Getting rid of Entrepreneur's Relief will send the wrong message
The Chancellor of the Exchequer is considering removing or reforming Entrepreneur's Relief in the upcoming budget, according to the papers. As an investor in early-stage IoT businesses across the UK and Europe, we can testify to its positive benefits. Before making any decision, the Chancellor needs to carefully consider what message it sends about the UK, and the value it places on entrepreneurship.
For anyone unfamiliar, the relief means that when an entrepreneur comes to sell a company they founded, they pay capital gains tax at the lower rate of 10 per cent instead of the usual 20 per cent on up to £10 million in gains. The tax has proved an excellent way for entrepreneurs to realise value from all their hard work and the risks they take.
Critics of the tax think that it merely helps rich people get richer. That is not our experience. We have met hundreds of start-ups who want investment. In many cases, founders work for a small salary, face long hours, and often borrow money from family and friends to build their business. Some have quit other jobs to back their vision. Success is hard to come by, and people should be well rewarded.
A nation's start-up culture is an indicator of the relative health of a nation's economy. In the sector we focus on, the Internet of Things, entrepreneurs are working on ideas that could have a profound and positive impact on our lives. People are helping to build more efficient, and environmentally friendly cities, or developing medical devices that will improve the way the NHS handles patients. Ultimately, it is today's start-ups that are going to solve the challenge of climate change, reverse the UK's low productivity, or help the Government deliver better services while saving money. For a country, that is facing the challenge of finding its way in the world after having left the EU we need more entrepreneurs.
Some might argue that making it less attractive to sell-up will lead to more Unicorns. That is not the case. Many start-ups, especially in the world of technology have a natural lifespan. They can only go so far before they need considerable external investment. If they want to scale or go global, then this will involve a substantial investment. Of course, it would be great if we could find the next Google or Facebook. However, the reality is entrepreneurs are great at getting businesses off the ground but don't necessarily have the skills to run a business of 10,000 people. Better they sell up to people who can, and they move on with their next great idea.
Part of the reason that the UK is so attractive to foreign tech investment is that there are companies to buy, and which can be scaled. This vital source of money will drop off if there are barriers to businesses being created and sold.
While the Chancellor has an unenviable job trying to balance the nation's books and pay for the election promises, trying to save money on Entrepreneur's Relief will backfire. Ultimately, Entrepreneurs are the ones who will make sure the nation can pay its bills.