The 2020 Budget is soon
In the build up to the UK Budget on 11 March 2020, understandably there is tremendous interest and speculation about what precisely the new Chancellor, Rishi Sunak, will announce.
Politically, as well as economically, this year's budget, the first since the Conservatives won the election in December 2019, is widely seen as setting the tone for how they intend to deliver on their promise to "level up" perceived regional inequalities and pivot the nation's finances towards a more dynamic post-Brexit industrial settlement.
If, as seems manifestly the case, government policy is being made on the crest of a populist wave, then in addition to large-scale spending commitments (on infrastructure, the NHS, social security etc.), we can also expect to see, as part of the government's strategy for making post-Brexit UK a success, the creation of a business environment that embraces de-regulation, nimbleness, digitisation, innovation and....entrepreneurial-ism.
And there's the rub.
If recent press reports are to be believed, the Chancellor will make a Budget announcement that entrepreneurs' relief or "ER", will be abolished - which seems counter-intuitive if entrepreneurs are the very people the government wants to keep onside to help create a dynamic business environment.
But here's the further rub. There is scant evidence to support the claim that, by itself, ER incentivises people to start a business.
To quote Warren Buffet (the world famous US investor):
"I have worked with investors for 60 years and I have yet to see anyone, not even when capital gain rates were 39.9% in 1976/7, shy away from a sensible investment because of the tax rate on the potential gain".
ER....what is it?
In the UK, the purpose of ER is to apply a flat rate of 10% on eligible (capital) gains made by taxpayers. There is a maximum lifetime limit on which ER can be claimed of £10m.
ER therefore delivers a 50% capital gains tax (CGT) saving - a 10% CGT rate instead of the current 20%.
If, by itself, you are sceptical that ER incentivises someone to start a business, a more persuasive argument could be that ER rewards entrepreneurial behaviour once the business has been built, i.e. it encourages wealth creation, with the follow-on benefit that wealth created is eventually redistributed back into the economy.
Regardless, whatever your views of ER, the relief currently costs the British taxpayer something like £2.7bn annually.
EMI options - a sensible investment
If ER is abolished, what does that mean for enterprise management incentive or "EMI" options?
EMI options are a fantastic way to give employees an equity stake in the future growth of the business in which they work and are by far and away the most popular form of employee equity incentive for private companies.
And yes, EMI options are highly tax effective.
At the moment, EMI options piggy back off the general ER regime. So EMI options held for two years automatically benefit from 10% CGT provided they still qualify for EMI treatment.
However, to paraphrase Warren Buffet, I have worked with companies for nearly 20 years now and I struggle to remember an occasion when the 10% CGT rate was the sole driver for granting EMI options.
I would even go so far as to say that the 10% CGT rate is almost a happy afterthought for many business owners and managers.
The normal reasons for granting EMI options are overwhelmingly commercial and strategic ones.
Having a stake in the company, building commitment and loyalty, sharing success, being focused on strategic outcomes, measuring what matters - these are the factors that influence the popularity of EMI options.
If, as a corollary of ER being abolished, EMI options lost their ability to benefit from the 10% CGT rate, I do not believe for one moment this would dent their popularity.
The emotional benefits of being a stakeholder in a successful company are just too powerful.
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