Claire Madden, partner at Connection Capital, said speculation about whether Entrepreneurs’ Relief will be scaled back is “intensifying”. She mentioned the lack of interest from politicians in addressing the scheme as a particular sore spot for small businesses. “The publication of the three main parties’ manifestos has done nothing to allay SMEs’ fears, whether it’s been mentioned specifically or not.”
The scheme, for those looking to sell their business, is open to directors who own five per cent or more of a company, and allows them to enjoy a ten per cent tax rate on capital gains up to a lifetime limit of £10m.
Chancellor George Osborne did target the scheme in the Budget, with the closure of a small loophole that had allowed some entrepreneurs to avoid paying a higher rate of tax when a company is sold. He said at the time that he was trying to ensure relief was “only available to those selling genuine stakes in businesses”.
The action was to clamp down on members of a management team who individually would not have had a high enough percentage from joining together to form a management company and ensuring they received the same rate of tax relief as Entrepreneurs’ Relief.
Figures from the National Audit Office showed that the tax break is estimated to have cost the Treasury £2.9bn for the year of 2013 to 2014 – more than three times the £900m originally predicted. Madden suggests this, and the fact that of the three main parties only the Liberal Democrats has explicitly targeted Entrepreneurs’ Relief in its manifesto, has given SMEs cause for concern.
“While this might seem a fairly soft target for tax cuts, this tax break doesn’t favour the super-rich that have built up multimillion pound empires – the lifetime allowance restricts its benefit. But it does reward those who have worked hard and taken risks with their own capital to build up a business, no matter what size.”
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Madden added that business owners are wealth creators for the entire economy, and imposing further restrictions on the scheme would be “an economic own goal”. She added: “The reality is that the ‘cost’ of Entrepreneurs’ Relief demonstrates value to the economy rather than loss to the Exchequer.”
The uncertainty over what tax treatment entrepreneurs will receive when they come to sell could prove a “disincentive to expanding businesses or reinvesting gains into establishing new ones”, she warned. The correct course of action from her perspective would be, “an expansion of its scope”.
As the parties have increasingly pinned themselves in by ruling out big rises in other taxes such as NICs, VAT and income tax, Madden believes this is unlikely to happen. The Liberal Democrats confirmed that the party would investigate refocusing the entrepreneurs’ relief to ensure it only helps “genuine entrepreneurs” and isn’t used as a tax loophole for the super-rich.
Labour and the Conservatives have not provided further insight into what their intentions would be. Madden suggested that the lack of overall clarity regarding what plans the parties have for the scheme leaves the UK’s entrepreneurs in an uneasy state – particularly those currently contemplating selling their business.
Originally introduced by Labour seven years ago, the coalition government doubled the lifetime allowance for the scheme to £10m in March 2011. A record 581,173 new businesses registered with Companies House last year, with many fast-growing firms creating some of the two million new private sector jobs since 2010.
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