Capital gains tax hike would hit Britain’s entrepreneurial spirit

This article, written by IoD Chief Economist Tej Parikh and Lord Leigh of Hurley, first appeared in the Daily Telegraph.

With the deficit likely to hit a peacetime record, the Treasury is understandably getting hot under the collar.

The good news is that the UK can tap into historically low borrowing costs and long debt maturity. The Government is rightly using this wiggle room to invest in infrastructure, with the hope of fostering a recovery that could help us grow out of some of our debt.

Nevertheless, the Treasury will be instinctively uncomfortable with rising debt and will be looking for ways to put the public finances back on a stable footing. That is, it will be looking for taxes to bump up.

One proposed target, if a recent report from the Office of Tax Simplification is to be believed, is capital gains tax.

From a policy-wonk’s point of view, sharply hiking the tax on capital gains in order to equalise it with that on income seems superficially attractive, but it is flawed, and would come at the least opportune moment imaginable.

Simply put, capital is different from income, and the key difference is risk. When someone puts their savings into a business, they may well benefit from it, but they may just as likely lose out.

As we emerge from a historic recession, it’s reasonable to expect that people’s appetite for risk will be significantly diminished. This matters because it is where risk is highest that the reward is often greatest – both for the investor and for wider society.

When a risky start-up gets on a roll, it doesn’t just help those with shares in the company. It creates jobs, generates prosperity, and improves life for consumers. That’s why it’s important that people are incentivised to create and support innovative businesses – not just put safe bets on established incumbents.

There may well be a case to look into tightening the rules where CGT benefits those not taking on so much risk.

But any reform would have to be done with extreme care to prevent a knock-on effect. Positive entrepreneurialism will be more important than ever in the months ahead.

There are already indications that even the prospect of an increase could lead business owners simply to give up and cash out. HMRC’s take from CGT has been creeping up steadily this year, while one tax adviser has said he has received more enquiries about moving abroad from owners of businesses in the last eight weeks than in the last 15 years.

We have to consider our international standing as a destination for business. The UK has long held a strong reputation as a place to start, run, and grow a company, and we need to prove to the world that this won’t be changing.

The impending end of Brexit transition will inevitably be raising concern in some parts of the world, and hiking CGT right now would only add to the impression held by some that wealth creation is falling down our list of priorities. When countries like New Zealand have no capital gains tax, we can’t rest on our laurels.

There’s another compelling reason why ratcheting up CGT would be a galling move right now. Thousands of entrepreneurs – even those on low income – have gone without any support during the crisis, falling through gaps in the furlough and self-employment grant schemes.

Foisting the bill for these schemes on the very people who were snubbed from them would rub salt in fresh wounds.

All told, ramping up CGT will pour cold water over Britain’s entrepreneurialism just when we need it most. It’s not an answer to the costs of coronavirus, but rather paves the way for a stunted recovery.