Tax shadow over venture capital scheme

For all its claims to the contrary is the government giving business what it really wants?

Ministers want to create a nation of entrepreneurs and the venture capital iniative, reforms to insolvency law and the new Small Business Service have been introduced with the goal of bringing the American Way to Britain.

Peter Mandelson and Stephen Byers, his replacement as trade secretary, are trying to pick through the UK psyche to find out how legislation can make starting a business easier and failure less stigmatised.

There is no doubt that venture capitalists need encouragement. They view start-ups with the suspicion that comes from high risk and tend only to get involved if they are a specialist, such as in IT (which has its own rules) or once the business gets to a ‘safer’ size.

Enter Blair with his £:50m support package, designed to ‘address the SME equity gap’. But if money is what these businesses need, why was the afternoon debate at the British Venture Capital Association Enterpreneurs’ Summit dominated by attacks on the rate of capital gains tax?

Biotechnology entrepreneur Chris Evans, chairman of Merlin Ventures, was in the audience for Blair’s speech. ‘He could have said I am going to cut CGT to 10% or 5% because it would create a huge enterprise culture,’ he said afterwards.

What Evans was getting at was that the Blair’s radical intentions are not being supported with action. Evans laid the blame squarely at the door of the ‘pathetic characters putting the boot in’, referring to the Treasury and Revenue, which do not want to give up capital gains tax, a lucrative source of income.

With CGT receipts totalling £:1.3bn in 1997-1998, it may seem lucrative at first sight but it adds up to a mere 1% of total Inland Revenue receipts, says Grant Thornton tax specialist Mike Warburton. Or, as PricewaterhouseCoopers’ head of Financial Advisory Services Robert Conway says, the government could scrap CGT tomorrow and it would be better off.

‘If CGT was cut by half, 70% of entrepreneurs would stay in the country and pay it, while if the rate stays the same, 80% said that they would prefer to go offshore,’ he said. The cost of collection, he points out, is not far off the £:1.3bn take anyway.

Not everyone agrees. BDO corporate finance partner Peter Hemmington and Baker Tilly’s Tim Berg dismiss CGT as irrelevant to start-up companies who are more concerned about sources of finance.

Hemmington argues that all the leading economies, including the US have some from of CGT, while Warburton recalls the chaos before CGT was introduced in 1965 when money leaked out: everyone rushed to convert cash to capital to avoid a tax bill. But even he believes the government could do better by dropping the rate to 30%.

Many accountants also bemoan the current tapering relief system, which rewards businessmen who keep assets for 10 years by dropping the rate of CGT they have to pay to a minimum of 10%. But it is extremely complex and unwieldy for modern, young entrepreneurs who want to get in and out of businesses quickly.

The answer to the age-old argument between tax and capital incentive would seem to lie in compromise, with a good dose of culture-shift to help the pill go down.

Just look at the growth in the high-tech companies to see how faith can drive the value of businesses, even when they do not turn in a single profit. Legislation alone cannot make the difference. It will require a shift in gear to change the preconceptions that dog the market and only then will Blair and Byers achieve their goal of a nation of entrepreneurs.

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