Tax  

The government must keep entrepreneurs' relief

Stephen Hemmings

Stephen Hemmings

The prime minister has given his clearest indication yet, that entrepreneurs’ relief is going to change and could even be scrapped altogether.

But with Brexit changes set to put pressure on trading conditions in the year ahead, is now the right time to remove this much-valued tax relief and how might entrepreneurial investors react?

Speaking at an event recently, Boris Johnson said that entrepreneurs’ relief was serving to make rich people ‘even more staggeringly rich’ and indicated that the Treasury is committed to making changes.

His comments seemed to uphold the views of the Institute of Fiscal Studies published last year, which found little evidence that the relief is an incentive for investment.

Review and reform

While some change to entrepreneur’s relief has been expected for some time, advisers had been hoping that the government would stick to the ‘review and reform’ approach set out in its recent election manifesto.

However, it now seems that the changes could be more drastic and more imminent.

With tax savings of £2.2bn in 2018-19, which is four and a half times the level forecast at its introduction in 2008, the case for action to curtail or remove entrepreneurs’ relief has strengthened significantly over the last few years.

However, removing the incentive altogether would contravene the long-standing idea that it is appropriate to reward owners and investors for risking their capital (as seen with the Enterprise Investment Scheme for external investors) and could cause a significant backlash from the business community.

While the government may argue that the presence of entrepreneurs’ relief does not drive investment decisions, the fact is that financially astute business owners and entrepreneurial investors do consider tax incentives in weighing decisions to invest their capital.

This is especially true for more marginal ventures that may nevertheless create jobs and generate profits upon which taxes are paid.

If such incentives are removed, individuals will be less likely to invest their money and any economic benefits that might have resulted, would be lost.

Successful SMEs

Government business population figures confirm that SMEs represent 99.9 per cent of private businesses in the UK and employ over 16m people.

Importantly, these businesses are also recruiting at a rate that is four times faster than larger businesses.

It seems unwise to disrupt such a productive engine of investment and economic benefit, which is integral to these achievements.

Rather than scrapping entrepreneurs’ relief, the government could introduce reforms with a view to trimming the tax cost slightly.

For example, a slight increase in the discounted rate of CGT, which is applied to profits generated by the sale of qualifying assets – currently 10 per cent, or a reduction in the overall lifetime allowance - currently set at £10m - could be considered.

Conditions could also be imposed, requiring investors to hold shares for a longer time.