As we look ahead to 2017 and the Brexit negotiations that will shape our country for generations, the uncertainty currently swirling around the market underlines the need to provide the UK economy with a timely boost. What better way to do so than to invigorate those entrepreneurial SMEs that are a vital domestic engine for growth through a reform of the current capital gains tax laws?
Introduced relatively recently and originally as a tax on gains from short term share trading, capital gains tax now means that those who’ve grown a successful British business are taxed when they want to realise some of the value they’ve created.
The entrepreneurs paying capital gains tax are often individuals who’ve thrown their all at a business while it grows, providing both financial and emotional capital to create jobs, build revenues and deliver a profit. Rather than carving out a regular dividend to support a comfortable lifestyle, they tend to reinvest these profits into the business, growing those staff numbers, increasing trade and creating the success stories that are part of the lifeblood of the UK economy.
Imposing an even greater tax burden on those who’ve taken these financial and personal risks to grow great businesses will inevitably discourage them. As long as we penalise entrepreneurs in this way, they will be more inclined either to take dividends out of growing businesses rather than reinvest them, or simply put their capital to work elsewhere. At the same time, they are discouraged from seeking external investment in their business to accelerate growth, as any stake they sell is also liable to the same tax.
Becoming a ‘serial entrepreneur’ is a less trodden path in the UK than elsewhere and, while there are a myriad of factors behind this, the simple fact is that there is less money to reinvest in new ideas and business for UK entrepreneurs thanks to the corrosive impact that CGT has on the capital value they create.
As a nation, is now the time for us to be putting the brakes on these businesses and taxing their success? Shouldn’t we be maximising and harnessing our entrepreneurs’ drive, zeal and ambition more than ever?
Historically, smaller companies have outperformed larger organisations during spells of economic uncertainty. Entrepreneurs are used to taking risks and making swift decisions and smaller businesses can be more nimble and adaptable. As larger companies take longer to adjust to the UK’s new global position post Brexit, the British economy and will need these businesses to shoulder more of the burden.
The next decade is not going to be easy but removing capital gains tax for entrepreneurs either permanently or for an extended period during these challenging times will provide a boost for SMEs and a mechanism for buoying the rest of the economy.
In America, there is a reputation for being ‘heroic’ if you have attempted to set up your own business and failed – “oh well, at least you tried” is the prevailing mentality.
The UK is lucky enough to have a broad and deep vein of entrepreneurial talent able to exploit the opportunities that inevitably arise from dislocations such as Brexit.
A long overdue reform of CGT could provide both the encouragement they need and the spur to the economy from which we all stand to benefit.
Wol Kolade is the managing partner of Livingbridge.
Related: Entrepreneurs deterred from maximizing growth potential by high CGT rates
