22 April 2015
Why entrepreneurs’ relief matters
For entrepreneurs across the Thames Valley, one cloud on the horizon has been the possible phasing out or scaling back of entrepreneurs’ relief that a change of government may bring. David Smellie, partner in the corporate and commercial team, makes the case for keeping it.
We’re fortunate that our region is one of the most productive and successful in the UK. Organisations range from corporate giants to small businesses and start-ups, and behind many of them are the entrepreneurs and innovators who work hard to bring their ambitions to reality.
Entrepreneurs’ relief means that those people, when they come to sell, can keep more of the wealth which they have created.
If such relief is extinguished or scaled back then why should entrepreneurs take the risks in growing smaller businesses? If there are no reliefs then why not just invest in blue chip investments?
In my view, any measures to reform or amend entrepreneurs’ relief (other than changes designed to prevent abuse, which are welcome) would be unfortunate to say the least.
The rumours of possible changes began after the National Audit Office revealed late last year that the cost of the scheme had risen from £475 million in 2007-08 to £2.9 billion in 2013-14. Margaret Hodge, the Labour chair of the parliamentary public accounts committee, criticised HM Revenue & Customs for “failure to routinely monitor the costs” of entrepreneurs’ relief and called for closer scrutiny to prevent fraud.
Her comments led to concerns that if Labour were to come to power then they may look to abolish or scale back the relief. Similarly, the Liberal Democrats have said they would look at “refocusing the entrepreneurs’ relief to ensure it only helps genuine entrepreneurs and isn’t used as a tax loophole for the super-rich”.
In the Budget, Chancellor George Osborne did to some degree address the issue of fraud by introducing anti-avoidance provisions, but it seems quite clear that if there is a new political party in charge, much more change could be on the way.
Of course, the Treasury would no doubt love to gain a much larger proportion of that nearly £3bn, and there is an easy political justification – why should a "fat cat" making £10m of gains receive tax breaks – but if the relief is abolished, arguably this could put our entrepreneurial culture at risk.
Entrepreneurs’ relief makes a real and valuable contribution in encouraging the growth of businesses; we should be looking at new ways to encourage the next generation of entrepreneurs to build their businesses, not looking to reduce the benefits they currently enjoy on a sale.
Entrepreneurs’ Relief was introduced under a Labour government seven years ago and it now allows business owners to pay 10 per cent capital gains tax on the sale of qualifying assets, instead of the normal 18 per cent or 28 per cent. Individuals have a lifetime limit of £10m of taxable gains, so they can save £1.8m if they maximise this relief.
For more information about entrepreneurs' relief and what the changes could mean for your business, contact David on 01753 279034.