By Simon Acland, author of Angels, Dragons and Vultures
It’s said that Genghis Khan’s Mongols invented the game of polo by knocking around their opponents’ severed heads. Supposedly, in one of the early matches of the Eton Wall Game, one of the participants got his head stuck in a small drainage arch and when the scrum moved it came clean off. Covered in mud, it was mistaken for the ball for a while. It would be a hugely popular move to incorporate this sort of thing into what seems to have become the national sport of banker bashing.
Of course it is utterly counterproductive. The City of London is the closest thing to Silicon Valley that we have in the UK — an international centre of excellence that attracts great talent to Britain and contributes billions to our national coffers. Short-sighted jealousy over bonuses militates against our self-interest. It is vital that our banks do well — it is worth repeating the statistic that I quoted in my last article: for every penny that the share price of RBS increases, UK plc, as the 83% shareholder, makes a profit of £480 million. And after all, the only reason to become a banker is to make money. If you reduce their ability to make money, or to keep what they make, you drive them away.
I had lunch at a private bank recently, and one of my hosts commented that there was a marked trend among his high-earning clients to move abroad in order to escape the 50% top tax rate (which of course is actually 62% with National Insurance, income tax by another name). Pushing up tax rates actually reduces the total tax take. Setting envy and cheap political point scoring aside, surely it makes common sense to reduce tax rates for high earners to the level which yields the highest revenue for the Exchequer.
But what about tax for entrepreneurs, people who create jobs and wealth in a way that bankers can scarcely claim to? How can it be fair to limit the 10% b]Capital Gains Tax rate[/b] for Entrepreneurs Relief to £5 million in a lifetime, with the balance likely to be taxed at 28%? Many entrepreneurs will have just one big capital payday in their career, whereas banker’s bonuses come round almost every year. If pushing income tax rates up by 10% drives bankers offshore, what is the ’s Capital Gains Tax regime likely to do to entrepreneurs?
With the structure of Entrepreneurs Relief the British tax authorities are saying that a £5 million Capital Gain is big enough. Don’t bother to build a business which gives you a larger gain and creates more jobs and more wealth in the process, because if you do we’ll tax you at 28%. Don’t build a Google or a Facebook — it is too much, and if you do we’ll tax you. Contrast the flat rate of 15% in the US.
And that is only part of the problem. Entrepreneurs Relief only works for those who found a company and retain 5% of the equity or more, or who are able to buy that level of equity in their business. It does not work for a manager who comes into a business, and builds it up or turns it round and receives his equity through an option package. This of course happens in many Angel or Venture Capital backed companies. The caps and limits on the Enterprise Management Incentive scheme make it close to useless in many circumstances, and result in wealth-creating entrepreneurs being pushed out of capital gains back into the income tax regime intended for the hated bankers.
Somebody’s head should be severed.
Simon Acland is a veteran investor and entrepreneur, with over 25 years' experience and 23 board seats under his belt. He has been involved with many successful trade sales, IPOs and flotations; he has also experienced failures and learned from them.
Watch the video below on talks about tax changes for high earners. It features Mark Puddephatt, Business Development Manager from Standard Life.
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