line stated ‘Entrepreneurs do not deserve tax breaks’, which pulled me in.
The author, John Kay, points out that capital gains tax has been in an endless state of flux since being introduced in 1965 and that when it hit 10% it became one of the lowest rates in the developed world.
He cites figures that show the number of new businesses registering for VAT and opening business bank accounts have been rising – but slowly enough to suggest the tax incentive did not influence those who chose to start-up.
He also suggests the heady and headless enthusiasm of the dot com boom at the end of the last century, which saw figures peak, merely skew the overall trend. He puts it down to the general up-turn in the economy since Labour came to power in 1997.
All arguably true. And in that context, the suggested whimpering of entrepreneurs would seem somewhat trite. After all, those of you who started your own companies and plan to sell at some point in the future – assuming the proposed flat rate is introduced and remains – will pay 22% less tax on the sale of your asset than you would have done pre-1998.
However, it’s not as simple as that. While Kay asserts that entrepreneurs will find the grass is not necessarily greener in the US, should they decide to up sticks and leave the country in search of a more amenable climate, he also claims the entrepreneurs who benefit today are rich and successful enough to be able to pay a higher rate anyway.
He aligns the alleged plight of the entrepreneur with that of Chelsea and England captain John Terry, who, while deserving of reward for his unique abilities, is rich enough to pay his fair share to the taxman.
What this fails, in my view, to recognise, is that many entrepreneurs make more financial sacrifices in growing their businesses than the likes of doctors and footballers in achieving their respective successes.
Many of you put your houses on the line, take no salary in the early stages after start-up, plough your own cash into the venture and reinvest profits. In doing so, you spurn the opportunity to provide for a pension. In creating employment and driving the economy entrepreneurs make tough call to consider their businesses a pension fund in itself.
John Kay asks for a compelling demonstration of widespread economic benefits. Look around, they’re everywhere. Without growing businesses the economy would be nothing and unemployment would rife. While nobody asks entrepreneurs to fail to provide for their futures we should all be grateful they make that call. And that’s why taper relief on the sale of private businesses continues to make sense.