Entrepreneurship is Taxing!

Re-building the UK on The Broken Back of Small Business..?

Update: fair play to the Chancellor for maintaining BADR and limiting CGT hikes for business assets – now 18% at the lower rate and 24% at the higher. This sensible compromise will impact small businesses far less than anticipated.

There’s much speculation the government’s impending budget will increase Capital Gains Tax and scrap Business Asset Disposal Relief, which would significantly diminish rewards for entrepreneurs selling small businesses or exiting startups; as well as for employees granted share options, or investing their savings in private businesses. According to the Prime Minister, “working people” don’t own shares.

These tax changes wouldn’t affect me, so I have no axe to grind, but I can tell you the small business owners and startup founders I know, and their employees, are extremely hard-working and disciplined. Most of them work very long hours, and most could get better salaries and benefits working 9-to-5 in a bigger company; some of them sacrifice financial stability, time off, even relationships or their health (I’m not encouraging that, simply stating a fact). Some of them are from relatively privileged backgrounds, some of them not at all; many have taken the risk of pursuing entrepreneurship to achieve social mobility, including my own family. Most of them are not, and may never be, truly wealthy; but they are motivated by a growth mindset.

I watched as they struggled to stay afloat through the pandemic; and, over the past 18 months of economic turmoil, I’ve seen founders break down, perfectly good businesses go bust, and employees laid off due to the economy and capital constraints. This doesn’t take anything away from the plight of those working in precarious circumstances or living in poverty – most people who work are struggling in their own way. Many entrepreneurs I know are having to dig deep to keep the lights on, and I think it’s only fair they should one day enjoy the full fruits of their labour.

Aside from the clumsy and divisive messaging, implying entrepreneurs don’t work for a living, I can’t help but think removing tax relief for small business owners is contrary to the government’s stated purpose: “rebuilding our country”. Labour’s manifesto proposes “an enduring partnership with business to deliver the economic growth we need. It needs more focus on long- term strategy, not the short-term distractions that can animate Westminster. And it demands a final and total rejection of the toxic idea that economic growth is gifted from the few to the many.” In the chapter entitled “kickstart economic growth”, they claim “we are the party of wealth creation.”

Well it seems they’re about to make the risk-reward calculus weaker for small business, in a period of economic strife, because the socialist wing of the party don’t consider those who operate or have shares in any kind of business “working people”. This would be a short-term political decision, a populist victory against soft targets. The self-made entrepreneur is to be aggressively taxed, along with everyone who makes a modest sum by sacrificing and supporting their entrepreneurship; meanwhile, multinational corporations underpay £11.5bn a year (more than half of the £22bn budget deficit) with zero repercussions; meanwhile, ultra wealthy landowners and freeholders, who don’t need to work, take advantage of all kinds of schemes and loopholes to avoid paying tax. Are you really the party of the people when your tax policies are harder on someone risking their life savings to open a restaurant or start a small tech business, thereby creating jobs and growing the economy, than on a landed aristocrat or a corporate billionaire shifting their profits overseas?

Small businesses (less than 50 staff) employ 13.1 million people, nearly 40% of the working population; their owners are literally building the base of the economy. If they chose to take a safe 9-to-5 job it would not be good for productivity or growth; and, given the abysmal state of the job market, there aren’t enough jobs to go round. We also don’t want them moving their business to Dubai or elsewhere, as many tech founders are planning to do if the budget is as negative for them as expected.

Entrepreneurship is arguably the best tool to share economic growth with the many; as well as encouraging people to invest in small businesses, not park savings idly in the bank. Let’s face it: the idea you can be socially mobile or achieve financial freedom as an employee, by relying on a salary, has become a fantasy for the vast majority. An average house in England costs 8.4 years of household income, and inflation will quickly whittle away any spare cash you don’t put to productive use. If government wants people to have a growth mindset, they must reward growth.

Then there’s diversity. Women and minorities are under-represented among business owners and startup founders, due to lack of access to capital and cultural norms meaning white men are more likely to take the risk. How better to further limit diversity, I say, than to tax rewards more in an already risky business environment? If the result of these tax changes is that only the privileged start businesses, that’s completely adverse to the government’s purpose and Labour’s philosophy.

I really hope the government finds a way to budget without discouraging people from starting the small businesses that are essential to the UK’s economic recovery, or dissuading them it’s worth taking the risk of investing in entrepreneurship. Either way, I’d like to see less needlessly divisive rhetoric and more encouragement; one big way the country can get back on track economically is by pulling together, embracing a growth mindset, and making it easier for home-grown businesses to succeed.

Maybe I’m wrong. What do you think? I’d love to hear your thoughts in the comments.