The general purpose of encouraging entrepreneurship has been vague since entrepreneurs’ relief was introduced. Its origins lie in rushed-through legislation introduced by Alistair Darling in 2008. This followed an outcry at the abolition of taper relief, previously available to business owners on the sale of business assets. Taper relief had in turn replaced retirement relief. Such a muddled genealogy is not conducive to the development of a well thought-through, policy-based tax system.
Mr Darling did his best, promising that entrepreneurs’ relief would ‘represent significant help to a lot of small businesses’ at a cost of around £200m a year. By contrast, it is estimated that the cost of the relief now exceeds £2.4bn annually with the benefit heavily skewed towards owners of large businesses.
Critics, a group which includes bodies as diverse as the Association of Accounting Technicians, the Institute for Fiscal Studies and the Resolution Foundation, express concern that there is little or no evidence that entrepreneurs’ relief encourages entrepreneurialism. While there is some debate about that, the very structure of the relief leaves it open to the criticism that it does nothing whatsoever to foster serial entrepreneurialism.
Faced with growing calls to reduce tax breaks for the wealthy, it would be a simple matter for the government to scrap entrepreneurs’ relief. However, this would not accord well with the post-Brexit messages that the UK is open for business, that entrepreneurial businesses are the backbone of the UK economy and that innovation is the way forward.
I therefore expect to see entrepreneurs’ relief changed into a form of rollover relief, with qualifying gains sheltered to the extent that related proceeds are reinvested in a further qualifying business within a defined period of time. Gains not reinvested after, say, three or five years would be subject to capital gains tax. This would also apply to gains when the entrepreneur finally cashed-up. With losses available to be offset against other gains during the entrepreneur’s business lifetime, there would be a certain policy logic in charging non-reinvested gains at the prevailing capital gains tax rate. Whether some of those gains should be taxed at a reduced rate is a question of political optics.