Supporting entrepreneurs through a simpler tax system
The recent call for evidence by HM Treasury on tax support for entrepreneurs is a welcome intervention. At a time when growth remains a central policy objective, it is right to examine whether the tax system is doing enough to support those starting and scaling businesses.
However, the consultation feels narrowly framed. Its emphasis on investment reliefs and capital incentives addresses only part of the picture. From a practitioner’s perspective, it risks overlooking the growing complexity of the tax system itself.
Complexity is a tax
Calls for simplification have been a feature of tax policy discussions for many years. Yet the direction of travel, in practice, appears to be the opposite. For most entrepreneurs, the system is becoming more complex.
Clients are now dealing with layered legislation, overlapping regimes and frequent changes that require continual reinterpretation. New rules interact with others in ways that create uncertainty and increase the risk of error.
Business owners now spend more time on compliance and administrative matters, which means less on actually running their businesses. Professional costs continue to rise as specialist input becomes essential rather than optional. Decisions are slower, often more cautious, and increasingly influenced by tax considerations that are difficult to predict with confidence.
In this sense, complexity operates as a form of tax in its own right. It absorbs time, increases costs and introduces friction into commercial decision-making.
Historically, the UK Government had an independent advisory body, The Office of Tax Simplification (OTS), which advised on simplifying the UK tax system. Its objective was to offer recommendations and advice to the Chancellor about how to make the UK tax system simpler, not least for individuals and smaller businesses. The fact this was disbanded several years ago seems to be at odds with the current direction of travel and highlights complexity has long been an issue within the UK tax system.
Administrative burden is still increasing
Alongside legislative complexity sits a growing administrative burden. Initiatives such as Making Tax Digital are intended to modernise the system, improve accuracy and reduce errors over time. However, the short- to medium-term reality for many businesses, particularly smaller ones, is an expansion of ongoing compliance obligations.
More frequent reporting, mandatory digital record-keeping and the need to continually adapt to evolving systems all add to the workload. And this is not a one-off transition cost – it represents a structural shift towards more intensive, continuous compliance.
For larger businesses, these changes may be absorbed within existing finance functions. For owner-managed businesses and SMEs, they often fall directly on the business owner or a small team, amplifying the burden.
Considering the entrepreneurial community
The consultation’s focus on high-growth, venture-backed businesses is understandable, but in practice, a significant proportion of the entrepreneurial population comprises owner-managed businesses, family enterprises and scaling SMEs. These businesses may not seek external equity investment or plan for rapid exit, but they are fundamental to the UK economy.
Their interaction with the tax system is different. For many, the primary concern is not access to sophisticated investment reliefs, but the ability to operate within a system that is clear, predictable and proportionate.
There is a risk that policy becomes skewed towards a relatively narrow segment of the market, while the needs of the broader business base receive less attention. A more balanced approach would recognise the diversity of entrepreneurial activity and the different ways in which tax policy affects it.
Reliefs are not the problem, but usability is
The UK is not short of tax reliefs aimed at supporting entrepreneurship. The Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Enterprise Management Incentives regime are well-established and, in many respects, effective. The difficulty lies in their practical accessibility.
These regimes are complex, highly conditional and often unforgiving in their application. Access typically depends on obtaining specialist advice and navigating detailed rules where the consequences of non-compliance can be significant.
This creates an uneven playing field. Businesses with the resources to obtain advice can engage with the system and benefit from available reliefs. Smaller businesses may be deterred by the complexity or simply unaware of the opportunities.
The result is that reliefs do not always achieve their full potential. Complexity reduces both uptake and effectiveness, limiting the policy impact.
Complexity is distorting behaviour
One of the more concerning effects of this environment is the extent to which complexity is beginning to shape business behaviour.
Entrepreneurs are increasingly making decisions by reference to administrative thresholds, compliance burdens and uncertain tax outcomes. This is not simply a matter of sensible planning; in some cases, it is leading to economically suboptimal choices.
