The challenges for entrepreneurs under the new tax rules

Jeremy Furniss, managing director at Arrowpoint Advisory, reveals what entrepreneurs really think about new CGT and tax free dividend allowance changes
Jeremy Furniss
HMRC paperwork

Despite the upcoming Budget, many entrepreneurs will still be assessing the impact of several recent announcements on their futures within the UK’s innovation ecosystem.

In the Autumn Statement, for example, Chancellor Jeremy Hunt put forward measures to cut the tax-free threshold on capital gains tax (CGT) and reduce the tax-free dividend allowance, with both measures coming into effect in April this year.

However, while the Government is focused on reducing spending levels and trying to ramp up growth, it needs to ensure that these latest measures continue to support entrepreneurs who are the heartbeat of the economy, the majority of whom are already facing the challenges of rising energy bills and supplier costs. Implementing a less favourable CGT system will only exacerbate these concerns, inevitably impacting revenues and reducing the level of reinvestment in the business.

Creating the right environment

Arrowpoint Advisory’s Heart of the Deal research goes some way in substantiating the level of importance that entrepreneurs place on CGT. 86% of respondents thought a favourable CGT rate was a key motivator when building up their business or starting a new enterprise. This rises as high as 94% in the technology sector and 90% in healthcare, a sector which has seen increasing importance placed on it following its growth during the pandemic.

The latest Global Acquirer Trends data also shows the appetite for M&A remains and as such changing CGT rates may encourage this further, prompting business owners to sell up and exit before a less favourable environment comes into effect. Indeed, 89% of entrepreneurs said a change in CGT would motivate them to explore a liquidity event and this trend is not a completely new one. The country already faced a similar flurry of activity in 2020-21, after the then Chancellor Rishi Sunak wrote to the Office of Tax Simplification requesting a review of the CGT system.

No responsibly managed economy can afford to deter wealth creators from building tomorrow’s business successes, and our survey suggests that the pervading sense of uncertainty around the longer-term benefits of building a UK business as a vehicle for personal financial security may be acting as such.

Future business

This is especially the case now we are seeing various trends emerge from the pandemic, one of which is that, on top of looking for financial gain, contributing to the wider community has become increasingly important for entrepreneurs. We expect more and more entrepreneurs to build businesses that have purpose. Not only does the UK economy need to foster growth for long-term success, but it also now has a societal benefit more than ever.

Economic policy needs to foster this, not discourage it, by creating a favourable environment for businesses. This is especially true as the UK is also contending with volatility in the debt markets as a result of September’s mini-Budget, which caused disturbance in government borrowing costs and the wider bond markets before stability returned. Considerable challenges presented by the conflict in Ukraine, inflation, rising energy prices and global supply chain issues also continue to have a significant impact on businesses so helping maintain a certain level of revenue and therefore reinvestment is vital.

The entrepreneurial spirit is very much alive, and the growth trajectory for businesses (both organic and through M&A activity) is expected to withstand further economic headwinds, at least in the first half of this year. To ensure this remains the case, economic policy needs to reflect an attitude that is looking to encourage and nurture this growth. Business owners are a vital part of the UK Government’s plans, so it needs to be careful that CGT reform does not serve to undermine its broader aim.

Written by
Jeremy Furniss
Written by
March 20, 2023