Published in the midst of excitement around recent sporting events, the Government’s draft Finance Bill for 2018-2019 may well have slipped under the radar of many. However, as well as suggesting changes around increasing the reach of and accelerating capital gains taxes, the new Bill contains a raft of proposals which could have a significant impact on the UK’s growth businesses and it is important for owners to waste no time in getting themselves up to speed.
Entrepreneurs Relief changes
A key proposed change for owners of growing UK businesses, in particular those considering a potential sale, are the suggested amendments to Entrepreneurs’ Relief, which allows qualifying individuals to reduce the amount of Capital Gains Tax they are required to pay when selling all or part of their business.
Whereas higher-rate taxpayers are generally required to pay Capital Gains Tax at 20 per cent when selling their company, business owners who meet the conditions for Entrepreneurs’ Relief can reduce this amount down to 10 per cent, subject to a lifetime limit of £10 million for gains. For individuals who have dedicated their career to growing their organisation and have seen their share values rise accordingly, it goes without saying that this could result in a significantly lower tax bill. In order to qualify for this relief however, in most cases the individual must own at least five per cent of a company’s share capital for 12 months prior to its sale.
A dilemma for some
Currently, entrepreneurs looking to maintain growth by attracting external investment may find themselves facing a tough decision if their shareholding is not much above five per cent. Bringing in new investors may dilute the individual’s shareholding, meaning they can no longer claim Entrepreneurs’ Relief and substantially increasing the tax liability the shareholder has to pay.
Allowing entrepreneurs to crystallise their capital gains while they still qualify for Entrepreneurs’ Relief, the Government’s new proposal is designed to help more growth businesses benefit from external investment without penalising original shareholders. Sensibly, the proposals also allow individuals to make this payment down the line when they come to sell the business, encouraging individuals to further grow their businesses without having to worry about losing the beneficial CGT treatment.
An area which is strangely absent from the draft Finance Bill but which has the potential to enhance growth prospects for UK SMEs is the Enterprise Incentive Scheme (EIS) Knowledge Intensive Fund Structure. Consulted on in the spring, this offers the chance for businesses to draw more ‘patient capital’ investment into knowledge-intensive businesses, such as those developing intellectual property, when they need it the most, encouraging longer-term investment in return for enhanced tax breaks.
Currently, investors in such innovative businesses, which take up EIS relief must retain the shares for three years in order to realise the full tax benefits of their investment. The Government has been consulting on how best to encourage these investors to leave their money for longer as they recognise that knowledge-intensive businesses are likely to need longer to fully develop and commercialise their ideas. For example, one option could be to offer dividend exemptions for individuals investing funds for five to seven years. Whether this measure will reappear in the Autumn Budget is yet to be seen.
EIS offers the chance for businesses to draw more ‘patient capital’ investment into knowledge-intensive businesses
Similarly, while not included in the Finance Bill and subject to an ongoing consultation, businesses should bear in mind expected changes to ‘off-payroll working’ rules, which are expected to see companies become responsible for deciding whether PAYE needs to be operated when employing contractors through personal service companies.
Another area contained in Government’s new draft Finance Bill which may be of interest to growth business owners is the proposed extension to the assessment time limit for offshore income, gains and Inheritance Tax from four to six years, to 12 years in cases where the behaviour is not deliberate. Rather than having a significant impact on companies’ registration requirements, the aim of these changes is to give HMRC longer to investigate overseas transactions, which are often difficult to regulate. This measure is a warning from Government to ensure that the offshore affairs of non-doms are up-to-date and that they do not fall foul of HMRC investigations.
New points-based system for missing tax returns
With HMRC’s new programme for Making Tax Digital due to be introduced next year for VAT registered businesses, another area contained in the draft Bill relates to the introduction of a new points-based penalties system for missing tax return submission deadlines. Rather than be hit with a fine for missing one single deadline, businesses will accrue points for misdemeanours – similar to a driving licence – with penalties imposed once a certain number have been clocked up. With growth businesses typically experiencing greater flux as they undergo rapid change in their procedures,
While the proposals announced in the Government’s latest Finance Bill are unlikely to be a significant cause of concern for fast-growing UK businesses, it is certainly in their interests to be aware of potential upcoming changes and adapt their business models accordingly. For example, for business owners with a shareholding likely to fall below five per cent which are looking to attract external investment, it may be worthwhile waiting for changes to Entrepreneurs’ Relief to be introduced in order to protect their personal investment.
The new system offers a welcome pragmatism and is designed to catch repeat offenders rather than penalise businesses for one-off failures.
Whatever their size, it is essential that business owners take the time to get up to speed with Government’s proposed financial changes and evaluate which are most relevant to their individual organisation. By doing so, UK businesses can ensure they stay on the right side of anti-avoidance laws and put themselves on the right track for future growth.
By Will Sweeney, senior corporate tax manager at Menzies LLP