Business owners have been lambasted by everyone from the prime minister to economic institutes over entrepreneurs’ relief. Accused of sitting on fat piles of cash, then adding more to it through a government hand-out in the form of reduced capital gains tax, there has been a sustained and concerted campaign to target entrepreneurs.
And yes, like every tax incentive, there are those who have been able to effectively exploit the benefit and are already well-off. But that fails to paint an accurate picture of the life of millions of business owners – or reflect the enormous economic contributions their businesses make by taking on staff in pursuit of growth.
Killing entrepreneurs’ relief entirely is not the right thing to do. Revisiting it is. And I sincerely hope the Budget this week reflects that. The vast majority – close to 90 per cent who have used entrepreneurs’ relief have not come anywhere close to the £10m cap imposed on lifetime gains.
Think for a moment about the product businesses and independent stores we all love. These business owners could easily have invested not in jobs, but in FTSE-tracker funds, which are taxed in the same way. But they didn’t.
Instead, they took out loans – often using their own homes as a guarantee, chose not to pay themselves initially, and accepted the sleepless nights that come with worrying about cashflow and being able to make payroll each month.
Why millionaire caricature is wrong
I’ve been there with my first business and know exactly what it’s like juggling cash in the bank and chasing clients for payment. In fact, it inspired my second business Fluidly, which helps small businesses predict when they might need some extra funding to cover cashflow holes.
Only when you’ve been there and had responsibility for people’s livelihoods do you truly understand. These are the real business owners who see their companies as a nest-egg akin to the family home and willingly spurned pension funds in favour of “risking it all”. The caricaturing of millionaire businessmen exploiting the system is spin.
We all benefit from various public services and welfare systems and are fortunate to do so. None of this would be possible without the millions of businesses that pay corporation tax, business rates, employer’s national insurance, and collect VAT.
These mighty financial contributions to the economy dwarf the cost of the relief. But why let context get in the way of a good headline figure, right?’
‘Limit the relief by imposing a £2m cap as opposed to £10m’
How to ‘level up’ entrepreneurs’ relief
Most decisions will have been made by now, but chancellor Rishi Sunak should really consider this before they throw the baby out with the bathwater. I propose we “grandfather it”. Limit the relief by imposing a £2m cap as opposed to £10m.
Secondly, introduce a longer holding period on shares to qualify – entrepreneurs’ relief’s predecessor Taper Relief required over four years against the current two-year qualifying period. Make it five years to encourage business owners to hold and build something sustainable. That cuts out those wanting to make quick wins from businesses being “flipped”.
Finally, a threshold increase on ownership might also work. A business owner currently only has to own 5 per cent of the business to qualify and some have suggested it be raised to 30-40 per cent. I would argue for 10-15 per cent ownership as we shouldn’t discourage use of venture capital funds and other funding instruments designed to help businesses scale fast.
Dilution of shares is something you accept as a business owner in exchange for investment that drives growth in employment and ultimately sales. Yes, the business owners that do raise capital and scale companies faster are more likely to be in the current “elite” group that use entrepreneurs’ relief, but a new lower £2m cap and the longer qualifying period would level that out and cost far less.
Do this and the economy will benefit, good jobs will be created, and owners will have reason to continue valuing the wider societal impact their businesses have. Either that, or we let them funnel any cash they have into tax-efficient funds for their own gain. I know which I’d rather. Get caught up in the negative hyperbole and we’ll regret it.
Further reading on entrepreneurs’ relief