Entrepreneurs and business leaders could be running out of time to take advantage of a tax relief after a growing number of calls to scrap it.
At present, Entrepreneurs’ Relief (ER) means that anyone who has owned at least 5% of the shares of their business for two years or more can pay substantially less Capital Gains Tax when all or part of the business is sold.
Providing relatively simple qualifying criteria is met, tax at only 10% on all gains is paid, instead of the usual level of 20% for higher and additional rate taxpayers.
ER ‘not achieving its objective’
However, the Association of Accounting Technicians (AAT) – whose members provide services to more than 400,000 UK SMEs – has called for ER to be axed, claiming that it’s not fit for purpose because it does nothing to encourage entrepreneurialism.
Phil Hall, Head of Public Affairs and Public Policy at AAT, told the Entrepreneur Club: “Time and time again, AAT members have highlighted that their clients are usually unaware of Entrepreneurs’ Relief until the time comes to sell their business – so it’s clearly not achieving its objective of encouraging entrepreneurialism.
“In most cases, Entrepreneurs’ Relief simply rewards those who would sell anyway or in some cases encourages business owners to look for an early exit.”
He adds that the money should instead be invested in “helping UK businesses to start up or scale up rather than sell up”.
The AAT is not alone in seeking reform. This autumn, left-leaning think tank, the Institute of Public Policy Research, called for ER to be abolished, arguing that it has become concentrated among wealthy individuals with “little evidence it has had a genuine effect on entrepreneurship”.
And the independent Office for Tax Simplification published a comprehensive Business Lifecycle Report which clearly states that while “other reliefs appear to be designed to encourage investment in young and growing businesses, or to preserve existing businesses from break-up in the event of succession, ER does not seem to achieve either of those objectives.”
Finally, another think tank, the Resolution Foundation, has criticised ER – introduced in April 2008 – as “expensive, ineffective and regressive”. It said the £22 billion* it had cost over the past decade would have been better spent elsewhere.
A tax-efficient way to sell
Against this backdrop of increasing criticism of ER, business owners could find they don’t have much longer to consider taking advantage of it before any possible changes are made to the benefits it offers – or before it’s disposed of altogether.
For the time being at least, ER offers a way to reduce the risk posed by difficult trading conditions through tax-efficiently taking money from the business. And there’s no need to exit your business altogether to take advantage of ER. Instead, selling part of your company to an investor can release some cash.
Qualifying criteria also stipulates that the company’s main activities are in trading, rather than non-trading activities like investment. HMRC may also reject an ER claim because a business is holding too much cash, as this may be considered a substantial non-trading asset if there’s no trading purpose for it – like expanding the business, moving to new premises or buying another company.
However, Martin Brown, CEO of business growth advisor Elephants Child, says any business owner considering selling up should first audit their company to make sure it is ready for sale and their possible exit from the business. If that’s not the case, ER qualification criteria, or the possible scrapping of ER, “isn’t something they should be worrying about”.
Entrepreneurs’ Relief is complex and it’s important to take professional advice before deciding on a course of action.
* Resolution Foundation website blog post, 29 August 2018
The levels and bases of taxation, and reliefs from taxation, can change at any time. Tax reliefs are dependent on individual circumstances.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.