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  • By AJ
  • 16th November 2020

OTS concludes that CGT can distort behaviour – but isn’t that what it’s intended to do?

OTS concludes that CGT can distort behaviour – but isn’t that what it’s intended to do?

OTS concludes that CGT can distort behaviour – but isn’t that what it’s intended to do? 150 150 AJ

Published on 12 November, the Office for Tax Simplification (OTS) has published its first review of capital gains tax (CGT).

This new report, written in response to the Chancellor’s request earlier this year, is the first that the Office of Tax Simplification (OTS) has devoted to CGT. The Chancellor asked the OTS, in particular, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.

But isn’t this a tautology? Is not policy intent exactly what the same sentence seeks to stop? Surely, if we want to encourage entrepreneurship and innovation, then we want to change behaviours. Some might call this “distort”. I’d rather view it as “change for the better”.

The OTS’s extensive consultation revealed a range of areas in which, in their view, CGT is counter-intuitive and creates odd incentives. Some respondents argued that CGT is a barrier to economic growth, others that it is a barrier to a more equitable society.`

In my view, there’s a fundamental misunderstanding here. People are confusing the taxation of real entrepreneurial activity, leading to innovation, growth, and in due course (hopefully) wealth, with the taxation of unearned wealth where the mere passive holding of an asset increases wealth. By all means tax the latter in a similar, or identical way to income, but not the former.

The report outlines 11 recommendations for the government to consider across four key areas: rates and boundaries with income tax; the annual exempt amount (AEA); capital transfers and business reliefs.

Specific suggestions include:

  • Aligning capital gains tax rates with income tax rates or perhaps re-considering the boundary between the two regimes, such as when taxing retained earnings on the liquidation of a small owner-managed company. My view: fine if we’re talking about speculative (short-term) gains but not if we’re talking about encouraging and rewarding entrepreneurial activity and success.

 

  • Reducing the level of the annual exempt amount (perhaps to £5,000). My view: fine, but the increased tax take will be minimal.

 

  • Removing the capital gains uplift on death in some circumstances. My view: if double taxation is OK, then fine. But is this really where we should be going?

 

  • Scrapping investors’ relief: My view: this is a mis-understood relief, does not benefit many, and could easily be merged with a better targeted entrepreneurs’ reward relief.

 

  • Replacing business asset disposal relief with an alternative more focused on retirement. My view: a complete disaster and will, once and for all, drive entrepreneurship out of the UK. Why focus on retirement? What about the 20-year old who has a great idea? They’re hardly going to be concerned as to what happens when they’re 60! What about serial entrepreneurs/investors? What about encouraging investment in the first place?

We need to wake up and smell the coffee. If we are going to come out of the pandemic as an innovation-led, vibrant economy, where risk-taking is encouraged, we won’t do this by taxing people to the hilt, We need to encourage investment, encourage risk-taking, encourage innovation, and reward this through low taxation and encouraging reinvestment for future growth.

Taxing our way to a better economy is a flawed concept. Innovating our way to a vibrant and economically-sound future is, in my view, the only way to go.

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