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Britain can’t afford to stand still on entrepreneurship – we need tax simplification

Chris Hulatt

This article first appeared in The Daily Telegraph.

When I joined with two friends to start our own business back in 2000, lots of people thought we’d lost our minds. Colleagues warned us we were taking a huge risk leaving our jobs at a large fund manager, and that we’d live to regret it. It took us more than a year to raise capital to get the business up and running. But our determination to prove the doubters wrong helped keep us focused during the lean early years.

Two decades later, and the landscape for entrepreneurs is completely different. Technology has made it far easier to turn a bright idea into a disruptive business, and people harbouring aspirations to build a business from scratch are more likely to be encouraged to take the plunge. Entrepreneurship has become part of our culture. New sources of finance such as crowd-funding are now firmly established, and there are far more angel networks that have the capital and know-how to help entrepreneurs. 

The entrepreneurial ecosystem found right here in the UK is the envy of the rest of the world, and deserves to be celebrated. However, as two reports published by the All Party Parliamentary Group for Entrepreneurship demonstrate, there’s still much more to be done, and a great deal of untapped potential currently being ignored. We’re in danger of falling behind as a nation of entrepreneurs and innovators.

The ‘Women in Leadership’ report contains some important findings. For example, there are now 1.2 million women-led SMEs in the UK, and they are contributing an estimated £75 billion to our total economic output. However, just a tenth of UK firms with revenues between £1 million and £250 million are run by women.

Making the transition from an ambitious start-up to an established, profitable business is challenging for everyone, but women are facing impediments to their progress that need to be addressed. Even more concerning, one-third of female entrepreneurs in the UK believe their gender has been a hindrance to their business ambitions. Many cited unfavourable business regulations, networking opportunities that favour men, and less access to finance. The data confirms their suspicions. Just 16% of companies with a female founder secured funding between 2009 and 2017.

Octopus is an entrepreneurial company, and we encourage everyone – even our customers – to think like entrepreneurs. But we’re also committed to creating a welcoming environment for female founders. Over the past three years, 33% of the entrepreneurs we’ve backed – with funding and guidance – have been women.

This hasn’t happened by accident. Our Ventures team has made a real effort to be visible and accessible to a more diverse range of entrepreneurs. But this report is a timely reminder that Octopus – and the investment community as a whole – must do more. The implementation of the recommendations in the APPG report would go a long way to giving more women the support they need to start their own businesses.

The APPG’s second report focuses on tax reform and highlights how the current state of play – high taxes and an unnecessarily complex tax system – actively discourages entrepreneurialism. Most business tax benefits become more valuable over time but for startups, time can be a commodity in perilously short supply.

For example, as the report explains, when entrepreneurs find a formula that works, they will look to expand rapidly, perhaps by investing in plants and machinery. But the tax treatment of capital expenditure can limit their ability to make productivity-boosting investments and strangle growth ambitions.

Most firms would much rather claim an immediate tax benefit from capital expenditure rather than write it off gradually through asset depreciation. Similarly, allowing startups to carry forward trading losses, plus adding interest to compensate for the opportunity cost of capital, would make investing in loss-making startups more attractive, and could help to reduce their failure rate.

Octopus has invested in more than 500 early-stage businesses. We’ve witnessed at first-hand the administrative and, at times, bureaucratic burdens entrepreneurs face. We fully endorse the APPG’s call for a further reduction in the complexities associated with business taxation, as well as making existing tax reliefs more accessible and widely understood.

Over the last two decades of working with entrepreneurs, I’ve learned that the entrepreneurial mindset – of bravery, hard work and dedication – can have enormous social benefits, and can transform people’s lives in unique ways. But if we want the UK to continue to be the best place in the world to start and grow a business, we need to do more to reward our risk takers, by creating the best environment for them to flourish. 

For journalists in their professional capacity only. Issued by Octopus Group. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. Issued: July 2018.