• Call us today on 07775 433914


Capital gains tax – time for reform? 150 150 AJ

Capital gains tax – time for reform?

Capital gains tax – are we likely to see major changes?

The Chancellor has recently asked the Office of Tax Simplification (OTS ) to carry out a review of CGT to identify simplification opportunities. Remember that CGT is paid by individuals and trusts; companies pay corporation tax on chargeable gains.

The call for evidence is in two stages:

  • the first stage seeks high-level comments on the principles of CGT, by 10 August 2020; and
  • the second and main stage invites more detailed comments on the technical detail.

The specific themes identified in the principles section of the call for evidence are:

  • Allowances, including the annual exempt amount – its level and the extent to which it distorts decision making.
  • Exemptions and reliefs, including how they fit together and the extent to which they incentivise some decisions over others.
  • The treatment of losses within CGT, including the extent to which they can be used and whether the loss regime distorts decisions about when to buy or sell assets.
  • The interactions of how gains are taxed compared to other types of income, including how the boundary between what is taxed as gains rather than income works. Should there be different regimes for short‐term gains, compared to long‐term gains?

So, what do I think should or will happen?

I have long thought that there needs to be a closer alignment between tax on short-term gains and income tax rates, with some form of relief for longer-term, non-speculative gains. I was never sure why Business Asset Taper Relief (BATR) was abolished and replaced with Entrepreneurs’ Relief (ER) – it seemed to me that ER gave far more scope for abuse than BATR ever did.

It’s clear that any changes must be effective in preventing income receipts being converted into capital if there’s any difference in the rates between income tax and capital gains tax. Similarly, there would need to be some interaction with national insurance, assuming that the NI system and tax system are not fully-integrated (that is another huge subject in itself).

Most importantly, things need to be simple. With lifetime ER now at only £1 million, there’s still huge complexity surrounding eligibility, and the cost of obtaining proper advice on this can be disproportionately expensive.

What would I do?

  • Completely re-write the Taxation of Capital Gains Act (for both individuals and corporates).
  • Abolish the distinction between business assets and other assets.
  • Tax all gains on assets held for less than 3 years as income.
  • Taper gains on assets held for between 3 and 10 years by 5% a year and tax the balance (the amount after the taper relief) as income.
  • For all gains on assets held for 10 years or more (regardless as to the type of asset) tax at a flat CGT rate of 30%.
  • Abolish the annual exemption for individuals.

Cleverer minds than mine would need to work out what this would mean in terms of overall tax take but it would certainly make the taxation of capital gains far easier to manage.

Will something like this happen? Of course not! There will be more tinkering, more confusion, no real progress. And continued fees for tax advisers such as me….

The Chancellor’s Summer Statement. Really?……. 150 150 AJ

The Chancellor’s Summer Statement. Really?…….

Following the Chancellor’s Summer Statement yesterday I posted a blog simply summarising what he had announced. Now, nearly 24 hours later, I’ve had a chance to reflect on what was said, and I can’t for the life of me believe that he’s got it right.

I don’t normally comment on political issues but confine myself to analysing the tax and business implications of fiscal and economic announcements. But I’ve decided to exempt myself from my self-imposed moratorium on political comment and get a few things off my chest!

I should say at the outset that I’ve been broadly supportive up until now. The furlough scheme and self-employed income support scheme were needed, and more or less hit the button. I’m less convinced as to how effective the various loan schemes were, but that’s more to do with the banks not playing ball rather than the sentiment behind the schemes. But some of yesterday’s announcements baffle me.

Of course, furlough and the SEISS have to end. We simply can’t afford to keep them going. And yes, there will be both business and individual financial hardship to come. That is sad but inevitable. But yesterday’s announcements are set to cost another £30 billion. Money well spent? I don’t think so.

The gimmick: “eat out on us”… £10 off meals eaten out on certain days in August. What about those who can’t even afford to eat in and are relying on food banks. Wouldn’t the money have been better spent helping them? If you have the luxury of being able to afford to eat out, is £10 off your meal really going to change your decision about going out or not? And does it fit with the social distancing and “be alert” messaging? I think not.

