Craig Alexander Rattray says the government needs to treat SMEs more positively
SMEs are the lifeblood of the UK economy. The owners of many of these businesses have been the risk takers and the creators. They have created thriving profitable businesses, perhaps having taken the risk to leave employment themselves, and to employ others often to their own short-term detriment.
In many cases the business owner is the last person to be paid after employees and suppliers. It is something I have seen many times over the last thirty years.
It has been said that the definition of an entrepreneur is a person who gives up working 35 hours a week for someone else to work 80 hours a week for themselves, at significantly lower pay.
Whilst that may be an extreme exaggeration, numerous business owners have taken lower salaries, and invested in people and infrastructure, focused on the longer term and the day when they sell their company.
Many of them have shown their entrepreneurial flair and grown businesses of scale from a standing start. During that journey they have paid significant employee and corporate taxes.
We need more of these entrepreneurs to drive us out of the recessionary state and the damage caused by the pandemic, and to return us to previous economic levels, and indeed to grow significantly from that and to improve our low levels of productivity.
According to the latest statistics from a House of Commons Briefing Paper in January 2021, there are 5.937 million companies with fewer than 50 employees, employing 13.3 million people, with the larger SMEs represented by 36,000 companies (50 to 250 employees) and employing a further 3.5 million people.
And how have these wealth creators and employers been treated by the government?
In my view, badly.
Yes, the government provided support quickly with Covid-related loan schemes and the “furlough” scheme. However, these loans need to be repaid, and the furlough scheme, while fantastic to keep people in employment, was of no direct financial benefit to the owners. In many cases it merely kept people off the unemployment register.
A retrospective change to Capital Gains Tax in March last year with the introduction of Business Asset Disposal Relief, reduced the lifetime limit (previously Entrepreneurs’ Relief) at the 10% band from £10 million to £1m, effectively meaning a reduction from £20m to £m for a married couple.
No taper relief. No reduction based on how long a business had been owned. No time to make changes.
That was a dreadful decision.
Change taxes going forward – that is fine, but do not create rules and part of the way through the “game” decide to change those rules.
How is that fair to the business owners who took risks, and invested and paid taxes, under those existing rules?
We know from history that crises have created opportunity and resulted in advancements in technology and changes in the way we operate, usually of significant benefit to the economy.
We need that now.
Buy why should entrepreneurs continue to take more risk and take a long-term view when their future tax burden can change overnight?
The Office of Tax Simplification (OTS) was asked by the Chancellor in July 2020 to carry out a review of Capital Gains Tax, to “identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent”.
The OTS produced its 135-page report in November 2020 “Capital Gains Tax Review – first report – simplifying by design.
My first question is, why should it be simplified – surely fair and focusing on growth and value is more important?
Surely, we want to encourage enterprise, investing and employing people? Is that not the intent?
Many of these businesses already pay significant taxes
We need to focus on the bigger picture.
‘Surely income taxes should be paid based on the short-term, and capital taxes based on the long-term? This encourages a long-term view and more investment’
I do not intend to comment on all of the recommendations in the report. However, some of the recommendations worry me:
A focus on retirement – what about serial entrepreneurs who want to build, sell and build again?
“A starting point for an efficient tax system should be neutrality, to minimise distortions to taxpayers’ business and family choices”. Why?
Surely income taxes should be paid based on the short-term, and capital taxes based on the long-term? This encourages a long-term view and more investment.
The OTS argues that the because the current rates of Capital Gains Tax are lower than standard Income Tax rates, the disparity is one of the main sources of complexity.
In 2017/18 Capital Gains tax generated £8.3 billion for the government (based on gains of £55.4 billion) and was paid by 265,000 individuals. In comparison, Income Tax raised £180 billion and was paid by 31.2 million individuals.
The focus on a tax that provides less than 5% of the total Income Tax take, runs the risk of severely damaging our entrepreneurial spirit and attitudes towards creating and building profitable enterprises.
In closing, I found the following statement concerning:
“There was a range of opinion on whether there needs to be a tax incentive to encourage risk taking or entrepreneurship and whether such an incentive can be sufficiently targeted not to lead to unnecessary distortions.”
Perhaps the earlier clue was in the change of name from “Entrepreneurs’ Relief” to “Business Asset Disposal Relief”.
We should not forget the Entrepreneurs and indeed should be embracing and assisting them if we really want to increase growth, prosperity and productivity.
We should certainly not be penalising them and making them pay unfairly.
Craig writes for Daily Business on issues affecting owner managers on alternate Mondays