Opinion

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Does our Chancellor understand small company investment dynamics?

5 Mins

The IFS has been suggesting to the Treasury that Entrepreneurs’ Relief, which restricts CGT to 10% for those who own 5% or more of a company is just a benefit for our nation’s rich and therefore should be abolished.

Apart from Corbyn’s manifesto, I have rarely come across such nonsense.

It demonstrates a total lack of understanding of how risk capital is provided to our early-stage companies that are the acorns from which mighty, tax producing, companies grow.

All over the UK businesses are started on the back of entrepreneurs and individual capital providers who are prepared to take massive personal risk in return for knowing, should their acorns take root, they will not be hit with a penal rate of Capital Gains Tax.

What will happen to our small businesses?

Can it really be that Sajid Javid is so stupid as to come along and say “sorry boys and girls, yes, of course, I applaud what you are doing but, tough, I want more tax from you “?

Admittedly the Treasury has a lamentable record of only thinking in the short term and if it can grab more tax now to pay for political vanity projects like HS2 it will, and to hell with damaging long term capital formation and hence long term tax generation.

Our new Chancellor thankfully comes with some strong financial credentials having worked at Deutsche Bank. So on paper, he should be able to understand precisely what I am saying but perhaps for the benefit for any of his Treasury colleagues who suffer from myopia (note to Dominic Cummings: please take these people away!) let me give them one small example.

My son’s story

My son has welded together 3 businesses in the last two years. At the time of the acquisition, they employed sixty-five people. They now employ north of one hundred and growing all the time. That’s another 35 people paying more tax and a business that pays more National insurance, etc. He is not a George Soros, a Peter Hargreaves or a John Caudwell.

He is just a lad who is an ambitious entrepreneur who doesn’t expect to be whacked by an inordinate level of Capital Gains Tax courtesy of the musings of a bunch of “experts” at the IFS. Indeed what our Chancellor should be doing is the reverse of the IFS’s direction of travel.

For years now I have suggested that CGT should not apply to individuals that invest in our list, traded companies that have a market capitalisation of less than £250m at the point/ time of investment. There are some fourteen hundred of these on the LSE and AIM and their very existence is under growing threat.

Their numbers have already shrunk by one third since 2008. Why? Because they are facing a perfect storm. Historically low-interest rates, which in themselves are tax-deductible at the corporate level, means that short term debt financing has become financially very attractive compared to long term equity finance.

In addition, post the Woodford debacle, the FCA and the compliance departments of the big institutional investors are questioning how liquid the trading is in the shares of the sub £250m companies and evidence is growing daily that these institutions are being discouraged from holding these stocks in their portfolios.

What’s the solution?

So the time has come to get radical and realise that the only hope for raising liquidity in this also vital area of the economy is to make trading in the equity shares of these companies free of the stifling hand of CGT.

It may come as a surprise to those in the Treasury who probably have never owned and traded equity in their lives but greater liquidity improves the attractiveness of any market place and when that happens in this case then more companies want to sign up.

Thus more beneficial long term capital is raised, which in turn leads to growing companies and more tax generation to satisfy the requirements of the Exchequer. Truly a virtuous circle Sajid Javid, who I met years ago when he was a junior Treasury Minister, I know is well capable of understanding all of the above, now has the perfect opportunity to act on all of this on March 11th but will he?

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