Similarly, a reduction in VAT from 20% to 5% on eating out, hotels, leisure parks, B&Bs, camping sites etc. Surely holidays have now been planned. If you can afford to go away, will a VAT reduction really change behaviours? And will the VAT reductions even be passed on to the consumer?

As for the SDLT holiday, surely a distortion in the housing market is inevitable. Will people really bring forward house moves to take advantage of this? Maybe first-time buyers will, but who else? And if you’re in the fortunate position to be able to spend £500k on a house, does the saving of a few £thousand really make a difference?

Kickstarters (our lexicon of new words increases by the day!). Surely there needs to be a commitment from the employer to continue to employ these young people (so-called trainees) once the initial period ends, otherwise it’s no more than encouraging cheap labour. Far better would have been a proper incentive for companies to invest in full, proper apprenticeships, which give young people the opportunity to learn skills that will hopefully set them off on a lifetime career.

Muddled thinking, gimmicks, loss of credibility. We needed something more imaginative and sustainable.

Chancellor’s summer statement (or “mini Budget”) 150 150 AJ

Chancellor’s summer statement (or “mini Budget”)

A range of measures to boost the UK economy in the wake of the Covid-19 pandemic has been announced by Chancellor Rishi Sunak. They include VAT cuts for the hospitality sector, a Job Retention Bonus for companies, a Stamp Duty Land Tax cut and an ‘Eat Out to Help Out’ discount.

In a statement to the House of Commons, the Chancellor outlined plans to give businesses a £1,000 bonus for every employee it brings back from the furlough scheme and employs them from November to January on a salary of at least £520 a month.

The Chancellor said that if all nine million people are brought back to work, it would result in £9bn being paid out by the government.

A new programme, the Kickstart Scheme,  will give hundreds of thousands of young people, in every region and nation of Britain, the best possible chance of getting on and getting a job, said the Chancellor. It will directly pay employers to create new jobs for any 16 to 24-year-old at risk of long-term unemployment. These will be new jobs – with the funding conditional on the firm proving these jobs are additional.

These will a minimum of 25 hours per week paid at least the National Minimum Wage – with employers providing Kickstarters with training and support to find a permanent job. If employers meet these conditions, the Government will pay young people’s wages for six months, plus an amount to cover overheads. That means, for a 24-year-old, the grant will be around £6,500.

Employers can apply to be part of the scheme from next month, with the first Kickstarters in their new jobs this autumn. Various other incentives to take on apprentices were also announced.

From Wednesday next week (15 July) until 12 January 2021, VAT for the hospitality sector will be cut from 20 per cent to 5 per cent on food, accommodation and attractions. It will apply to the likes of restaurants, pubs, hotels, caravan and leisure parks, cinemas and zoos.

The Nil Rate Band of Residential SDLT (Stamp Duty) will be temporarily increased from £125,000 to £500,000 until 31 March 2021, with immediate effect.

Sunak also announced that every person in the UK would get an ‘Eat Out to Help Out’ discount of 50 per cent off, up to £10 per head, in August if they go for a meal between a Monday and a Wednesday.

The Chancellor said his plan was designed to support jobs by focusing on skills and young people.

“Throughout this crisis I have never been the prisoner of ideology,” Sunak said.  “For me, this has never just been a question of economics, but of values.

“We believe in the nobility of work. We believe in the inspiring power of opportunity. We believe in the British people’s fortitude and endurance.

“Our plan has a clear goal: to protect, support and create jobs. It will give businesses the confidence to retain and hire. To create jobs in every part of our country. To give young people a better start. To give people everywhere the opportunity of a fresh start.”

There will be a full Budget in the autumn in which the Chancellor will give a far more detailed analysis of the economy with no doubt some significant tax changes.

