Taxation and the Entrepreneur
Insights by Peter Watson.
With a flurry of deal making in advance of the Budget on 30th October I have been thinking quite a lot about Entrepreneurship, and the taxation thereof.
Entrepreneurs’ Relief was originally introduced on 2008 in response to the scrapping of taper relief (a similar type of relief) and the removal of indexation allowance (a way of calculating appreciation in asset values due to inflation alone). It gave an effective Capital Gains Tax (CGT) rate on sale of 10% for many small business disposals. The relief has been tinkered with by successive governments, increasing or reducing the ‘lifetime limit’ which now stands at £1m and is currently known as Business Asset Disposal Relief (BADR).
The rate of CGT itself has also attracted political attention. Having been (broadly) 30% since 1965 this was reduced to 18% in 2008, then increased to 28% for higher taxpayers in 2010, then brought back to its current levels of 10/20% (lower/higher) in 2016.
It has been said that no Entrepreneur starts a business as a direct result of the tax regime on sale, and that is highly likely to be true, but having spent the last 25 years speaking to small business owners and Entrepreneurs – the ability to make substantial capital sums is absolutely a key motivator.
It takes a lot of courage to start a business, to dispense with the regular income on the hope of future success – with the knowledge that many won’t succeed. But starting new enterprises is a key driver of economic growth and we should be doing everything we can to help make this happen.
I have also been aware of the natural lifecycle of a business, often allied to an owner’s stage in life. There comes a time in most businesses where new management and impetus is required. Encouraging the transfer of ownership can be an essential part in the future growth of businesses (and hence of the UK as a whole).
I fear that were the BADR to be removed, and/or CGT rates increased, this would be another barrier in the road for entrepreneurs (many of whom can and will move to other locations if necessary) and furthermore will put a pause on acquisition activity, which is not just bad for Prism, but also for the UK economy. The progressive increases in tax on dividends has already narrowed the margins between being an employee and being a business owner. The latter frequently put substantial elements of their personal capital at risk so there has to be some incentives through the tax system otherwise people just won’t take the risk.
It is perhaps not surprising that recent business confidence has fallen but let’s hope that sense will prevail. We will be listening to the Chancellors words closely on Wednesday 30th October!
If you are considering selling your B2B software or IT services business then do join on of the live webinars we are hosting in October. We will be sharing insights from our 20+ years of M&A experience to help you make your business more attractive and increase its value: www.prismcorporatebroking.com/our-webinars
Whether you are thinking about selling or acquiring a tech business, I would be happy to discuss your plans and next steps – book a meeting slot in my diary for a free, confidential and no obligation 1-to-1 Chat: https://calendly.com/peterwatsonprism/1-to-1-chat