Highly respected think tank the Institute of Fiscal Studies has become the latest organisation to question entrepreneurs’ relief as a way to encourage growth business investment.
The institute says that entrepreneurs’ relief leads to founders “adjusting how and when they take money out of the company” rather than boosting “the amount of income they create or how much investment they do”.
Labour chancellor Alistair Darling introduced the relief partly to encourage entrepreneurs to start companies.
The IFS said: “If one of the aims of reduced capital gains tax rates on business assets is to incentivise individuals to invest more in their businesses, this evidence suggests they are not working.”
Meanwhile, the Association of Accounting Technicians (AAT) has gone further, calling for entrepreneurs’ relief to be scrapped and that the £3bn or so the relief costs the Treasury to be invested directly in helping small business start-ups and scale-ups.
Phil Hall, AAT head of public affairs and public policy, said the relief is, “… extremely expensive, misguided and ultimately ineffective [and] if the government is serious about wanting to encourage entrepreneurialism, committing this £3bn of relief to help small British businesses to grow and prosper would be a far better investment for UK plc than encouraging business owners to sell up”.
Damningly, AAT-licensed accountants say that their clients are unaware of this relief until the time comes when they are considering a sale, when their accountant tells them about it. The AAT says this shows the relief does nothing to encourage entrepreneurialism but instead unnecessarily rewards those who would have sold their businesses anyway.
Plus, the average age of those taking the relief is 57, which suggests it’s being used by founders taking early retirement rather than start-up entrepreneurs.
However, Luke Davis, chief executive of start-up financier told The Times that the relief was “hugely important”.