Tax policy documents (and my thoughts) and Covid-19 150 150 AJ

Tax policy documents (and my thoughts) and Covid-19

HM Treasury and HMRC have set out new timelines for tax policy consultations and other work in the light of the current Covid-19 crisis. As I comment further below, this is welcome news but I would have gone much further…

In summary:
• There will be a three-month extension to many consultation deadlines to give stakeholders time to submit their views
• The extension will ensure that those facing Covid-19 disruption will have a chance to have their say on possible tax changes
• Despite the extension of publication deadlines, due to Covid-19, the government remains committed to all planned reforms

The government is extending deadlines to ten consultations and calls for evidence currently underway by three months and also a short delay to the publication of other documents announced at Budget 2020.
The extension will give all stakeholders, who are facing disruption due to COVID-19, more time to submit their views and allow them to fully engage with these documents and contribute to the tax policy making process.

The government says it is grateful for responses already received, and would welcome further early responses from stakeholders where possible, to support its continuing consideration of these issues.
The Financial Secretary to the Treasury Jesse Norman said:

“Consulting on tax policy is crucial to good tax law. And a good consultation makes sure everyone with an interest in the subject has an opportunity to have their say.
That is why we are extending these deadlines. The government is very grateful to the stakeholders who have already responded to these documents. But it is also acutely aware that there may be others who want to contribute but cannot do so because of the current situation with Covid-19. This extension should help them to do so.”

Alongside the consultation extensions, the publication of some documents announced at Budget 2020, including work on tax conditionality and a consultation on stronger penalties for tobacco tax evasion, will be pushed back until the Autumn. And the government will set out in due course when it will publish other tax policy documents, including the consultation on aviation taxation and a call for evidence on disguised remuneration schemes.

Is the delay long enough though? It’s claimed that an extra three months should allow sufficient time for engagement, whilst still enabling the government to deliver important tax policy changes within the current fiscal timetable. I disagree. We’ve already had the farce of a Budget, which within days proved to be a complete fiction as the economic rulebook was re-written almost overnight. How can we possibly say with any certainty, within the next three months, what the economic situation will be? Surely it would be far better to simply ditch all the proposed changes and start again from scratch.

We know there will have to be a re-writing of the tax code. It’s obvious. We will all have to pay more taxes. Ways of working will change beyond recognition, as they already have done. That will make current plans for off-payroll working completely redundant. The distinction between earned and unearned income will have to go, as will the discrepancy between capital gains and income.

But that’s for another day and I will be writing more on that over the coming weeks.

For what it’s worth, though, whilst the government continues to try and pretend that fiscal and economic life can go on much as before, here is a full list of the extension announced.

Full List of Extensions
The deadlines for responses to the following tax policy documents will be extended for three months, to allow stakeholders to engage fully with these documents and to contribute to the tax policy making process. However, the government encourages early responses from stakeholders where possible, to support its continuing consideration of these issues:
• Plastic Packaging Tax: Policy Design – now closing on 20 August 2020
• Preventing abuse of the R&D tax relief for SMEs: second consultation – now closing on 28 August 2020
• Tackling Construction Industry Scheme abuse – now closing on 28 August 2020
• Notification of uncertain tax treatment by large businesses – now closing on 27 August 2020
• Vehicle Excise Duty: call for evidence – now closing on 3 September 2020
• Call for evidence: raising standards in the tax market – now closing on 28 August 2020
• Consultation on the taxation impacts arising from the withdrawal of LIBOR – now closing on 28 August 2020
• Hybrid and other mismatches – now closing on 29 August 2020
• Tax treatment of asset holding companies in alternative fund structures – now closing on 19 August 2020
• Consultation: HMRC Charter – now closing on 15 August 2020

Budget Commentary 150 150 AJ

Budget Commentary

This was the first Budget of the new government, the first Budget for 18 months, and the first Budget of the new Chancellor, Rishi Sunak. It followed a Bank of England interest base rate cut from 0.75% to 0.25% (50 basis points) announced earlier in the day.

Whilst the first Budget of a new Parliament usually sets the tone for the next few years, often gets rid of “bad news” well before the next election, and possibly takes some longer-term decisions that will gradually impact over the lifetime of the Parliament, this one was focused on one main issue – the coronavirus impact which the Chancellor went straight into in his first sentence. But the Chancellor also said that the Budget would deliver on the change that was promised at the General Election and was a Budget for prosperity. He then set out massive spending plans and promises. I will leave it to you to work out how this is all going to be paid for!

