According to the Guardian (01/03/20) the Chancellor is planning to scrap a £3bn tax relief in a bid to raise cash for an expected increase in public spending in the budget on 11 March.
With the budget just around the corner, Rishi Sunak is expected to target entrepreneurs’ relief (ER), a tax break which halves the capital gains tax paid when people sell their businesses. Under current rules, sellers pay only 10% on lifetime gains of up to £10m, compared with the 20% capital gains tax paid by higher-rate taxpayers.
ER was designed to encourage people to start and invest in small businesses. However, the Institute for Fiscal Studies (IFS) is on record saying “We do not find any evidence that tax-motivated retention of profits translates into more investment in business capital. If one of the aims of reduced capital gains tax rates on business assets is to incentivise individuals to invest more in their businesses, this evidence suggests they are not working.”
I suspect they are right. In my 25 years of helping and working with business owners, not one has ever stated tax breaks on exit as a reason for starting or investing in a business.
I do however wonder if the IFS and Mr Sunak are missing the point and failing to recognise where the real benefit (that there doesn’t seem to be any commentary about) may lie?
Of the hundreds of business owners I have worked with and helped sell over the years, almost all were aware of ER and what it would mean to them, and in many cases ER was a contributing factor in the decision to sell.
When a business owner contemplates an exit, invariably there is a driver behind it; a desire to do something else, retirement, lack of investment to grow or perhaps a recognition that they are no longer the right person to drive the business forward and further its growth.
It is critical, among other attributes, that business leaders are motivated and dedicated for a business to succeed. When business owners feel that have reached the end of their journey, for whatever reason, it may be time to move on and allow new blood, whether individual, corporate, or institutional, to take up the mantle and continue driving the business on.
In my view anything that stands in the way of that cannot be good for business.
It should be remembered that small to medium sized enterprises (SMEs), the very businesses that ER is aimed at, currently employ circa 16 million people in the UK. That’s around 50% of the entire UK working population and 60% of UK private sector employees.
In my experience, whether from a material or psychological aspect, ER definitely impacts on business owners’ decisions to sell. They won’t sell because of it, but they may not sell due to the absence of it.
Businesses changing ownership is good for business, employment, tax receipts and the economy.