Growth may be constrained to avoid crossing regulatory or reporting thresholds. Hiring decisions may be delayed due to the perceived cost and complexity of employment obligations. Business structures may be driven as much by tax considerations as by commercial logic.
While tax will always influence behaviour to some degree, the current level of complexity risks distorting decision-making in ways that are not aligned with broader economic objectives. An oft heard phrase is that ‘the tax tail should not wag the dog’ but in reality this is happening more frequently.
The risk-reward balance is shifting
These issues sit within a wider context in which the risk-reward balance for entrepreneurs appears to be changing.
The cost of employing staff has increased materially, notably the increase in National Insurance contributions and minimum wage costs, adding both financial and administrative pressure as businesses grow. At the same time, the fiscal rewards available to founders on exit have been reduced, affecting the potential return on long-term risk-taking.
Layer onto this an increasingly complex and demanding compliance environment, and the overall picture becomes less attractive.
Entrepreneurship is inherently risky. The role of the tax system should be to provide a framework that supports and, where appropriate, incentivises that risk. If the balance tilts too far towards cost, complexity and uncertainty, it may begin to influence behaviour at the margin.
Rewarding entrepreneurship and leaving a legacy
The call for evidence cites commentary that reliefs like Business Asset Disposal Relief (BADR) have a limited impact on encouraging reinvestment. However, the changes to those rules in recent years have had a significant impact on creating an environment that disincentivises their efforts long before the owners consider reinvesting.
A historic maximum £1m tax saving on the sale of a business has now been reduced to £60,000 from 6 April 2026, whilst the complexity of implementing the rules remains unchanged. As a result, what was historically a significant incentive has been reduced to a limited sale discount.
For many though it is not about selling their business, but creating something that can stand the test of time. The recent changes to APR and BPR have however put a cap on that ambition, making it significantly more difficult to transfer businesses to the next generation. The result is that businesses are reducing investment to focus on succession at a time when growth is urgently needed.
Unlocking the scale-up potential of UK businesses is an admirable target, but it will continue to remain elusive if there is no incentive or support once you have done so.
Implications for the UK’s attractiveness
The UK operates in a competitive global environment for both capital and talent. Entrepreneurs today have choices about where to locate, scale and ultimately realise value.
Tax is only one factor, but it is an important one. Ease of operation, predictability of outcomes and administrative burden all feed into those decisions.
A system characterised by complexity, frequent change and increasing compliance obligations inevitably creates friction. While this may not drive wholesale relocation, it can influence marginal decisions and shape perceptions of the UK as a place to do business.
Maintaining competitiveness therefore requires more than targeted reliefs. It requires a system that is straightforward to navigate and stable in its application. In recent years that perception of stability and fairness has been eroded and many of those, at whom this consultation is aimed at, have voted with their feet as a result.
Stability matters
Frequent changes to rules, thresholds and regimes add another layer of difficulty for entrepreneurs trying to plan with any degree of confidence. Even well-intentioned reforms can create uncertainty if they are introduced too often or without sufficient lead time.
Businesses need clarity and predictability. They need to understand not only how the rules apply today, but how they are likely to apply in the future. Without that, decision-making becomes more cautious. Investment may be delayed, expansion plans reconsidered and risk appetite reduced. A more stable approach to policy development, with fewer but better-considered changes, would go some way towards addressing this.
Reframing the debate
The consultation asks how tax can better support investment in entrepreneurial activity, which is a valid and important question, but perhaps a more pressing issue is how the system can be made simpler, more stable and easier to navigate for those who are already building and running businesses.
Without addressing that underlying framework, additional reliefs are likely to have limited effect. They will sit within a system that remains difficult to engage with, and many of the existing barriers will persist.
The call for evidence is a valuable opportunity to rethink how the tax system supports entrepreneurship. However, its impact will depend on whether it engages with the issues that practitioners and their clients encounter on a day-to-day basis.
A simpler and more stable tax system would not only ease the burden on existing businesses but also create a more supportive environment for future entrepreneurs. That, ultimately, is where meaningful reform could have the greatest impact.
Article republished with kind permission of Taxation