As always, much of the tax detail was not announced and was only apparent when reading the Treasury Press Releases and other documents which were released as soon as the Budget Speech ended. But the real detail will not be known until the Finance Bill is published on Thursday 19 March. From a first look, however, other than the measures discussed below there is very little to get excited about and certainly no major surprises.

This summary focuses on the key tax changes and does not consider the public spending and investment announcements that were made (and there were many of them!).

Here are the key points which we know so far.

The headlines (further detail below)

  •  Entrepreneurs’ Relief major change.
  •  R&D tax credit PAYE cap delayed until 2021.
  •  Off-payroll working/IR35 to proceed with effect from 6 April 2020.

Help for businesses in response to coronavirus

  •  “Time to Pay” service to be ramped up with immediate effect to ease burden for businesses affected by COVID-19, which may be able to agree a bespoke Time to Pay arrangement. To ensure ongoing support, HMRC have made a further 2,000 experienced call handlers available to support firms when needed.
  •  New temporary coronavirus business loan scheme.
  •  Business rates for this year to be abolished for many businesses in the retail and leisure sector.
  •  Any business eligible for small business rates relief will get £3k cash grant as a one-off payment

Entrepreneurs and innovation

  • Major reform to Entrepreneurs’ Relief (ER). Lifetime limit on gains eligible for Entrepreneurs’ Relief to be reduced from £10 million to £1 million from today (ie with immediate effect). This will affect all eligible CGT disposals carried out from today. Whilst this is unwelcome, and fails to address the structural complexities of ER, it is a “quick fix” way of addressing many of the concerns and pressures that the Chancellor faced. It is claimed that 80% of those using the relief will be unaffected.
  •  Review of the Enterprise Management Incentive Scheme (EMI) to see whether more companies should be able to access it.
  •  Research & Development Expenditure Credit (RDEC) rate to increase from 12% to 13% from 1 April 2020.
  •  Consultation on whether expenditure on data and cloud computing should qualify for R&D tax credits.
  •  SME R&D scheme PAYE cap to be delayed until 1 April 2021 (was to be 1 April 2021). Consultation on the design of this to ensure that eligible businesses are not penalised.

Business tax

  •  Corporation tax rate to remain at 19% (as expected).
  •  Structures and buildings allowance to rise to 3% from 1 April 2020.
  •  Reforms to Intangible Fixed Assets regime.
  •  Off payroll working/IR35 proceeds from 6 April 2020 subject to some minor changes.

Personal taxes

  •  Savings tax and ISA limits unchanged.


  •  Extra funding for HMRC to secure £4.7 billion of additional revenue over period to 2024-25.


  • All alcohol and fuel duties frozen.

Other issues

  •  Additional 2% SDLT for non-residents purchasing residential property in England and NI from (1 April 2021).

Our immediate thoughts

This was a Budget full of spending promises but very light on tax policy changes or addressing some of the complexities/inequalities in the tax legislation.

Changes to Entrepreneurs’ Relief were expected, but the proposal is a very crude attempt to address the issue. Whilst we have yet to see the small print of the Finance Bill, at this stage it appears that little has been done to make the relief easier to understand and qualify for. Maybe, with only £1 million of relief now available, the Chancellor didn’t think that detailed legislative changes were necessary. To put this into context, the relief is now only going to be worth £100,000 maximum (10% x £1 million). In my view, this is hardly an incentive to take entrepreneurial risk. Far better, in my opinion, would have been a reintroduction of some form of retirement relief which rewarded longer-term investment in entrepreneurial businesses.

Another missed opportunity is in the area of R&D tax credits. Whilst the delay to the introduction of the PAYE cap is welcome, ditching the idea completely and increasing the rate of enhanced relief from 130% to 150% would have been far more welcome.

As for off payroll working/IR35, we appear to be stuck with it, subject to some minor tinkering.

