UK tax hike: what do businesses think?

Businesses across the UK are bracing for higher taxes. No one can be absolutely certain at this stage, but it is unlikely to come in the form of higher taxes on income, business profits or sales (VAT) – measures that have already been ruled out. Instead, analysts are looking at changes to the capital gains and inheritance tax systems. As it happens, these corners of the tax system are of particular interest to entrepreneurs and business owners. If you have business assets to sell or pass on to future generations, you can currently benefit from fairly generous tax breaks. However, these reliefs could be subject to review as the new government seeks to plug a £22 billion black hole in the public finances.

With the government clearly signalling that taxes are set to rise, questions are being asked about how this can be done without undermining the commitment to boosting growth. So what do Britain’s fast-growing businesses think? To find out, I asked a group of businesspeople and advisers to send me their views.

Possible tax changes

So what are we talking about? Well, as it stands, the top rate of capital gains tax (CGT) – charged on the disposal of assets – is 28%. This compares with the top rate of income tax of 45%. According to analysis by the Resolution Foundation, a think tank, bringing CGT into line with income tax rates could raise an extra £7.5 billion in revenue. Given that selling assets is a form of income, this could be popular on the grounds of fairness. However, an alternative would be to reform the rules that reduce the amount of CGT payable. For example, business owners who qualify for Entrepreneurs’ Relief could benefit from a 10% rate when selling their business. Abolishing or reducing some of these rates could raise more revenue.

Similarly, inheritance tax. For example, Business Property Relief reduces the tax paid on certain assets when a business is inherited. Again, the relief offered may be less valuable.

Changes to the CGT and inheritance tax systems would undoubtedly affect business owners in one way or another. But would this, as some argue, in itself have a stifling effect on entrepreneurship and thus undermine economic growth? Not necessarily, but it is complicated.

The tax rates that are likely to be imposed on exits in the distant future are unlikely to be a priority for founders starting their own companies, according to Andy Fishburn, managing director of Virgin Startups, a nonprofit that provides support to entrepreneurs.

Innovation comes first

“While tax considerations can impact decisions about investment, hiring and long-term strategy, most early-stage founders are driven by opportunity, innovation and the desire to build something significant, so tax policy is unlikely to discourage new startups,” he says.

It’s a view echoed in part by Chirag Mehta, co-founder of coaching firm Know You More: “When I started the company, it was about getting my idea off the ground. The financial elements were seen as a necessity of running the business, but not as an exciting part. “But they started playing a role later on, in terms of the business model and forecasting,” he says.

Mehta adds that tax worries wouldn’t be a demotivator, but the tax system can still affect the chances of success. “I would still start a business. But whether it’s successful or not is another question. At some point, higher taxes have to be passed on to the customer.”

Zain Ali, CEO, is the founder of Centuro Global, a platform designed to help businesses expand overseas. He points out that a country’s tax system has an impact on competitiveness. “Higher taxes would be a problem, especially when competing with more tax-friendly environments abroad. Over the last few years, we’ve seen both cultural and technological advances that make remote working possible. And if the tax burden in the UK increases significantly, that could encourage businesses to look for alternative locations with more favourable tax regimes,” he says.

Stability matters

On the other hand, a supportive tax system can do a lot to encourage entrepreneurship. “Businesses benefit from a stable and predictable tax environment, so taking a long-term view of what supports a thriving UK economy is key,” says Andy Fishburn. “Simplifying the tax code for small businesses, as well as offering targeted relief to early-stage businesses – and those who invest in them – would go a long way to better supporting UK entrepreneurs. Business rates are also long overdue for a major overhaul, so progressive policies in this area would be welcome.”

Of course, companies look at the tax system and plan accordingly. Varun Bhanot is co-founder and CEO of personal training firm Magic AI.

“My primary reason for starting the company was to fill a gap in the market—making personal training accessible to the masses in an affordable way,” he says. “However, tax considerations were part of the initial calculation. While the primary focus was on market strategy, understanding the tax implications helped to effectively structure the business. For example, planning around corporate and capital gains taxes influenced decisions about financing strategy.”

The fact that businesses plan their operations with tax considerations in mind highlights the need for a degree of stability.

Family businesses – a matter of inheritance

Not all businesses, small, medium or large, are focused on exits. For family businesses, the aim is likely to be to create a business that can survive for generations. This is recognised in current policy, and Business Property Relief offers a way of reducing inheritance tax.

Neil Davy, chief executive of Family Business UK, says any changes to the current rules could be economically worrying.

“Business property relief is crucial to the long-term prospects and prosperity of family businesses and the wider family business sector,” he says. “Business property relief enables family businesses to be passed on to the next generation without the business incurring costs that would otherwise go towards investing in training, creating jobs, new products and services or expanding into new markets.”

While acknowledging the fiscal challenges facing the government, he urges careful consideration. “We understand that the government faces difficult choices to balance the budget. Against this backdrop, there is no doubt that BPR will be considered by the Treasury as part of its overall budget review and planning. However, removing or reducing BPR without fully understanding the implications would be devastating for these businesses, the sector and the wider UK economy,” he says.

Governments can change the tax system to make it fairer (e.g. align CGT rates with income tax), promote growth or simply increase revenues. Finding the right balance will never be easy.