Small and Medium-sized Enterprises: Government Policy

Lord Mitchell Excerpts

Thursday 17th June 2010 Lords Chamber

[Lord Mitchell]

My Lords, I congratulate the noble Baroness, Lady Wilcox, on her new position. I know that she started in a family business. I hope that she never forgets her background because it is crucial that in government she represents us in all these areas.

Sometimes I wish that Members of the other place, who are often dismissive of your Lordships' House, could be present at a debate such as this. There is real expertise, born of experience at the coal face and able to voice opinions and recommendations that really do have validity. Interestingly, of the 11 Back-Bench speakers, eight come from the Labour Benches. This contrasts with what I suspect happens in the inner circles of the Treasury and Her Majesty’s Revenue and Customs, where a PPE at Oxford seems to be the prime qualification for running the tax affairs and business policy of the nation.

I thank my noble friend Lord Sugar for introducing this vital and highly topical debate. The noble Lord is an entrepreneur to his very core and his successes are there for us to see. He started his business life selling aerials from the back of his car. I started mine selling vacuum cleaners door-to-door. You do that, you learn a lot and you never forget. But my noble friend has done more. When I started running my own business in the early 1970s, people thought I had taken leave of my senses. Not only was it risky, but it was somewhat socially unacceptable. Nice boys—never nice girls—where I came from joined banks, became chartered accountants, solicitors, or, heaven forbid, even estate agents; but start a business—never. In those days, we were simply not an entrepreneurial nation.

However, my noble friend Lord Sugar, through “The Apprentice”, has brought the thrills and spills of being an entrepreneur into the sitting rooms of the nation. Now people know that business is challenging and brutal, but is also fun and creative. We must thank him and others like him for changing attitudes very much for the better. I have to say that I notice young people coming out of universities, even those from Oxbridge, who are rejecting going into the City or the professions. They want to get into business as quickly as they can.

Being nice to SMEs is not just about speaking warm words, but goes to the very soul of our economy. In the United States, it is estimated that between 1985 and 2005, nearly all new net jobs were created by firms that were five years old or less. This amounted to 40 million jobs. That means that established firms created no new net jobs during that period. I bet that the same is true here. Unemployment will not come from bailing out losers, but only from new companies with new technologies and new business models. Think British Airways and then think Virgin and Ryanair. Think Apple, think Microsoft and think Google. None of them existed 30 years ago; indeed Google is only 12 years old. That is where the growth and jobs are to be found.

This new coalition Government will not get this sort of entrepreneurial growth if they continue in their plans to decimate our education system. Maybe Labour in government did not get everything right, but we were very clear that you cannot build a 21st century economy if you hack into our schools, our universities and our colleges of further education. What is proposed by the coalition Government for science is truly scandalous. The previous Prime Minister, Gordon Brown, has become much maligned, but he was always very clear that small businesses were key to our prosperity and that the tax system should reflect it.

I speak as a serial entrepreneur. In my career, I have founded and grown three quite separate businesses in the IT services sector. Each became a market leader, and two had major operations abroad. I created employment and my companies provided a vital service in the high technology marketplace. In each case, I sold my shareholding when I thought that it was time to move on. To be honest, it was when I became bored.

In 1987, when Margaret Thatcher—now the noble Baroness, Lady Thatcher—was running the show, I sold one company and was faced with a sizeable capital gains tax bill. It was in the region of 40 per cent. Today, 23 years later, writing out that cheque still hurts. Four years ago, I sold another company when new Labour was in charge and I paid 10 per cent capital gains tax. Now tell me, my Lords, which Government were pro-business and pro-entrepreneur? It is very clear that capital gains tax is going to increase—the Lib Dems demand it. On the other hand, many in the Conservative Party are against any change. The coalition is divided down the middle; next Tuesday we shall see who has won.

To me, it is very clear what a capital gain is. It is when an investment is made with the intention of securing a gain over a period of time; it is about the expectation of gain but the possibility of loss; it is about risk; it is about the medium to long term; but, most of all, it is about investment in business. Today’s CGT situation is plainly bonkers. It is far too wide and 18 per cent is clearly inappropriate for all classes of assets. However, I really believe that 18 per cent or something like that rate should remain in place in respect of genuine investments in business where the investment remains in place for the medium term—say, three years. In the UK, we tend to love complex, arcane tax rules that few understand. If there are to be changes, let them be simple.

During the recent election, the Lib Dems, and the Deputy Prime Minister in particular, fought the campaign on the subject of fairness, so I now propose two ways in which CGT and the tax system could be made much fairer and generate significant taxation revenues. The first, referred to by my noble friend Lord Sugar in his excellent speech, concerns the area of reward known as carried interest. These days, hedge funds, venture capital funds and private equity funds gain most of their return from carried interest. When a fund is set up and investors are located, the fund usually pays the managers an ongoing management fee—usually in the region of 1 or 2 per cent per annum of the fund’s value. This amount is used to run the business. However, in addition, when the investors eventually receive their investment back, any additional gain is usually split 80 per cent to the investors and 20 per cent to the managers. The investors have clearly put their capital at risk and any benefit they receive is a very legitimate capital gain and should be taxed as such, but how about the 20 per cent in the hands of the managers? Is that a capital gain? I do not think so. It is a fee earned by the managers and, as such, it should be taxed as income, but currently it is not; it is taxed as capital. This is not fair and should be reversed.

Secondly, continuing the example of unfairness, I want to refer to a particular bugbear of mine which I have raised in your Lordships’ House several times before. It is the subject of non-doms—people who were born abroad and are able to avoid tax on their non-UK generated income because they are effectively non-domiciled. This was a hot potato three years ago but it went off the boil when we in government dealt with it in a half-hearted manner because we were frightened of upsetting the City. If the Government want to be fair and courageous, they should say the following. If you were born abroad but live in the UK and you have lived here for seven years or so, then you have become a de facto resident. As such, you should pay tax on the same basis as the rest of us, and it should be based on your worldwide income. That is what the Americans and most other developed nations do. It is only fair. If people say, “Well, that’s too much. We’re off to Singapore or Geneva”, I shall say to them, “It’s better to be taxed to death than bored to death”.

It is not my Budget; it is Mr Osborne’s. However, if it were mine, I would make it small-business-friendly, I would keep CGT at its current rate for business investment and I would have no hesitation in plugging the carried trade and non-dom loopholes.