Given the times that we’re in I was maybe hoping for too much. Perhaps the Autumn Budget when, hopefully, COVID-19 is not so high on the agenda, will be the time for more radical legislative change. Let’s hope so.

And as a final point, what about life after Brexit (remember it?!). It was barely mentioned…

11 March Budget predictions 150 150 AJ

11 March Budget predictions

On 11 March, Sajid Javid will present his first Budget as Chancellor of the Exchequer, which will also be the first Budget in nearly a year and a half. It’s also the first Budget presented by a government with a sizeable majority in Parliament for a decade or so.

The first Budget of any new Parliament is normally the one where the Chancellor has the political capital to make some major reforms, as it gives, potentially, five years to major on the welcome news and five years for people to forget the bad news!

What can we expect?

We don’t yet know what sort of Chancellor Mr Javid will be; more like George Osborne who liked to pull rabbits from hats, or more like Philip Hammond who adopted a cautious approach of announcing, investigating, and only then implementing changes.

Encouraging business investment will be high on the Chancellor’s agenda and it has already been announced that the rate of research and development expenditure credit (RDEC) will increase from 12% to 13%. But I’m hoping that the proposed re-introduction of the “PAYE cap” for SMEs claiming repayable R&D tax credits will not be implemented. Equally, the Structures and Buildings allowance will be increased from 2% to 3% to encourage businesses to start building new business facilities. And will the Chancellor finally make large scale investments in green technology?

Tax raising measures

There will, of course, be tax raising measures although, as usual, most are likely to be portrayed as action to prevent tax avoidance and refocus incentives.

Capital Gains Tax and Entrepreneurs’ Relief

I hope not, but I fear that there will be significant changes to Capital Gains Tax (CGT), with a review of Entrepreneurs’ Relief (ER) having featured in the pre-election material of the Tory party, with an increasing amount of speculation that ER might be reformed or even abolished at the Budget.

CGT is often perceived as a tax on the wealthy and increases in CGT rates may well be popular amongst the newly converted Conservative voters in former Labour strongholds. At 20%, the headline rate of CGT is fairly low, although the 28% headline for residential property is more significant. My prediction: a flat rate of CGT at 30% with a modification of ER or the re-introduction of Business Asset Taper Relief (remember it?) to tax long-term entrepreneurial gains at a lower rate (maybe 15%?).

Some taxpayers may be considering triggering gains, looking to lock into current regimes ahead of the Budget announcements, or otherwise ahead of the tax year-end.

Off-Payroll Workers

Another area in which change is rife is off-payroll working – freelancers and the so-called gig economy. The latest planned changes to the so-called IR35 rules (extending to the private sector the rules introduced for public sector workers a couple of years ago) are subject to a recently announced review. The review is due to be finished by mid-February and any changes arising are likely to feature in the Budget in time to be implemented by the scheduled change date of 6 April 2020. Those working on a non-employed basis certainly need to keep appraised of developments and the likely changes they are going to face in the new tax year, although current thinking is that the scheduled changes will not be altered significantly, and contractors will need to prepare for the new regime.

Tax Avoidance

This has been a recurrent topic in recent Budgets, and one could be forgiven that tax avoidance is the answer to the former PM’s “money tree”. Immediately after the election, we saw the publication of the loan charge review and HMRC’s surprisingly swift response to it. Most of the changes recommended will need to be legislated, so are likely to feature in the Finance Bill.

My wild cards

Let me pull two rabbits out of the hat. Both are ripe for changes for differing reasons.

Inheritance tax: an all-party parliamentary group of MPs has recently recommended major reforms to inheritance tax (IHT) – and echoed comments from the Office of Tax simplification last year that IHT is far too complex and outdated. The Chancellor might choose to increase the basic relief (the nil rate band) but collect more tax in the long term by removing/restricting complex reliefs (the main residence nil rate band, exemption for gifts out of income, business property relief qualifying rules etc.). My prediction: a flat rate of IHT on both lifetime and death disposals with no nil rate band, no reliefs, and no complex anti-avoidance rules such as the gifts with reservation or pre-owned assets test.

