If Chancellor George Osborne raises capital gains tax (CGT) next week, it could have major implications for entrepreneurs, argues Alex Macpherson, head of the ventures team at Octopus Investments.

If Chancellor George Osborne raises capital gains tax (CGT) next week, it could have major implications for entrepreneurs, argues Alex Macpherson, head of the ventures team at Octopus Investments.

One of the most controversial moves the new coalition government has made is announcing plans to raise the rate of CGT from 18 per cent to a level ‘in line with new income tax rates’. Most of the ensuing discussion and press coverage has been centred around the potential impact on investors. However, this possible rise has major implications for UK entrepreneurs. It prompts questions about how best to support a culture of entrepreneurship in the UK.

CGT has long been a thorny issue, understandably so, being applied to assets that may have taken years to acquire and build, from property to shares. For savers and investors, this can impact on retirement plans and future legacies. For entrepreneurs building a business, it can cut right across their efforts, inhibiting the ability to progress and undermining long-term visions and goals.

Many entrepreneurs take salaries well below their market rate in the early years of building a business. That helps keep money inside the company, increasing its growth potential, and it frequently means taking on more staff in order to facilitate that growth. The idea is that the founders will see reward eventually through capital gains: but their commitment is for the long term.

Clearly a rise in CGT does not complement this approach. And it could have a more far reaching negative impact, not only on entrepreneurs but the government and economy if those entrepreneurs are discouraged from taking on the considerable risks they face in starting and building a business. What is at stake is the incremental benefit to the government of employment-related taxes from additional employees and corporation tax as the entrepreneur’s business grows.

No one is denying that each successive UK government has its work cut out in trying to tackle national debt and arrive at taxation that can be reasonably be borne by both business and consumers. But given that UK entrepreneurship is such an integral part of the future economy, and can bring tangible benefits to both business and consumer sectors, it would make sense to ensure tax legislation takes entrepreneurs’ needs into account.

What are these needs? In short what entrepreneurs need is support – whether that comes in the form of funding, advice or government policy. The UK’s entrepreneurs want to see an environment that enables them to deliver on their objectives and does not tie their hands through regulation and red tape.

The acuity of the issue for this community is reflected in the extent of resistance they’ve shown to the planned CGT rise. The government has received numerous and lengthy petitions from VC industry groups. It can also take into account the weight of evidence against it which has been produced by the British Venture Capital Association (BVCA). Its recent Emergency Budget Submission sets out the case for maintaining a stable and competitive tax framework, particularly on capital gains, with a view to ensuring that Government policy does not undermine the private equity and venture capital industry.

Creating an environment conducive to enterprise means assisting not only those who are starting and growing businesses but those that have exited. It is a major loss if successful entrepreneurs leave the UK in reaction to high taxation. Conversely, it is a benefit to the future economy if they stay and set up successive new businesses. It is also a benefit to entrepreneurship in general if experienced businesspeople can be encouraged to mentor, support and invest in the next generation of entrepreneurs.

An integrated approach to CGT, which tackles how it affects entrepreneurs, business investments, and investors, for both listed and unlisted businesses, is what’s needed to ensure that entrepreneurs and their companies get the support that they need. Tax policy needs to reflect the aim of creating world-beating global businesses in the UK.