Sajid Javid, the chancellor, may guillotine Entrepreneurs’ Relief instead of scrapping it completely, following protests from entrepreneurs.
According to the Sunday Times, Sajid Javid may shut off Entrepreneurs’ Relief for new businesses in next month’s Budget instead of scrapping the tax break completely.
And the tax break for entrepreneurs selling their businesses would be capped at £1m worth of capital gains tax to pay instead of the current £10m.
Entrepreneurs’ Relief halves the amount of CGT business owners must pay when they sell up, from 20 per cent to 10 per cent on sale.
Introduced by Gordon Brown’s government, the idea was that entrepreneurs would reinvest in their companies rather than sell out when they can.
However, Treasury officials see Entrepreneurs’ Relief as a tax loophole and want to shut it down completely. Prime minister Boris Johnson claimed the £2.4bn-a-year tax break served only to make the “staggeringly rich” even wealthier.
In October the Institute for Fiscal Studies criticised Entrepreneurs’ Relief for just rewarding owners already selling their businesses, rather than encouraging them to reinvest in another start-up.
The Association of Accounting Technicians (AAT) went 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.
Business owners are accelerating plans to sell their businesses before the Budget on March 11, say accountants.
Responding to reports that the government is considering guillotining Entrepreneurs’ Relief, Phil Hall, AAT Head of Public Affairs & Public Policy, said: “Scrapping Entrepreneurs’ Relief for any new business, while keeping it for existing owners, would introduce yet more complexity to the tax system, would be bureaucratic and create considerable inequity. The best thing to do would be to scrap this misnamed, misguided and unnecessary reward for the very wealthiest in society, in its entirety.”
Responding to business owners’ pleas to keep the relief because it encourages investment and entrepreneurialism, Hall added: “AAT licensed accountants have repeatedly told us that their client base is largely unaware of the relief until the time comes to sell their business. This is backed up by HMRC research which found 92 per cent of Entrepreneurs’ Relief recipients said it had absolutely no bearing on their decision to start or invest in a business. The remaining 8 per cent may be a vociferous minority but that’s not a sound basis on which to make policy.”
But Stuart Crook, partner at accountants Wellers, called for a review of Entrepreneurs’ Relief rather than outright scrapping completely.
Crook said: “A review of the lifetime limits and ER criteria seems a more balanced and proportionate reaction to all of the comments made to date. A long-term plan for a number of reliefs and allowances would also make more sense than arbitrary increases or removals to suit political whims.”
Knowing that the relief was there, said Crook, meant entrepreneurs were not taking money out of the business and, more importantly, were not making sufficient pension contributions, relying on the tax break to make up their pension deficit.
“Some form of indexation to the original limits set in these key areas would reduce the chances of a political hot potato being passed backwards and forwards by successive governments,” Crook said.
However, the chancellor may think again about allowing existing businesses to keep the tax break if the economy follows the path forecast by the Bank of England, breaking Javid’s new rules to guarantee a budget surplus.
Financial Times has calculated that the lower rates of economic growth forecast by the BoE would leave the chancellor with a £12bn deficit by 2022-23, instead of the £5bn surplus laid out in the Conservative election manifesto.