Monday, 2 March 2020

How to undermine your own argument.

From City AM:

Plans have been drawn up by the Treasury to hit businesses with a £2.7bn tax rise in this month's budget.

Nope. Businesses don't and won't pay any more tax. Business owners will pay a bit more tax when they sell up.

Chancellor Rishi Sunak is set to scrap entrepreneurs' relief, which gives a capital gains tax cut to people who start their own businesses.

Nope. It gives a CGT cut to people when they sell a business - whether they started it or took it over from somebody else. It comes at the end, not the beginning.

The scheme cuts the amount of capital gains tax paid, when they sell the business, from the usual 20 per cent to 10 per cent on up to £10m of lifetime gains.

Those selling now might have started their businesses pre-1998, when we had Retirement Relief. The first £750,000 of the gain was tax-exempt and the rest taxed at 40%, the normal CGT rate at the time. This didn't dissuade people then and upping the CGT rate to 20% won't deter them now.

Entrepreneurs' relief was brought in by Gordon Brown's Labour government in 2008 with the intention of encouraging people to start businesses.

Nope. It replaced - and was less generous than - Business Asset Taper Relief in 2008.

The scheme cost the government £2.7bn in tax revenues in 2018-19, up from £427m in 2009-09.

Ho hum. Is not taxing something really a "cost" and if so, to whom? How is it calculated? Compared to what?

A letter written by 150 prominent business owners...  read: "Other entrepreneurs have sold their business and are now currently considering whether to start a new business or not and the rate of tax is a very important factor."

It clearly isn't, or else nobody would have started a business pre-1998, when the very generous Business Asset Taper Relief replaced the rather stingy Retirement Relief, see above.

The Federation of Small Businesses (FSB) also released a statement today, saying that scrapping the scheme would "destroy retirements".

No it won't. Say you get lucky and sell your business for £1 million. Clearly, you'd prefer to pay 10% CGT and keep £900,000; if you pay 20% CGT, you keep £800,000. Not the end of the world.

FSB national chairman Mike Cherry said "The vast majority of those who benefit from this incentive – 38,000 each year – are everyday entrepreneurs, those who see their business as their retirement plan, and who would lose an average of £15,000 each as a result of this change."

Ho hum. That would be a good argument for reducing the £10 million limit down to £1 million (similar to old Retirement Relief), so that 'the vast majority' with smaller gains are unaffected by the change.
What they should have said:

1. The revenue-maximising rate of CGT is somewhere between 10% - 15%. At that level, people are happy to just pay it. People don't defer sales to defer or avoid the CGT. They don't get involved in other avoidance or deferral schemes, which cause further distortions elsewhere.

2. So by all means, scrap Entrepreneur's Relief as a separate relief and just reduce the main rate of CGT to 10% - 15%, everybody's [reasonably] happy.

3. The good news is, there would be no need for all the legal deferral opportunities either, as very few would want to use them. Hooray, more simplification. And people like me out of a job.


Graeme said...

Isn't there an Office of Tax Simplification? I seem to remember reading about it a few years ago. Have they ever come up with any measures, such as reducing the overall rates and cutting out all the complex reliefs and anti-avoidance stuff?

Mark Wadsworth said...

G, yes there is and no they haven't. Or else we'd have an LVT, a flat income tax and a UBI by now. And not much else.

Dinero said...

How do these contrived tax laws get created in the first place.

Mark Wadsworth said...

Din, your assumptions are as good as mine.

I assume it is because instead of taxing land values (the obvious and simple thing) they want to tax incomes. So they have to have rules defining income. And so people present income as non-taxable capital gains. So they define capital gains and tax those. But this has negative effects nd/or vested interests lobby hard. So they bring in reliefs or exemptions, such as Entrep Relief. And so on.