Entrepreneurs need a stable tax policy landscape to thrive

THE cut and thrust of politics may not matter all that much to entrepreneurs. But policies certainly do – particularly those related to tax.
Some have been a boon for businesses: Entrepreneurs’ Relief and the Enterprise Investment Schemes (EIS) have been particularly welcome. The former grants entrepreneurs a 10 per cent tax rate on capital gains up to a lifetime limit of £10m, while EIS grants 50 and 30 per cent tax relief for investors.
Lawyers, meanwhile, have a complex relationship with tax policy. Though we can benefit professionally from complexity, most of us want simplicity so our clients can succeed. For example, although lawyers benefitted from the complexity of the taper relief system, scrapped upon the introduction of Entrepreneurs’ Relief, entrepreneurs gain from the simplicity of uniform capital gains tax benefits across the board.
One area that could do with simplification is tax as it relates to employee share schemes. US investors are left perplexed by the complexity and the tax burden these can create, as the US has a much simpler system. The Employee Share Scheme regime seems to have gained traction, but even that requires employees to seek separate advice.
Although UK regulations are broadly light touch, the tax system is becoming increasingly challenging. Over recent years, HMRC has become much more vigilant, sophisticated and punitive. We have moved from a rules-based system to one where moral obligation plays a role.
Specifically, business owners operating multi-jurisdictional firms should be aware of the diverted profits tax, which can leave companies liable for a tax of 25 per cent on profits relating to UK activity deemed to be diverted. On the international level, the new Base Erosion and Profit Shifting project led by the OECD also has teeth. Some entrepreneurs have been calling for this to level the playing field with multinationals, but as their businesses grow it will impact them too.
Tax is also the single biggest issue for those beyond our shores. Investors into the UK are finding traditional ways of structuring their affairs a problem. The result could be less investment into the UK. Combined with the uncertainty brought about by the upcoming EU referendum, Britain could see foreign investment fall significantly.
The government is stuck between a rock and a hard place. We have significant debt, with tax and cost cutting the only tools for balancing the books. Entrepreneurs will keep plugging away – but we need a policy landscape to ensure that they flourish.
At present, this government has a near monopoly on support from business owners, but it needs to be held to account. Labour must devise a message that’s positive, dynamic and built upon a strong policy framework. Entrepreneurs don’t want to be vilified, and Labour’s mistake going into the last election wasn’t necessarily one of policy but positioning: it came across as anti-business and underestimated how much industrious people are admired.
Whoever is in power, we could always do with more long-term thinking, policy certainty and an open dialogue with entrepreneurs and experts. But we shouldn’t worry too much. Entrepreneurs are by their nature tenacious and ingenious. As long as we can keep them in the UK, we will all benefit as the consumers of their successes.
Larry Nathan is a corporate partner at Mishcon de Reya.