Entrepreneurs’ relief allows business owners who meet qualifying criteria to pay the 10 per cent rate of capital gains tax when they sell assets rather than the normal 20 per cent. This encourages enterprise and risk-taking by incentivising people to start a business.
It also enables them to build successful companies by attracting quality staff whom they might otherwise struggle to employ because the relief applies to employees who subscribe for shares through Enterprise Management Incentive (EMI) share options too.
The government’s current view follows comments made last year by the Institute for Fiscal Studies (IFS) which claimed the relief was prone to abuse and did little to promote UK business investment. The Prime Minister recently said that he felt the measure was being used to make businesspeople "even more staggeringly rich".
When speaking to a group of businesswomen in London last month where he was challenged about his commitment to the measure, he did nothing to suggest he was rethinking his position. While it was reported Sajid Javid was wavering on making significant changes to entrepreneurs’ relief, whether his successor Rishi Sunak shares that sentiment is unclear.
At a time when businesses want and deserve stability and encouragement, it is very disappointing to hear plans to scrap a measure that incentivises people to start or work for entrepreneurial businesses, often foregoing a higher pay package on offer from a larger company or within the public sector.
A move to abolish entrepreneurs’ relief when we have just left the EU and heading into an uncertain economic climate is bad timing. Now is when we need to be encouraging entrepreneurship in the UK, and embracing its role in the future of the post-Brexit national economy, rather than pulling the rug from under entrepreneurs’ feet.
I work closely with the UK start-up community and see first-hand the benefits of entrepreneurs’ tax relief. Far from making people "staggeringly rich," this relief has been essential in encouraging company founders to invest time and money into starting a business.
It also incentivises employees, who are prepared to accept a lower salary to work for these businesses with the prospect of a future capital gain when they sell their shareholdings obtained through EMI share options.
There have been abuses of the measures, as flagged by the IFS, but these have been addressed through previous amendments. The March Budget should focus on closing additional loopholes rather than threaten throwing the baby out with the bathwater by abolishing the relief measures altogether.
To be clear: scrapping entrepreneurs’ relief would be very bad for the types of businesses that rely on this support to recruit key individuals – most notably entrepreneurial, high-risk companies in the technology and life sciences sectors.
Any notion to do this without firstly putting a better alternative in its place must be questioned. If we are to unleash this country’s potential, we should be helping those who are developing it. Losing a relief that encourages investment in innovation risks denting the UK’s enterprising, forward-thinking spirit.
Neil Norman, partner and head of the entrepreneurial tax team at chartered accountant Chiene + Tait