Even if taxes must rise, a raid on entrepreneurship is madness
Higher taxes on dividends. A major hike in the levy on capital gains. An end to all the reliefs for entrepreneurs, plus an extra charge on registering a new business. Oh, and a special windfall tax on anyone who happens to be a director, a levy on angel investors, and a one-off charge of £10,000 when you take on your first employee. OK, OK, it is possible I made one or two of those up. But the rest of them are all under serious consideration by the Treasury, and heck now that I have mentioned them some bright official is probably drafting plans for the others as well.
As the Chancellor Jeremy Hunt looks for ways to fill a black hole of £50bn in the public finances one point is already becoming clear. Small businesses and entrepreneurs are the most likely target.
True, they are relatively lightly taxed in Britain, both compared with employees and other countries. But a pro-enterprise tax and regulatory regime has also created a start-up culture that is unequalled across Europe. If we kill that off we will have nothing left except for the tired giants of the FTSE 100.
If we have to raise taxes to fund healthcare and public services we should just be honest about it and raise income tax and VAT instead. At least that way we won’t damage the economy any more than we have to.
We already know that Hunt and the Prime Minister are committed to a hefty round of tax rises in the fiscal statement set for later this month as they attempt to balance the books and bring borrowing back under control.
Corporation tax is already set to rise to one of the highest rates in the developed world next year so there is not much space there. We have already imposed windfall taxes on the energy sector, and surcharges on the banks so there is not much room there either.
Instead, the Chancellor is looking at entrepreneurs, the self-employed and small businesses. The tax rate on dividends, used by many people who work for themselves as their main source of income, could well be increased. Capital gains taxes could be equalised with income tax, which would allow the Government to take almost half of whatever anyone makes from selling an asset they have created. And entrepreneurs’ relief, charged at just 10pc for anyone selling a company, may well be scrapped (and there is already a £1m lifetime limit, hardly a huge sum for a successful business these days).
To cap it all, Companies House is looking at increasing the charges for registering a new company, putting yet another burden on anyone embarking on what will without question be the riskiest financial decision of their lives. Add it all up, and the self-employed and start-ups will be made to bailout the rest of the country.
For the officials who run the Treasury, no doubt it all makes a kind of sense. Both groups are relatively lightly taxed compared with the rest of the country. Indeed, Sunak was already threatening to “review” – a code word for increase – the way they are taxed when he was chancellor.
With so few alternatives, it may be the only way to squeeze any significant revenues out of a stagnant economy.
Here’s the problem, however. It will kill off one of the few remaining sectors showing any signs of life.
For all the failures of the past 20 years, the one thing the UK has been able to do is create a vibrant start-up culture. The rate of new company formation soared. Between 2000 and 2020, the number of private businesses in Britain rose from 3.5m to 5.5m. Some of them were just vehicles for self-employment, but many more were genuinely new, enterprising ventures, and while only a handful might turn into the next Dyson or Ineos a few of them will eventually.
Likewise, the number of selfemployed rose from 3.2m in 2000 to a peak of more than 5m. At one point they were close to overtaking the public sector as a share of the workforce. And while a few were poorly paid gig
‘If we pile extra taxes on start-ups and the selfemployed, we will simply kill those sectors off ’
workers, many more were high charging professionals, while plenty of them were taking that vital first step to creating a new business (most companies start with one person – the founder). We made it relatively easy to start up for yourself, and that was one of the sure ways of creating greater prosperity in the future.
If we pile extra taxes on the sector, we will simply kill that off. Worryingly, there are already signs it is dying out. The number of companies has dropped by close to half a million since the pandemic, and half a million people have left self-employment. We should be thinking about how to encourage those numbers back up again. Instead, we are about to give the sector a good kicking. If people decide not to bother with all the stress of starting a business, or decide another country is a better bet, we can hardly blame them.
In reality, we need the vibrancy that only those two groups can create. Without them, Britain would be dominated by the tired, low-tech giants of the FTSE, most of whom invest in other countries whenever they can. If the UK is to have any hope of getting out of its doom loop of rising public spending, rising taxes and stagnant growth, it needs that energy. If we have to raise taxes to fund the NHS and other public services, we should at least be honest about it and raise income tax and VAT instead. At least that would do less damage to the economy than killing of new and small businesses.