VAT: EU membership has prevented us from doing very much with VAT. Now “this thing has been done” we can be more flexible with VAT. Not a prediction but my wish: Varying rates of VAT, so, for example, a rate of 25% on “luxury” items, 15% on normal items, zero% on essentials such as light, heat, food, children’s clothing etc.

As always, we will be analysing the Budget speech and the press documents that are released by the Treasury the moment the Chancellor sits down, and posting our analysis soon after the end of the speech.

Retirement relief to Entrepreneurs’ Relief – the next stage of the journey?… 150 150 AJ

Retirement relief to Entrepreneurs’ Relief – the next stage of the journey?…

When I started my career in tax, we had Retirement Relief; very few people will remember it. Then we had Business Asset Taper Relief; some of you will remember that. Now we have Entrepreneurs’ Relief; but for how much longer?

According to a recent article in The Times, this “loophole” (really? It is a Government incentive backed by comprehensive legislation) has “scandalised tax experts for years” and cost the exchequer more than £2bn each year.

For the uninitiated, Entrepreneurs’ Relief effectively reduces the rate of capital gains tax (CGT) on the disposal of qualifying businesses and business assets to 10%. It is designed to encourage enterprise, entrepreneurship and risk-taking. It helps people to recycle businesses, to bring in new management with fresh ideas, to breed a generation of serial investors (the lifeblood of many early-stage businesses) and to take risks that they might otherwise not be minded to take. It breeds multiple Dens of Dragons!

But is the relief now too generous? Many people think it is. I don’t.

Those who criticise it take the “fat cat” view on life. They think that all it does is reward the wealthy who have already made their riches and doesn’t really encourage entrepreneurship. Really? What about all the new jobs it creates, with the associated tax-take for the exchequer. What about the VAT and duties it generates? What about the physical and mental well-being it engenders in people involved with a thriving, new, exciting business?

Some people go as far as to say that the tax system shouldn’t have a part in rewarding and incentivising entrepreneurship? Fine, if we want a nation of 9-5 workers, and to rapidly fall away as a nation fit to compete on the world stage.

Whatever/whoever is in power in government in the months ahead, examine the system by all means. But please don’t make hasty decisions. Consider it in the round, along with incentives such as SEIS/EIS, R&D tax credits, Patent Box, EMI share schemes, IHT Business Property Relief etc.

It would be a disaster if misinformed, politically ideology led to hasty and misguided decisions on fiscal policy.

Tax policy – some personal thoughts and interesting statistics… 150 150 AJ

Tax policy – some personal thoughts and interesting statistics…

What do politicians want to do with tax? They want to raise revenue to fund public spending and they want to use tax policy as a political carrot. Clearly the two completely contradict each other.

Most people don’t like paying tax. It’s the nature of my work that a lot of people ask how they can “get round the system” or “isn’t there a way I can do this tax-free”? My answer is always that I will help them to ensure that they pay what is rightly due, that I will ensure that all reliefs and allowances are claimed, and that where there’s more than one way to do things, I point out the most tax-effective way. That’s where my tax planning ends.

Personally, I consider it a privilege to pay tax. Why wouldn’t I? And I’m going to risk my clients’ wrath by saying that I think I should pay even more tax than I currently do. Yes, I’d notice it. Yes, it would hurt. But equally, I can afford to do so, even if it means making some sacrifices. Many people don’t have that luxury, though.

So, where do our taxes go? As the economy has grown, so has the tax-take. In 1980 the tax receipts were some £69bn. This year the tax-take will be almost £770bn, an increase of well over 1000%, and well in excess of the compounded rate of inflation. The bulk of our tax comes from three sources: income tax, VAT and national insurance. Over 40% of our entire tax-take comes from taxes on personal income (income tax and NICs). This is somewhat higher than the OECD average and many of our key trading partners such as France and Germany.

But as the nature of trade and work changes, some of these taxes might be vulnerable. Self-employment, less spending on luxury items, a move to a more digital economy: all these could potentially erode our tax base.

