If the Chancellor raises capital gains tax at the Budget, entrepreneurs will either decline to sell or move to a friendlier jurisdiction – either way Britain will lose out, says Andreas Adamides
Many people debate whether John Lennon or Paul McCartney was the better songwriter. But for me, it’s George Harrison I’m thinking of right now – for writing Taxman.
“Well it’s one for you: 19 for me, because I’m the taxman. Yeah, the Taxman!”
What a line. It’s not often that tax policy makes for a great pop hit, let alone the opening song of one of the greatest albums of all time, Revolver in 1966.
Harrison was singing about Britain’s top tax rate under Harold Wilson’s Labour government.
At the time, the government’s thinking was simple: the more you tax people, the more revenue you generate.
But something strange happened – tax receipts went down.
People didn’t find it worth working hard for less than 10p of every pound they earned, so they stopped.
It’s a reminder that tax works best when it is fair.
People know public services need to be funded, and they’re willing to pay more tax as their income grows.
But if the system becomes punitive, people either migrate or work and trade less.
In the last four years, entrepreneurs have already been hit by two significant tax changes.
In 2020, the threshold for paying Capital Gains Tax (CGT) dropped by 75 per cent, from £12,300 to £3,000.
Entrepreneurs’ relief also fell dramatically, from £10m to £1m.
After that, entrepreneurs who sell their businesses pay a 20 per cent Capital Gains Tax (CGT). That’s on top of the Corporation Tax they have been paying throughout the life of the business.
Now, as Labour prepares to unveil its Budget at the end of the month, rumours are swirling that Chancellor Rachel Reeves may target entrepreneurs again.
Many business founders I speak to feel this could be the straw that breaks the camel’s back.
Imagine a founder who spent 20 years building a company. Two years ago, they might have been preparing to sell that business for £20m.
At that time, under the rules in place, they would have paid 10 per cent on the first £10m of the sale, benefiting from entrepreneur’s relief, leaving them with a tax bill of £1m.
If their spouse’s relief were factored in, the total tax owed could have been £2m.
Fast forward to today. The same sale would mean paying 10 per cent on the first £1m and 20 per cent on the remaining £19m, resulting in a tax bill of £3.9m.
But under the alignment Labour is reportedly considering – taxing CGT at the same rate as income tax – that same founder could end up paying 45 per cent tax on the entire sale.
That’s a staggering £9m gone, almost half the value they’ve spent two decades building.
Remember the Laffer curve
It echoes the findings of economist Arthur Laffer who, in 1974, showed tax increases can reduce overall receipts by discouraging economic activity.
This isn’t just speculation. As the CEO of the UK’s largest network of high-growth business leaders, we’ve seen an unprecedented level of concern from our members.
Our latest poll revealed that 60 per cent of our members would consider leaving Britain if CGT were increased.
60 per cent of members of the UK’s largest network of high-growth business leaders say they will consider leaving Britain is CGT is increased
The potential tax hike Labour is reportedly considering – aligning CGT with income tax – would more than double the tax burden for many entrepreneurs selling their businesses.
This would be a devastating blow for those who have spent years, or even decades, building their businesses.
Many have said they simply won’t sell. Meaning businesses will lose growth opportunities.
Some, who were on the verge of selling their businesses, are now putting those plans on hold.
Why sell when you can move to a low CGT country for a year, make the same sale, and pay no UK taxes at all?
The result for Britain: no tax receipts, no reinvestment, and no innovation staying on these shores.
These founders took significant risks, often reinvesting all profits and forgoing pensions in the early years to fuel their company’s growth.
Now they face losing nearly half of the value they’ve created due to heavy-handed tax hikes.
This is no small matter. Small and medium-sized enterprises (SMEs) account for 99.9 per cent of UK businesses and generate £2.4trillion in turnover, and account for 61 per cent of total private sector employment.
If even a fraction of SME owners decide to set up their next business elsewhere the consequences for the UK economy could be catastrophic.
Rather than pushing entrepreneurs away, the UK should be working to retain and attract them.
Britain’s loss is Europe’s gain
Our European neighbours are bending over backwards to attract Britain’s top entrepreneurial talent.
Many are already relocating to business-friendly environments such as Portugal and Ireland which offer favourable tax rates and a supportive ecosystem.
Once they leave, the jobs and innovation they create won’t return.
The government must strike a balance between fiscal responsibility and nurturing the entrepreneurial spirit that drives the economy.
For those who may feel that George Harrison’s frustrations were just a relic of the 1960s, his message rings as true today as it did then.
“If you drive a car, I’ll tax the street. If you try to sit, I’ll tax your seat.”
The spirit of Taxman still speaks to the burdens entrepreneurs face today – only now, it’s not just rock stars but the builders of Britain’s economy who are contemplating their exit.
Andreas Adamides is CEO of Helm, a networking organisation for founders of scale-up businesses. It has more than 400 UK members with a joint revenue of £8bn per year.