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The absurdity of confusing CGT with income tax

4 Mins

“Taxing capital gains at the same rates as income, so that all the money you make is taxed in the same way.” – Liberal Democrat Manifesto.

Fair?

When you “earn” money on the Lottery, you don’t pay any tax.

Here is a rough working for a company that has been built from scratch by an entrepreneur over 15 years. These numbers are simple and based on some basic (and occasionally unrealistic) assumptions for the sake of simplicity. 

Assumptions:

  • An entrepreneur founds a business and grows it organically (without external investment) over 15 years at a steady rate of 20 per cent a year.
  • In year one her turnover is £500,000.
  • She has one employee for every £100,000 of revenue.
  • Employees are paid on average £30,000, which means that about £7,300 is taken as tax and national insurance.
  • She pays corporation tax on her profit – which is 20 per cent of revenue – but ploughs any profit over £100,000 back into the business.
  • When she sells the business, she sells it for 5x profit in year of sale.

In this relatively simple scenario, the business would be sold for £6,419,592.

Is it right that this payment should be taxed at 50 per cent?

Consider this:

  • Over this time, the entrepreneur has paid over £10,805,000 in wages.
  • She has provided employment for 64 people. (Jobs that were not there before.)
  • She has paid over £1,800,000 in corporation tax.
  • She has paid over £2,629,000 in PAYE and national insurance. (Plus another £1,383,000 in employer contributions.)
  • She has taken £1,500,000 out of the business during this time. (Although this is likely to be far less as in the early years, she would not have taken out the full £100,000 as she would have been likely to reinvest this into the business.)

So, having created 64 jobs, paid over £16,700,000 to the state and to employees, having taken an enormous risk and probably worked 100 hour weeks to get to the point she has, she then must pay another £3,200,000 to the state leaving her with the same amount.

The scenario could be so different. She could have gone bust after ten years and been left with nothing (and she would still have paid her taxes).

Entrepreneurs have to take big risks – they mortgage their properties, they survive on as little as possible, they do what they need to do to make things happen in their business.

If politicians decide to penalise entrepreneurs for making the sacrifices they do then they are not going to get my vote.

Give entrepreneurs a break. They work hard, take risks and create wealth and employment. The least they deserve is a break when it comes to an exit. (And, when they exit they are FAR more likely to use that money to do something else that creates wealth than any other section of the community.)

You can download the spreadsheet that I put together to produce these numbers here. It’s not completely accurate – it’s a rule of thumb and if anyone wants to refine it, please feel free to do so. (Just leave a comment below!)

You can also see here how the two things have been treated historically by Labour and Conservative governments. 

Make your own mind up about who you vote for.


Mark Littlewood is founder of The Business Leaders Network.

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