Entrepreneurs Pay Too Much Business Tax In Britain

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Entrepreneurs selling large businesses could pay double the tax of a smaller business due to an unfair spread of capital gains tax allowances and reliefs.

A study by accountants UHY Hacker Young shows someone selling a business for £6.2 million would pay just 9% in tax after reliefs and exemptions.

However, a successful entrepreneur who had taken their business to a higher level, selling for £30 million, would pay almost 22% of the sale proceeds in tax.

The firm’s figures come from a review on the 50th anniversary of the introduction of capital gains tax in Britain.

The firm says reliefs and allowances are supposed to encourage and compensate entrepreneurs for their efforts in starting a business and creating jobs, but fail to help larger businesses.

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Lifestyle businesses

In a G7/European Union comparison, the discrepancy between taxes paid on a small business compared to a large business is 12%, argues the firm.

Tax partner Roy Maugham said: “There’s a big difference in the tax treatment of owner-managed business sales depending on the value of the business.

“If the government really wants to help entrepreneurs move on from lifestyle businesses to create corporations, then they must do something to equalise the tax entrepreneurs pay that penalises them for their success.”

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) both offer capital gains tax shelters to investors and entrepreneurs, but tend to help small companies  rather than large enterprises.

Both schemes offer capital gains deferrals on raising cash for investment and CGT-free growth on equity stakes.

Entrepreneurs relief failings

“The capital gains tax system does not offer enough compensation for the financial risk entrepreneurs take,” said Maugham.

“To grow a company into a larger corporation, an entrepreneur would need to make significant investment in professional management and probably have to look for investment to promote and expand the business.”

Reduced capital gains tax available as entrepreneurs’ relief is meant to deal with these issues, argues Maugham, but only applies to a lifetime limit of £10 million of gains.

The relief reduces CGT down to 10% for qualifying assets – which would include most businesses.

“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.

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