The Government could raise up to £25 billion a year in tax and plug the “black hole” in the public finances by incentivising UK business owners to sell to staff ahead of foreign buyers, according to research by Price Bailey, the Top 30 firm of accountants.
This would also be the most meritocratic way to boost the intergenerational transfer of wealth.
According to Price Bailey, there are 17,000 UK businesses* that are potentially suitable for a management buyout (MBO).
This could represent a £407bn tax opportunity for the UK over 16 years, equivalent to £25bn in tax revenues per year, more than enough to plug the £22bn “black hole” in the public finances.
In arriving at this figure, Price Bailey has based its calculations on the following assumptions:
- The acquiring management team consists of three people in their late 30s/early 40s
- They hold the shares for approximately 16 years before going on to sell to via another MBO
This £407bn tax opportunity for the UK Treasury is comprised of three parts:
- The capital gains tax paid by the original business owners on the sale (worth 14% of the tax opportunity)
- The dividend taxes during the 16-year hold period which might otherwise have flowed to foreign jurisdictions (worth 44% of the tax opportunity)
- The capital gains tax on the future sale of the business (worth 42% of the tax opportunity)
According to National Statistics, there are on average 1,640 business sales every year but 42% are sales to foreign buyers when outward investment is removed (ONS data from Jan 20 to March 24). This means that around £145bn of the tax opportunity leaks to other countries rather than being captured in the UK.
Chand Chudasama, Partner in the Strategic Corporate Finance Team at Price Bailey said, “By encouraging a higher proportion of business sales to UK buyers, the Government could generate billions in additional tax without having to raise tax rates or freeze bands.”
“While it is important that the UK remains open for business to foreign buyers, there is no reason why incentives could not be enhanced so that sellers are encouraged to favour their own employees when assessing would-be buyers.”
He adds: “The MBO team are typically three individuals who are younger than the current shareholders. If they can deliver modest value growth of 6% to 8% over 16 years, they stand to make on average £11m each on sale, plus significant dividends along the way. Aside from boosting the Treasury’s coffers, I can think of no better way to boost the intergenerational transfer of wealth in the UK in accordance with meritocratic principles.”
Price Bailey explains that given the size of the opportunity, even modest tax incentives could provide a significant boost to tax revenues and nurture a generation of young British business leaders. For example, tax relief on a qualifying MBO that provides 10% CGT on gains up to £10m rather than the current Business Asset Disposal Relief regime which provides 10% up to only £1m.
The following criteria could apply to a qualifying MBO:
- The MBO team to have put capital at risk and buy at fair value
- The MBO team should be employees with a minimum period of service
- The business, seller and buyer’s tax regime must be in the UK and the buyers must keep the business in the UK tax regime
- The entity is at least five years old and selling a majority position
Chand Chudasama says: “Businesses only end their lives by winding down, passing to family members or being sold. MBOs should be seen as a unifying tool within the latter category that brings business owners and the next generation of business leaders together to encourage British entrepreneurship, boost tax revenues and shift wealth through the generations.”
“Clearly it won’t be possible for the Government to ensure that 100% of sales are to UK management teams but we can certainly do better if the right incentives are in place.”