Family companies continue to be disadvantaged by the UK tax code

Wed 23 Nov 2016

It is generally accepted that the great strength of the German economy are the so called ‘Mittelstand’ companies: family run, long term, low debt, creating high quality products and jobs and with high productivity. So why does our tax code continue to disadvantage such companies?

The Chancellor recognised the problems of low UK productivity and the ‘longstanding problem of our fastest growing technology firms being snapped up by bigger companies, rather than growing to scale’.  He announced an injection of additional £400m into venture capital funds through the British Business Bank, unlocking £1 billion of new finance for growing firms. There is also to be a Treasury-led review of the barriers to accessing patient capital in the UK.

However the driver to small firms being snapped up by larger ones is not necessarily that capital is not available for growth but may often be that owners want or need to realise some value from the business at reasonable tax rates in order to reduce their own risk.  The current tax framework makes the only option for this a sale of the entire business with Entrepreneurs Relief at 10%. Every other means – pensions, dividends etc. – are quite punitively taxed.

Whilst there continues to be a tax incentive for quick exit, all the behaviors of long term ownership, including investing in the long term skills of the workforce and therefore improving productivity, will be absent.

What the Government needs to do in order to remove the tax incentive to sell in the short term is create some opportunity for partial equity release for owners at reasonable tax cost.  There seems to be little recognition of the problem let alone a solution.

Additionally, one of the strengths of the Mittelstand model is strong employee retention and engagement.  Changes to employment tax will therefore be unwelcome to many businesses and Employee Shareholder Status was dealt a further deathly blow, which will be unpopular with some enterprises seeking to incentivise key talent.

For more information please contact Lindsay Pentelow (Lindsay.Pentelow@mazars.co.uk), Melanie Orriss (Melanie.Orriss@mazars.co.uk) or Graham Odlin (Graham.Odlin@mazars.co.uk)