A Chancellor under pressure following an announcement to scrap a 10 per cent tax rate on the sale of business assets. Howls of outrage from the CBI and calls from ministers and business owners to reverse the decision. A lack of any substantial research or consultation on the issue, followed by an embarrassing reversal.
This is not crystal-ball gazing but rather how entrepreneurs’ relief came into existence as Alistair Darling responded to criticism of abolishing taper relief. For many, rumours of the forthcoming demise of entrepreneurs’ relief are reminiscent of Groundhog Day.
The more notable flaws of entrepreneurs’ relief include its cost, its failure to encourage individuals to start businesses and its tendency to benefit those who are retiring rather than those seeking to reinvest. So, what has changed since taper relief was abolished to spark such widespread criticism?
The reality is that little has changed except public opinion. When entrepreneurs’ relief was introduced, its key aims included simplifying the tax system and a desire 'to help investors plan for the long term'. It was widely considered that a stable and sustainable tax treatment would encourage long-term entrepreneurial activity. Cost was important but the focus was more on the cost to the economy of knee-jerk changes to the tax system.
That point is seemingly missing from the current debate. What is the actual cost of curtailing the relief? HMRC acknowledge that the figures they cite as the cost of entrepreneurs’ relief ‘do not represent the gain to the Exchequer should [it] be abolished’ and it is too simplistic to state that if it didn’t exist in its current form, business owners would simply pay tax at the normal 20 per cent capital gains tax rate and the Exchequer would be £2 billion better off each year.
If the expected changes to entrepreneurs’ relief are announced, they could have a material impact on the mergers and acquisitions market. Considering the uncertainty we are already observing, many business owners in the midst of a transaction are reassessing their options, potentially delaying disposals and succession plans.
Likewise, the disruption will push some to seek warmer shores with more favourable tax regimes. This point is easily dismissed but shouldn’t be in this context. Some of the larger beneficiaries of entrepreneurs’ relief are retirees and their exit strategies may well be based on a 10 per cent rate that has existed in one form or another for at least 20 years. Its sudden removal may be enough for many successful entrepreneurs to consider packing their suitcases.
The cost-saving generated from scrapping or limiting entrepreneurs’ relief could therefore be substantially lower than some anticipate. The truth of the matter is none of us really know as the necessary research doesn’t appear to have been undertaken. Rather than rushing headlong into sudden changes in the Budget, it might be more prudent to ‘review and reform’ properly as the manifesto suggested, undertaking a thorough consultation on alternatives. As it stands, it seems the Chancellor ‘cannot remember the past and is condemned to repeat it’.