Will tax laws give start-ups a break?
11 August 1999
Gordon Brown's Enterprise Management Incentive Scheme, to be announced this week, aims to give tax breaks to small businesses. The forum looks at the changes and asks are they enough?
City lawyers are divided over the Chancellor of the Exchequer's plans to introduce tax breaks to small and start-up companies.
Gordon Brown revealed the tax breaks at a Confederation of British Industry conference at Birmingham last week.
And in his pre-budget report, to be delivered on Tuesday, he is expected to give details of his Enterprise Management Incentive Scheme, which will allow small businesses to give 10 key employees share options of up to £100,000 free of income tax.
The move has already provoked controversy with union members, who claim that Brown's attempt at promoting UK entrepreneurship favours managers over employees, encouraging a "fat cat" hierarchy within companies.
And although the share options are free from income tax, the scheme will be subject to existing capital gains tax law.
Small companies will still have to pay 40 per cent in capital gains which will slowly decrease to a 10 per cent charge after a 10 year period.
Do the tax breaks go far enough to really benefit small companies? Or does the law on capital gains tax need to be changed for the new rules to have any effect?
Michael Trask, head of the tax department at SJ Berwin, says the scheme appeals mainly to IT and e-commerce businesses. He says: "I think it is meeting a need. You have got some high-tech companies, for example, which need high quality people."
He says that if a company asks its employees to commit their livelihoods and careers to a perceived high-risk venture, then they deserve an equity share with a tax break that will allow them to have a greater stake in the company's success.
While Trask concedes that the issuing of shares would avoid incurring an up-front license tax charge, he says that there may be problems over the fact that the lowest capital gains tax rate only kicks in after the lapse of a 10-year period.
His problem with the delay is that it is out of the hands of the individuals affected. "The way people realise their capital is out of their control. There should be no limit.
"If they have an incredibly quick success, they should be able to cash in," he says.
Robin Tremaine, head of the employee benefits group at Clifford Chance, agrees that the 10 year period "is probably an unrealistic time".
Although it does not go as far as he would hope, Tremaine says: "It's a start and a move in the right direction."
He says he is not overly concerned by Brown's proposals. "It is unlikely that many of our clients will be affected. It is very restricted and only applies to firms with growth assets of £15m or less."
Tremaine argues that the rules are still way behind the US policy on start-up companies where, for example, in Silicon Valley budding businesses have been able to flourish through flexible tax incentives. He says: "There is still a long way to go to achieving what they have in the States."
Graham Muir, tax partner and share scheme specialist at Nabarro Nathanson, disagrees. He says that the scheme is beginning to mirror the US treatment on smaller companies. "The US does not have a regime targeted at smaller concerns but they do have more generous benefits."
He feels that the proposals are a step forward. "There are significant benefits for smaller companies although there is nothing targeted at venture capitalists specifically," he says.
He argues that the net could be spread wider: "They will not be available to listed or quoted companies. There is no reason to discriminate against plcs."
However, he says: "The policy behind it is a good policy - to encourage people who would not actually go and join those smaller concerns rather then stay with larger concerns."
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