Wednesday 4 March 2020 4:34 am

DEBATE: Should the chancellor rethink plans to get rid of entrepreneurs’ relief in the Budget?

Caroline Plumb OBE is chief executive and co-founder of Fluidly.
and Alfie Stirling
Alfie Stirling is head of economics at the New Economics Foundation.

Should the chancellor rethink plans to get rid of entrepreneurs’ relief in next week’s Budget?

Caroline Plumb OBE, chief executive and co-founder of Fluidly, says YES.

Critics of entrepreneurs’ relief want proof of its economic impact, but it’s not as simple as throwing a couple of headline figures around and dismissing beneficiaries as the already “staggeringly rich” getting richer.

Everyday entrepreneurs treat their businesses as a nest egg akin to the family home. Scrapping the relief would punish those who personally guarantee loans, take risks (often with little salary of their own), and endure sleepless nights to create jobs and growth.

Their businesses fund public services and welfare systems through corporation tax, business rates, national insurance, and the collection of VAT. Such long-term contributions are worth far more than the cost of the relief.

Don’t be fooled into believing the caricature that the government is trying to spin of millionaire businessmen: 90 per cent who use entrepreneurs’ relief will not make life-changing sums, but deserve some payback for the risks they take. Or would we rather those founders invest not in jobs but in FTSE-tracker funds, which are taxed in the same way?

Alfie Stirling, head of economics at the New Economics Foundation, says NO.

Entrepreneurs’ relief is one of the most egregious examples of a tax break that just does not do what it says on the tin.

The relief allows effectively all business owners to pay a reduced rate of capital gains tax of 10 per cent. But detailed research from the Institute for Fiscal Studies has shown that this has not increased productive investment or innovation by firms. Instead, it simply incentivises owners to move their income from “pay as you earn” (PAYE) to capital gains, avoiding income tax and national insurance along the way.

The relief is also part of a wider moral problem in the UK: those who own their own company are asked to contribute proportionately less in tax than those who happen to work for them — who are often on far lower incomes as well.

Entrepreneurs’ relief was supposed to increase entrepreneurship. It doesn’t. It was supposed to boost investment. It doesn’t. And every year it costs the Treasury an estimated £2–3bn — around five times as much as total spending on homelessness services in England. It’s time for a rethink.

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.