I’m not a politician, but there’s much for the politicians to be worried about. There needs to be transparency, scrutiny, accountability, and most importantly a long-term view. At the moment a day seems a long time in politics. Should we be worried?…

The tax gap – and the next PM wants to cut taxes further… 150 150 AJ

The tax gap – and the next PM wants to cut taxes further…

HMRC has recently published the 2019 edition of Measuring tax gaps which shows estimates of tax lost in 2017/18. Worryingly, the “gap” for 2018/18 is estimated at £35 bn, or 5.6% of total tax due. The 2017/17 figure was £33 bn (5.7%), so little progress has been made in reducing this.

How does this fit, then, with our next PM’s wish to cut taxes? A 14th-Century Islamic scholar, Ibn Khaldun, was the original tax-cutter. He argued that lower taxes stimulate activity, which creates wealth and that generates more tax receipts. This is the concept behind the Laffer curve. Some 500 years after Khaldum’s first postulation, Art Laffer, the American economist, picked up the theme during the Nixon administration. He explained that there is an optimal rate of tax somewhere between zero (where no tax would be collected) and 100% (which would deter anyone from work and hence raise nothing either). The simplicity of this logic stuck and became the theoretical foundation for reforms by both Ronald Reagan and Margaret Thatcher.

The Laffer curve is clearly enjoying a revival today. When President Trump slashed taxes in the US, the Treasury secretary claimed “the tax plan will pay for itself in economic growth”. Now, it appears, our next UK PM wants to do the same thing.

There’s a big problem though. In order to be effective, you need to know where the Laffer curve peaks – and no one does! It moves around according to the sophistication of tax lawyers and accountants, social mores, and perhaps, most importantly, the effectiveness of the tax system in collecting the taxes due.

So, we’ve completed a virtuous circle!

If we look at the 2018/18 tax gap, the largest share is due to income tax, NICs and CGT at £12.9 bn. This includes £7.4 bn in respect of self-assessment of which £4bn is attributable to the self-employed. The VAT gap is £12.5 bn whilst corporation tax accounts for £5.2 bn.

Demographically, the largest culprit is small businesses, followed by large businesses, mid-sized businesses and finally, individuals.

Behaviour-wise, criminal activity amounts to £4.9 bn, the hidden economy and tax evasion accounts for £3 bn and £5.3 bn respectively. Avoidance accounts for £1.8 bn.  Errors and mistakes amount to a staggering £9.8 bn.

So, what are my conclusions about both the tax gap and tax rates in general?

  • Tax evasion and illegal activities account for seven times as much as tax avoidance. The focus should, therefore, be on reducing the former and not making the tax system even more complex by addressing the latter which also has the knock-on effect of penalising many innocent and commercially-driven decisions.
  • Make the tax system simpler. If so much is lost due to mistakes, making the system even more complex is simply daft.
  • Address practice, not theory. The Laffer principle is a great hypothesis, but impossible to get right.
  • And finally, on a personal note, let’s stop being greedy and pay our taxes (the correct amount – not more or less) with good grace, thankfulness, and optimism (hopefully not mis-founded) that they will be used wisely.
Innovation – why we’re missing a trick… 150 150 AJ

Innovation – why we’re missing a trick…

Innovation – why we’re missing a trick for early-stage financing

There’s a market failure in financing early-stage technology companies. Anyone who watches “Dragons’ Den” will know there’s a fine balance between risk and reward, but for early-stage technology companies, a number of factors combine to make this an extremely tough area. The thoughts and solution outlined below are the result of input from several authors experienced in the creation of innovative technology-based companies, an important component in creating a robust future economy.

We argue that there could be a government intervention-based solution that is easy to implement, could provide positive returns to both Government and the entrepreneurs, ultimately benefiting the UK economy as a whole and ensuring that the UK remains at the forefront of innovation.

The key issue is ‘liquidity’; to be more precise the key problem is absence of liquidity for the high-risk entrepreneurs, management teams and angel investors that create new innovative companies. That is, early-stage investment funds and management teams become locked in to their investments, often having to wait a decade or more to secure any return.

