Fears over tax rises for entrepreneurs trigger 71% average jump in businesses choosing to close ahead of Budget days
Fears over increases in taxes on entrepreneurs mean that the run-up to Budget day triggers on average a 71% jump in the number of businesses deciding to close, shows a new study by international audit, tax and advisory firm Mazars.
The firm explains that an average of 1,308 businesses per month are wound up voluntarily by their owners* in the month before a Spring Budget or Autumn Statement, compared with 764 per month in all other months (see graph below – based on five years of data).
A major reason for these spikes in closures is the worry among business owners that the chancellor may increase the tax on them taking capital out of their businesses. This would potentially cost some millions of pounds extra tax if they closed their businesses after a change to tax rules in the Budget.
Simon Chandler, partner and head of restructuring services at Mazars, says that speculation persisted ahead of Budgets for several years that the chancellor would increase taxes on entrepreneurs closing their businesses. This meant that spikes in business closures have occurred for several years in a row, with many of these closures being premature, costing the economy jobs and growth.
A major tax rise for entrepreneurs did eventually take place in the March 2020 Budget**, meaning they are now much less incentivised to grow their businesses. There is now further speculation that tax rates for entrepreneurs taking capital out of their businesses*** may be increased in a future Budget, which is likely to lead to more businesses closing.
Simon Chandler says: “Speculation about rises in tax on entrepreneurs has been a feature of almost every Budget for much of the last decade. These figures show it genuinely has an effect on businesses, employment and the economy overall.”
“If entrepreneurs are afraid that the government will suddenly increase tax rates they are more likely to take money out of their businesses. That is money that isn’t being invested in growth, machinery or new staff.”
“It would be good to see the government commit to now leaving tax rates for business owners untouched for several years. Entrepreneurs ideally want a stable environment to invest in and grow their businesses.”
Months before Budget statements see spikes in businesses closing – driven by tax rise fears
* Through a process known as a Members’ Voluntary Liquidation. Source: Mazars analysis of Insolvency Service data
** ‘Reduction in lifetime allowance from £10m to £1m for disposals qualifying for Entrepreneurs’ Relief / Business Asset Disposals Relief’
*** Capital Gains Tax