High Capital Gains Tax (CGT) rates mean some entrepreneurs are no longer motivated to maximise their company’s growth before exiting, according to a report by Brighton accountancy firm UHY Hacker Young.
The figures compiled by UHY suggest an entrepreneur based in the UK selling a business worth $10 million (£6.2 million) would, after tax reliefs and exemptions, pay 9% in tax.
However, if an entrepreneur grew a business from an initial $1 million (£616,124) investment and grew it to the value of $50 million (£30.8 million), the tax paid would increase to 21.8%.
UHY Hacker Young partner Richard Simmons questioned how effective the entrepreneurs’ relief for CGT is.
“The current system doesn’t reward the additional risks an entrepreneur would need to take to bring their business to the next level,” he said. “They would almost certainly need to put a professionalised management structure in place, or take out substantial loans to generate economies of scale or develop new product lines.”
Despite the apparently glum news for expansionist entrepreneurs, the research does suggest those based in the UK are still at a relative advantage compared to others within the G7. The average tax paid when selling a $50 million is 28.6% across this community – 6.8pp higher than in this country.
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However, in the BRIC market the average tax is only 16.7% – creating a more attractive market to grow and sell mid-market companies. Simmons sees this as one among a number of factors that are making the traditionally less fashionable markets more attractive for both entrepreneurs and investors alike.
“Although the UK offers an attractive regime compared to its G7 counterparts, its uneven tax system nonetheless risks acting as a brake on entrepreneurial ambition and stifling business growth,” he explained. “Entrepreneurs that are capable of growing a business from a small size to a substantial enterprise should be encouraged and incentivised when they sell their business.
“High levels of taxes on the sale of a business will drive entrepreneurs to set up in other locations, divert their focus onto tax mitigation structures, or see them starting to run the company to maximise their own income rather than the growth of the company.”