Recycling the entrepreneurs and skilled early-stage management teams is critical for optimising the growth of new innovative companies, as is the ability for investors with specialist early stage capability to realise gains quickly in order to re-invest in further new opportunities.

The proposed solution is a government-backed fund that is structured to provide the opportunity for these key individuals and investors to do exactly that – realise gains and move on to the next opportunity.

Here are some of the elements that combine to create the market failure:

  1. Investment Managers specialising in genuine early-stage investment are becoming increasingly rare; they find it more profitable to come in when the technology has been proven, markets established and the commercial risk diminished. As a result, there are strong motivating forces at work driving those early-stage investment houses that are successful to move up the food chain to make larger Series A investments, and so on.  These economic drivers act to erode the availability of expert early-stage investment in the UK.
  2. The returns for specialist early-stage investors historically have not been very good.
  3. Although various mechanisms exist to enable very early investors and management teams to realise value, e.g. requiring existing shareholders and/or incoming new investors being offered the opportunity to buy out the early stage investors and at market value, they are rarely practiced.
  4. Early-stage investment funds often lack the scale to continue investing in their portfolios and there is uncertainty as to follow-on funding.
  5. Due diligence costs for early-stage investments are often just as large as later stage ones, and what actually is the due diligence performed on?
  6. Incoming late-stage investors usually insert ‘cascade’ structures that wipe out earlier funders (mitigated if the new fund provides support to the early stage investors to follow their investments).
  7. There’s a scarcity of high-quality, industry experts who have the managerial experience to steer start-up companies through early investment rounds and towards revenue generation.  This issue is a particular problem outside of the key technology clusters such as London, Oxford and Cambridge.
  8. Specialist start-up management teams, critical to establishing a robust company, but often not the right fit for later stage companies will need to be replaced by managers with other skills-sets as the business matures. But the incoming management will want a slice of the cake and would probably be unconcerned about the impact of diluting or even eliminating their predecessors’ rights.  These situations can result in the acrimonious removal of the early-stage management teams as ‘bad leavers’ who lose their stock options entirely.  This will clearly impact on the motivation of such management teams to recycle their skills in other early-stage opportunities that emerge.

A Possible Solution

A Government-backed fund, operating under specified conditions, to reward both early-stage investors and associated management teams for taking those very high early-stage risks could release these skills and capabilities to be recycled more efficiently. The same mechanism could be used to enable early high-risk investors / management to follow on their investment as an alternative. To some extent tax-favoured Venture Capital Schemes such as SEIS and EIS address this, but they have their limitations.

We propose a more fundamental solution, being a government supported fund mechanism. The fund would not only incentivise more early-stage activity but would also create a return to government over the long term. The fund would acquire an equity position but at a discounted value, i.e. it could buy early investor / management equity at a discount or, in the event the fund enabled an early investor to follow their investment the same discounting mechanism would be obtained by the supported investors / management agreeing to pass on a % of the economic value of any equity they dispose of in the future.

When the fund operates to buy equity, there would need to be clear 3rd party, independent validation of the value of any equity that is acquired, i.e. at the point of a new round of investment where unconnected parties are defining the value of the shares.  A Government-backed fund could buy early stage investors out at a clear discount (10%, 20%, 50%) without any State Aid issues and the % discount could be tuned to drive investment to the regions. Investment gain would be subject to corporation tax. The same mechanism could be used to reward management which of course would be subject to income tax or capital gains tax


In conclusion, the market failure in early-stage technology investment is not simply an aversion of technological risk or the traditional low return but rather is compounded by the lack of liquidity for all parties involved and the risk that early investors / managers will be ‘squashed’ by later stage investors and management teams. A mechanism for addressing this market failure has been proposed which is not only State Aid compliant but which can also be tuned to incentivise regional development. The liquidity created in both cash and (now) experienced management teams could be transformational.

It sounds easy; it is easy. If structured carefully it could provide positive returns to both Government and the entrepreneurs, ultimately benefiting the UK economy as a whole and ensuring that the UK remains at the forefront of innovation. bidi-

And just to confirm you are not a bot... + 67 = 77