Tax professionals have warned that Entrepreneurs’ Relief could be vulnerable in the chancellor’s upcoming Autumn Statement, as George Osborne looks to make savings beyond the planned welfare cuts.
The benefits of the relief are worth £3bn a year on latest estimates, and some campaigners have called for the tax break to be halted.
Richard Murphy, a director at Tax Research UK, pointed to official analysis that found £1.8bn in tax relief was enjoyed by around 3,000 individuals for the 2013-2014 period, who each sold their company stakes for more than £1m. Their tax relief was worth an average of £600,000 each.
The relief was claimed by 43,000 for that year – allowing those selling a firm to pay capital gains tax on their profits at a reduced rate. Rather than facing a charge of 28 per cent, business owners pay ten per cent on disposals up to a lifetime limit of £10m.
“This relief is literally giving wealth away,” Murphy told the Financial Times. “I’ve never met someone who genuinely set up a business because of the tax relief, it simply doesn’t work that way.”
As the Treasury looks to tighten its belt, Entrepreneurs’ Relief could be on the chopping block, with the overall cost of the relief standing at £2.9bn last year – £2bn more than originally predicted by HMRC. Back in the 2008-2009 period, it was £360m.
Chas Roy-Chowdhury, head of taxation at Association of Chartered Certified Accountants (ACCA), believes the value of the relief means that it is likely to be a topic of conversation within an Autumn Statement that’s likely to centre around spending.
“Anything that can the government money, particularly because of the tax credit fiasco, must be up for grabs,” he said.
The parliamentary public accounts committee had criticised HMRC’s “failure to routinely monitor the costs” of Entrepreneurs’ Relief back in November 2014 and the government firmed up rules in March to try and prevent abuse using contrived structures.
Since the pre-election “triple lock” pledge to stay clear of increasing income tax, national insurance or VAT until 2020, reliefs on capital gains have looked an obvious target.
Following the Summer Budget, Paul Aplin, a partner at AC Mole & Sons, said capital gains tax was “the dog that didn’t bark”.
“Given it was not mentioned in the ‘tax lock’, it suggests the government has one eye on reform,” he added.
The move would be a set-back to the government’s self-proclaimed pro-business agenda, though Roy-Chowdhury said if Osborne “feels he can get away with it, I’m sure he would” cut the relief.
While it looks more likely that there will be amendments to the ten per cent rate and the lifetime limit for qualifying gains than the outright removal of the relief, Murphy thinks it should be completely cut, as those benefitting “are already paying tax at something at 28 per cent that would otherwise be paid at 40 or 45 per cent”.
“Will they stop being entrepreneurs if the relief was taken away? No.”
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