Unfair Taxes Throttle Britain’s Startup Entrepreneurs

Heavy capital gains tax burdens are discouraging entrepreneurs to develop companies to their true potential, claim business experts.

Accountancy firm UHY Hacker Young argues entrepreneurs who sell their business for more than £30 million have to hand 22% of the proceeds to the government in tax.

But those selling a business for £6 million or less only have to pay around 9% to the government in taxes.

The statistics come from a G7/European Union review of business sale taxes by the accountants on the golden anniversary of the introduction of capital gains tax in Britain.

The comparison showed entrepreneurs pay an average 12% tax on the disposal of a business worth £30 million or more in other leading developed nations.

Too much CGT

The firm accuses of the government of not looking after entrepreneurs building larger corporations, despite encouraging them to expand to create jobs and economic growth, writes Stuart Smith for specialist web site SEIS.co.uk.

Tax partner Roy Maugham told Stuart Smith: “The value of a business can make a big difference to the amount of tax an entrepreneur pays when selling a company.

“If the government wants more business people to build bigger firms, then they need to look at the way they tax treat the disposal – which is their reward for doing well.”

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) both shelter capital gains tax to investors and entrepreneurs, but the tax breaks tend to favour small companies.

SEIS and EIS allow capital gains deferrals on cash raised for investment by selling assets and CGT-free growth on equity stakes.

Risk and reward

“Building a business is about risk and reward and capital gains tax does not take proper account of the risks involved,” said Maugham.

“Growing a large corporation involves significant investment in professional management and taking on considerable debt to promote and expand the business.”

Entrepreneurs’ relief is meant to deal with these issues by reducing capital gains tax rates down to 10% for entrepreneurs, explains Maugham, but the relief only applies to a lifetime limit of £10 million of gains.

“The next government will have to address this as lower taxes on the sale of businesses in other parts of Europe and emerging markets will encourage entrepreneurs to move away from Britain, which could affect growth and jobs,” said Maugham.