It seems an annual issue in recent years that a forthcoming Budget causes business owners to lose sleep over whether entrepreneurs’ relief (ER) will be reformed, particularly those involved in a transaction.
The Resolution Foundation calling for the Chancellor to take a ‘long, hard look at ER’ will not be helping them with their insomnia. However, looking again at the benefits of ER is not unreasonable and it might be argued that the general purpose behind ER of encouraging entrepreneurship has been vague since it was introduced.
The origins of ER lie in rushed-through legislation introduced by Alistair Darling in 2008 following outcry at the abolition of taper relief (the previous relief available to business owners on the sale of business assets), it was based on the previously phased-out retirement relief which taper relief had itself replaced. Not circumstances conducive to well thought-through tax law.
Since then, ER has been subject to numerous changes expanding its reach well beyond the original purposes set out by Mr Darling who anticipated it would cost £200m a year and would ‘represent significant help to a lot of small businesses’. For context, the forecast annual cost for 2017 exceeds £2.7bn and in 2016 over 70 per cent of the ER claims were for gains over £1m, suggesting owners of large businesses tend to be the principal beneficiaries.
In response to questions regarding when it last reviewed ER and what the findings were, the Treasury noted that ‘all tax policy is kept under review’, pointing to a couple of recent consultations and a research report undertaken in 2017 interviewing 1,700 taxpayers.
These documents provide the greatest insight on what the Chancellor’s thoughts may be. Respondents to one consultation noted that ER is a ‘successful relief’ with the notable caveat that ‘it does not provide sufficient incentives for entrepreneurs to become serial entrepreneurs’. Reference is also made to increasing the ownership period requirement above the current 12 months to encourage longer-term entrepreneurial activity. The second consultation concerns extending ER to those who might otherwise lose it if they took on investment that would dilute their shareholdings.
In the research report, it was found around 30 per cent of those claiming ER were doing so to release capital to reinvest and a further 60 per cent to retire or be bought out. A material change to ER could therefore negatively impact business decisions, as seen in the past with changes to retirement relief (eg encouraging delayed sales), and indeed the report cites that a quarter of those interviewed took ER into account in making such decisions.
Given the political landscape and the backlash suffered by Mr Darling, it seems unlikely that ER will be suddenly abolished but if changes are announced, it would not be a surprise to see them focused on encouraging serial entrepreneurship and longer-term entrepreneurial investment.