Why the UK government risk exiting our domestic economic engine resource.

In my view, the UK government underestimates the profound impact taxation has on entrepreneurs. The data they rely on often fails to capture what I call the "compound experience" effect.

What do I mean by that?

From my experience, when entrepreneurs launch their first business, they rarely consider future exit strategies or the tax savings they could enjoy down the line. At that point, it's all about pursuing a vision or creating value for themselves. The focus is on getting started and breaking free from working under someone else. But by the time they consider starting their second venture, taxes and potential financial outcomes become a major factor.

The mentality for the first-time entrepreneur is simple: “I want to work for myself.” There’s little concern for tax strategy. Instead, it’s about taking control of one’s destiny, both financially and emotionally. Most entrepreneurs begin with limited knowledge but a fierce determination to succeed. They are willing to grind from the bottom up, refusing to give up despite the odds stacked against them.

As they grow and evolve, their experiences turn into expertise. Every challenge faced helps them build resilience and sharpen their skills. They become strategic, focusing on cost management, resource allocation, margins, EBITDA, data, and efficiency. The journey from start-up to a mature business transforms them into seasoned operators.

Eventually, the life cycle of the business may reach a point where the entrepreneur considers selling or exiting. This decision is often influenced by personal circumstances, but there’s no doubt that the perspective at the end of the journey is dramatically different from when they first started. Now, they understand the full scope of running a business and the importance of maximising value upon exit.

So, what happens when the UK government tells these entrepreneurs that their reward, after everything they’ve built, will be substantially less if they stay in the country? After selling a business, does the entrepreneur just say, "No problem, I’ll do it again here," despite knowing there are better incentives elsewhere? Of course not.

The UK, like any successful business, must think strategically. It needs to retain its top talent—the entrepreneurs who have the experience, money, and knowledge to start again. These individuals, armed with the benefit of 15 years of commercial, financial, legal, and operational hindsight, will be more inclined to move their ventures elsewhere if the tax incentives don't align with their goals.

Take Business Asset Disposal Relief (BADR) as an example. It was originally introduced in 2008 as Entrepreneurs’ Relief to cushion the blow of removing taper relief and indexation allowance. BADR provides a 10% Capital Gains Tax (CGT) rate for small business owners when they sell, and while its lifetime limit has been adjusted several times, the core principle remains crucial for encouraging entrepreneurs to stay and reinvest in the UK.

However, an entrepreneur who didn’t benefit from tax relief the first time around will definitely consider it the second time. With their knowledge, assets, network, and finance ready to go, they’ll ask themselves: "Where will I get the best return?"

CGT itself has been a moving target for years. Historically set around 30%, it dropped to 18% in 2008, rose to 28% in 2010, and has since stabilised at 10% for basic rate taxpayers and 20% for higher earners. While risk-taking is embedded in the entrepreneurial mindset, financial returns are a major focus for those starting their second venture, especially given the effort, capital, and expertise they've invested in the first.

If the UK fails to incentivise these experienced entrepreneurs, the talent drain could be significant. Increasing CGT or scrapping BADR could have a chilling effect on acquisitions and stifle the very people driving economic growth. More concerningly, these moves could send a signal that the UK is no longer the best place to take business risks, leading to a flight of talent and investment to more favourable jurisdictions.

Furthermore, the increased taxation on dividends has already narrowed the gap between being an employee and running a business. Without meaningful incentives, fewer entrepreneurs will be willing to take the leap again. BADR and CGT rates must remain competitive if the UK hopes to retain its top entrepreneurial talent.

The UK government must think of itself as a business and treat entrepreneurs as its valued customers. If half of all business comes from repeat customers, what happens when experienced entrepreneurs, with cash in hand and years of knowledge, leave for greener pastures? The damage to the UK economy could be far greater than the government realises. Retaining these individuals is critical, and ensuring that the tax regime encourages entrepreneurship rather than deterring it is essential for the UK’s long-term growth.

Rt Hon Rachel Reeves

Jonathan Reynolds MP