Entrepreneurs’ relief? They won’t feel it.

Science|Business senior editor Nuala Moran

But do not think of them as ingrates: the relief is a minor concession in the face of much disquiet over the government’s plans to increase tax on the sale of start-ups from 10 percent to 18 per cent.

The concession would leave the capital gains tax on the first £ 1 million of profit at 10 per cent. Given this, the term Entrepreneurs’ Relief is a misnomer. While it will offer small business owners a rate of 10 per cent on lifetime gains, serial investors can only claim the 10 per cent rate on their first £1 million of profits, not on each disposal.

And to qualify for the relief investors must own at least 5 per cent of the equity, which is likely to have implications for the employee share ownership incentive schemes that are critical to giving experienced managers the incentives they need to take on the risks of running a start-up.

One of the most active groups in lobbying against the tax rise has been the UK’s BioIndustry Association, which hit out against the increase when it was proposed in October 2007 saying it could deliver a “fatal blow” to the UK’s bioscience sector.

Now the BIA says the Entrepreneurs’ Relief will do little to avert the negative impact of the overall increase on long-term investment in bioscience companies. Aisling Burnand, Chief Executive, said the proposal, “Does not recognise how business angels and serial entrepreneurs work in the bioscience sector.”

Making the UK less competitive

Burnand was echoed by Simon Walker, chief executive of the British Private Equity and Venture Capital Association, who said the minor concession, “Does not address the question of how to encourage serial entrepreneurship.” He added, “The rate of 18 per cent remains and this does make the UK less competitive than it was a year ago.”

Similarly, Richard Lambert, head of the UK’s most powerful business organisation, the Confederation of British Industry said, “Although one million pounds may sound a lot, it could have been built up over 20 or 30 years.”

“It is clear that the real wealth and job creators of the UK’s economy, selling assets for a lot more, will be seriously clobbered.”

The introduction of the 18 per cent rate was presented by the government as a move to simplify the capital gains tax regime, by introducing a single rate of tax payable by anyone, regardless of the type of asset sold.

Public disquiet

The increase can also be seen as a response to public disquiet that private equity firms involved in deals worth millions – and in some cases billions – in mature and profitable companies, were only liable to pay 10 per cent tax on the profits from selling these companies on.

Bringing in the Entrepreneurs’ Relief undermines the stated objective of simplifying the tax system, messing things up again before the new regime even comes into effect.

But it is also an explicit acknowledgement by the government that in trying to extract more money from loaded private equity firms, the increase in capital gains tax could deter entrepreneurs from investing in start-ups.  

The tax on any gains from investments in high tech start ups should not be set at the same rate as gains on investments in mature companies, because there is a chasm between the two in terms of the level of risk. And it is not hard for the public – or the taxman – to tell one from the other.