General election raises fears over tax break

Entrepreneurs' relief was introduced in 2008 by the then chancellor, Alistair Darling. Picture: John Devlin
Entrepreneurs' relief was introduced in 2008 by the then chancellor, Alistair Darling. Picture: John Devlin
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FEARS are mounting that May’s general election could trigger the abolition of a valuable tax break for business owners that has been criticised for costing £2 billion more than originally predicted.

Entrepreneurs’ relief was introduced in 2008 by the then chancellor, Alistair Darling, and offers a substantial cut in capital gains tax on the sale of a business.

However, corporate advisers say they have seen a jump in the number of entrepreneurs expressing concerns that a new government could opt to scrap the tax break after the election.

The concerns come as analysts at Deutsche Bank warned the upcoming vote is set to be the “most unpredictable for nearly a century”, with polls suggesting that neither the Conservatives nor Labour will have enough support to secure an outright majority.

In a note to investors, the bank said: “There may be no good outcome. Whatever its composition, the next government is likely to face the political need to accelerate fiscal tightening.”

Ewan Grant, head of corporate finance for accountancy firm Baker Tilly in Scotland, said: “Entrepreneur’s relief is an extremely popular tax initiative for business owners, so it’s not surprising that the take-up of it has resulted in 
a much larger cost to 
government than originally anticipated.

“We’ve already started to get calls from entrepreneurs concerned that any change in government may result in the reduction or scrapping of this relief, and what impact this could have on the sale of their business.”

Margaret Hodge, the Labour chair of the Commons public accounts committee, said recently that she was “deeply concerned” that HM Revenue & Customs (HMRC) had failed to monitor the costs and usage of some tax breaks, including entrepreneurs’ relief.

She said: “It’s astonishing that it has done little to investigate whether the 500 per cent increase in the cost of entrepreneurs’ relief since its introduction in 2008-09 might be a result of abuse, despite this relief costing the exchequer around £2bn more than published forecasts suggested.”

Hodge was speaking after a report from the public spending watchdog revealed the tax break cost an estimated £2.9bn in 2013-14, about three times greater than predicted.

HMRC has dismissed as “nonsense” suggestions that its administration of tax reliefs loses money, insisting it “robustly” monitors their implementation and tackles abuse as a routine part of its compliance work.

By claiming entrepreneurs’ relief when selling all or part of their company, business owners pay just 10 per cent capital gains tax on qualifying assets, instead of the normal rate of 18 or 28 per cent. Individuals have a lifetime limit of £10m of taxable gain, so they could save £1.8m if they use their full allowance.

Colin Borland, head of external affairs at the Federation of Small Businesses in Scotland, said: “Any incoming UK government will need to ensure that the tax system works for small businesses and rewards those who take risks to generate wealth and employment. We want to see the development of a radically simplified system, which lets the smallest businesses spend less time filling in forms for HMRC and more time running and growing their business.

“At the moment, business owners tell us that entrepreneurs’ relief encourages people to take the plunge and invest their time and money into building something new. In the short term, it’s important we maintain and where possible build on this relief and similar tax incentives.”