The Wire: Winter 2019 – Entrepreneurs’ Relief – What next post-election?

Entrepreneurs’ Relief – What next post-election?

With the political hunt on to find extra tax revenues in order to end austerity, both Labour and the Conservatives have recently had the Entrepreneurs’ Relief (ER) scheme firmly in their sights. The Labour manifesto stated that “it is now widely recognised that Entrepreneurs’ Relief in its current form cannot continue, so we will scrap it and consult on a better form of support for entrepreneurs which is not largely just a handout for a small number of people”. The Conservative manifesto promised to “review and reform entrepreneurs’ relief”

Entrepreneurs’ relief costs the government £2.4 billion a year relative to taxing gains at the full Capital Gains Tax rate. Recent HMRC data from the latest financial year available shows that 9,000 people paid just £5.1 billion in tax on £33.7 billion of capital gains income. This works out at an average tax rate of 14.8% – lower than the basic rate of income tax. 

The Institute for Fiscal Studies (IFS) is supportive of scrapping the relief saying that incentives such as entrepreneurs’ relief have simply resulted in business owners shifting their income around to minimise tax payments, rather than encouraging investment. 

We’re always keen to explore the thought process of those organisations which influence government policy, and any potential ramifications of their recommendations. 

As this is a shift in approach as highlighted in the recent election, we’ve looked at the key issues involved. 

What is Entrepreneurs’ Relief and why is it important? 

ER is a tax relief scheme that was introduced by Gordon Brown’s Labour government in 2008. Its aim was to incentivise people to establish and grow businesses in the UK by providing a reduced rate of Capital Gains Tax (CGT) on business disposals. The new relief took effect from the 2008/09 tax year and meant that any qualifying shareholders would only pay a flat rate CGT of 10%, as opposed to the standard (18%) and higher rate (28%) CGT rates, when they sell all or part of a company, up to £10m. 

Since its introduction, ER has evolved into one of the most generous reliefs on the statute book. The maximum lifetime limit has increased from the initial £1 million limit in 2008 to £10 million in 2011 and supporters argue the relief plays a key part in making the UK, and London in particular, a centre for entrepreneurial activity in Europe. 

‘No evidence that tax-motivated retention of profits translates into more investment’ 

The IFS says its analysis of UK tax records shows that, in general, company owner-managers respond to income tax 

changes by adjusting how and when they take money out of their company, not by changing the amount of income they create or how much they invest. 

The think tank also claims that many company owner-managers hold significant sums of cash in their companies in order to access lower CGT rates and thereby substantial tax savings. 

According to the IFS, systematic retention of income within owner-managed companies is large, particularly for those individuals with higher income. This income is held as cash and equivalent assets and is not associated with increased investment in business capital. 

In conclusion, the IFS said it did not find any evidence that tax- motivated retention of profits translates into more investment in business capital. 

Other experts back scrapping the relief 

The IFS view has been backed up by other experts. The Association of Accounting Technicians (AAT) has also called on the government to scrap entrepreneurs’ relief and replace it with initiatives or reliefs that encourage business start-ups or scale-up activity. 

Phil Hall, AAT Head of Public Affairs & Public Policy, said that entrepreneurs’ relief is “extremely expensive, misguided and ultimately ineffective [and] if the government is serious about wanting to encourage entrepreneurialism, committing this £3 billion of relief to helping small British businesses to grow and prosper would be a far better investment for UK PLC than encouraging business owners to do nothing more than sell-up.” 

The Former Head of HM Revenue and Customs has also called for the relief to be abolished, saying that it provided “no incentive for real entrepreneurship”. 

Sir Edward Troup, Executive Chair of HMRC from 2016 until January 2018, said: “The point of entrepreneurs’ relief is that it rewards you when you make a lot of money. There are lots of things getting in the way of people becoming great entrepreneurs in this country, but the fear of tax on future gains is not one of them. 

“Absolutely, the government should be helping [entrepreneurs] set up great businesses here, but the idea that having to pay more tax at the end is preventing inventing things is nonsense.” 

Scrapping the relief would be ‘counterproductive’ 

If entrepreneurs’ relief is replaced with targeted incentives to boost productivity, employment and wider economic benefits, many think that would be a welcome move. 

From our perspective, the think tank’s recommendation to simply scrap entrepreneurs’ relief could be counterproductive as a 10% CGT rate on a future sale of a successful business is an immediate attraction towards entrepreneurship. 

It is a very attractive relief and it would potentially be a mistake to get rid of – especially with Brexit still looming – as the UK needs to position itself better from a business point of view. At the time of writing the Conservatives have announced that they would postpone a reduction in the tax rate from 19% to 17% while Labour plans to raise the UK corporation tax rate to 26%. The UK corporate tax rate is currently attractive but needs to remain so from a global and local business point of view. Removing this relief would make the UK less attractive. 

Ultimately, it does seem that change is coming for Entrepreneurs’ Relief given that both major parties are now seeking either a review or an overhaul. We think that any replacement needs to be structured in such a way to reward and incentivise only perceived ‘real entrepreneurs’, who have put their livelihoods on the line to start their new business. There are many different ‘types’ of entrepreneur and ER is ultimately only one piece of a broader policy approach to encourage entrepreneurialism. At the end of the day, the more people employed and the more profit a business makes, the bigger the overall tax take.

Have any questions regarding entrepreneurs’ relief or other business planning? For further information please either contact your HFMC Wealth adviser for further details, send us a message via hfmcwealth.com or call us on 020 7400 4700.

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