Justin Byam Shaw: Risk-takers need tax breaks

Enterprise can help pull us out of recession, so you might think that the very last thing anyone would want to do would be to increase the rate of tax on entrepreneurs

At times like these, you can forgive us entrepreneurs for wondering who our friends are. No sooner do we say goodbye to a Labour government which cut capital gains tax to its lowest level since the levy's introduction in 1965 than the Conservative-led successor threatens in tomorrow's emergency Budget to raise the charge to its highest rate for quarter of a century. But to date all the discussion has centred on the likely increase in CGT on shares and second homes. The plans for taxing gains on business assets sold by entrepreneurs, their share-holding staff and their backers have been largely overlooked.

The entrepreneur, of course, is the risk-taker who actually starts and builds the business which, if it succeeds, will go on to support staff, lawyers, accountants, PR men, bankers, private equity people and an army of other professionals – as well as contribute to the financial well-being of the rest of the population via corporation and employment taxes. Entrepreneurs should be encouraged and feted as the drivers of the UK economy. We need enterprise to get us out of recession, to lead recovery. Who ever heard of a free market nation that taxed and cut its way to growth? So you might think that the very last thing anyone would want to do right now would be to increase the rate of tax on entrepreneurs and damage the prospects for growth and jobs.

So far the new coalition has failed to give any undertaking that taxes on business assets will be held at the current 18 per cent rate – let alone at 10 per cent, which had prevailed under Labour before the private equity boys fouled the nest for everyone else by finding a way to convert their carried interest into capital. Instead, it's been the payment of lip service as usual towards the wealth creators who are needed to rebuild the economy. "I understand the importance of encouraging entrepreneurship in our country," says David Cameron. That's pretty much what every Prime Minister has said over the last 30 years but with consistently disappointing follow-up.

Moreover, no one has yet clarified what the term "business assets" means. Recent governments have form here, as entrepreneurs are all too painfully aware. Previous definitions under various incentive schemes have been presented to entrepreneurs as sun-lit uplands, when in fact they have proved to contain impenetrable forests of rules and conditions, which eventually trip up and disqualify even the wary.

CGT is a discretionary tax. So it needs to be perceived as fair by those who are asked to pay it. If the only certainties in life are death and taxes then tax avoidance runs them a close third. It's not that hard to avoid the tax. Entrepreneurs, almost by definition, love to find new ways around the obstacles in their path and there will always be plenty of clever accountants to help them.

Other entrepreneurs will take their businesses abroad in an "exodus of talent", as ex-Man Group CEO, Stanley Fink, warns. Entrepreneurs by temperament tend to be comfortable with change and many businesses, such as those in the digital sector, can increasingly be based anywhere.

For the rest of us, who want neither to dodge our taxes nor to move our families to the cultural wastelands of a Monaco or a Switzerland, there is another option. If we think the tax is too high, why will we sell a good business when we don't have to? I have a London-based business whose shareholding management team is one of the many who are waiting to see what happens tomorrow before deciding whether to proceed with their plans to sell up.

The Adam Smith Institute has calculated that every time the US Treasury has increased CGT it has seen tax revenues actually fall. That's because investors, including entrepreneurs, hold on to their assets and wait for rates to drop before selling. This time the Institute estimates lost tax revenues in the UK could be £2.5bn, equivalent to cutting 30,000 public sector jobs.

Other potential entrepreneurs, who have not yet made the leap of faith, will decide that if capital and income are taxed at similar rates, there are quicker and less uncertain ways to become rich and independent. Many bright graduates already conclude that they can do without the extraordinary hard work, commitment, perseverance through hard times, financial risk and sheer good luck required for a successful start-up when they can now earn in a single, good year in the City, what an entrepreneur may make in a lifetime.

Last week, the director of the Institute for Fiscal Studies, Robert Chote, suggested that CGT should not discriminate between business and non-business assets. "We should be wary of the argument that investing in one's own business is a virtuous act deserving of a subsidy in a way that investing in somebody else's business is not."

From this comment alone I assume that Mr Chote has never been engaged at the sharp end of the economy. He misunderstands the basic motive for starting a business, which, as all my entrepreneur friends agree, is overwhelmingly about the desire to take control of your life rather than simply to make money. If you don't invest your cash and energy in your own business, you are unlikely to divert that investment into someone else's. The likelihood is you won't invest at all.

And the solution to all this ? Base the tax rate on careful economic analysis, not a political arrangement, and keep it simple. CGT is hard enough to administer as it is and investors crave clarity. Business assets should mean shares in unquoted trading companies with assets of less than £50m at the time of investment. Tax those gains at 10 per cent. There should be no other rules, no other conditions, no other schemes.

That way, my hunch is that the Exchequer will see its revenues from the tax on business assets actually rise, just as it did in Ireland in 1997 when overall revenues from the tax nearly tripled after the rate was halved. Entrepreneurs will start to feel appreciated here and, who knows, there may be a rise in the numbers wanting to join them – beginning a business, placing orders and creating jobs. Britain may get the enterprise society it still badly needs.

The writer is an entrepreneur and deputy chairman of Independent Print Ltd, owners of The Independent