Capital Punishment For Agency Entrepreneurs

David%20Benady%20120x120An unexploded tax bombshell is ticking in adland. Set to detonate on April 6, 2008, it has sent agency entrepreneurs running for cover.

Chancellor Alistair Darling’s pre-Budget report proposal this week to levy a new flat rate capital gains tax of 18% could spark a flurry of sell-offs across the advertising, media, design and online sectors.

Start-up agencies looking to sell out have a powerful incentive to tie up their deals before the April deadline.

For the past decade, entrepreneurs and those who own shares in their companies have paid just 10% on the gains realised on investments sold after more than two years. To be absolutely accurate, they are taxed – probably at 40% – on 25% of the capital gain, which works out at 10%.

But Darling proposes that from next April they’ll pay 18%, an 80% rise. The hike will also hit some start-up impresarios who have already sold and are awaiting “earn-outs” based on future performance.

A lot of small business people are squealing that the hike is an attack on entrepreneurialism. Even the GMB union has attacked the move as a setback for Britain’s start-up culture. There will be a silver lining for some, though more on that later.

The ad, design, media and online industries have thrived on regular waves of breakaway agencies. In advertising, the breakaways have creamed off much of the industry’s top talent over the past ten years, though they would deny they were motivated by anything as shabby as a 10% tax regime.

For many start-ups, the extra 8% tax is not necessarily a reason for panic selling. If the business is growing at 15% a year, it would obviously be worth hanging on for the right deal. The start-up agencies that are looking to sell will wait for the right deal to come along, say their owners.

But the real victims are likely to be among the thousands of small start-up agencies – often regionally based and employing under a dozen people – offering a myriad of marketing services. Many owner-entrepreneurs have based their pension calculations on selling their shares at a 10% tax rate. The hike could seriously damage their retirement.

And that silver lining? Capital gains tax will be a flat rate 18% and that includes the duty on selling second homes and buy-to-let properties which face a 40% rate at present. So all those agency bosses who have bought second – and third – homes in Cornwall, Devon or any other part of the country are sitting on potential goldmines. The CGT changes are likely to spur growth in the regional property market which is capital news for second home owners.

Over the next few months we can expect the familiar old rumours about who is buying whom to start circulating again as deal mania hots up in advance of next spring’s deadline.

David Benady

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