Tax & admin · 9 March 2016

Could this year’s Budget spell the end for Entrepreneurs’ Relief?

The Budget is set for 16 March

With the chancellor’s 2016 Budget now just a week away, we at Business Advice have been contemplating what weird and wonderful tricks George Osborne may have up his sleeve this time around, particularly any that’ll have an impact on the country’s micro firms.

So far in this parliament, the chancellor’s spending measures have been heavily geared towards encouraging small business growth and innovation. In November’s Autumn Statement, a year-long extension of the small business rate relief scheme and the creation of 26 new “enterprise zones” was introduced alongside the promise of a £400m Northern Powerhouse Investment Fund, designed to hand business rate-setting powers back to certain local authorities whilst boosting small business productivity in the more economically deprived areas of the country.

What steps will Osborne take to move his small business agenda forward on 16 March? One distinct possibility is that he takes the opportunity to tackle Entrepreneurs’ Relief – perhaps one of the most valued relief rates in the government’s current system of taxes on capital, but one that has nevertheless been toyed and tampered with. The future of Entrepreneurs’ Relief was talked about at length in the build up to Autumn Statement, but was eventually left alone. Could the 2016 Budget finally be the moment it gets thrown on the scrap heap?

Under current measures, Entrepreneurs’ Relief enables the sale of a qualifying business to be taxed at a rate of ten per cent, rather than at the principal capital gain rate of 28 per cent, on gains up to a lifetime total of £10m. Full relief is therefore worth anything up to £1.8m per person. Qualifying firms are likely to be smaller, as it’s sole traders and partners that are generally eligible to apply for Entrepreneurs’ Relief.

HMRC figures from the 2013 to 2014 tax year showed that the government’s bill for Entrepreneurs’ Relief ended up being £2bn more than anticipated, with 43,000 people claiming the relief to the tune of £2.9bn. This is a costly sum that Osborne may not be willing to fork out for much longer. Further analysis of those figures demonstrated that £1.8bn of the relief was shared between around 3,000 taxpayers, providing an average saving of £600,000.

Reductions in the total lifetime limit have been predicted for some time, and from December 2015 to February 2016, HMRC ran a consultation which sought to introduce restrictions preventing profits retained within a company from benefiting from Entrepreneurs’ Relief in the event that company was wound up. Entrepreneurs who wished to remain involved in a business, or enter a new business continuing a similar trade to the old one, would in theory be taxed at the new higher dividend rate of up to 38 per cent, rather than the ten per cent Entrepreneurs’ Relief rate. Tax experts expect these measures to be introduced this year, but HMRC has not yet published the full results of the consultation.

Scrapping the Entrepreneurs’ Relief rate will no doubt result in short-term revenue gains for the government, but it’s the long-term consequences on small businesses that could be most in danger. It is likely, for example, that the UK will see fewer serial entrepreneurs should the relief rate be scrapped or changed, as the prospect of lower capital gains prevents startup owners from reinvesting into a new venture.

Also, how will funding for small businesses be affected? Many small firms seeking finance depend on the seed-level investments of entrepreneurs to get off the ground. With entrepreneurs making less money from the sale of their ventures, the government may inadvertently reduce the size of the pool of private investment the UK startup sector swims in.

Further than this though is the worry that would-be entrepreneurs are put off from running with their idea and starting a business in the first place. The government wants to create a nurturing environment for fledgling businesses, and the gesture of a tax break like Entrepreneurs’ Relief goes a long way. By doing away with incentives, Osborne will see fewer people taking a leap of faith.

The chancellor should continue to show his backing for small business in next week’s Budget, and being considerate with the Entrepreneurs’ Relief rate could be central to that. Whilst representing a big pull on the public purse strings in the past, Entrepreneurs’ Relief is representative of the kind of measure that can help fuel small business growth – Osborne’s so-called “engine room” of Britain’s economy.

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Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.

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