Is Entrepreneurs’ Relief Coming To An End?
Entrepreneurs set up businesses before establishing and growing them. As a vital part of a functioning capitalist society, their ideas often bring about efficiency and save us time. They also push boundaries and break into new markets, making an essential contribution to the economy.
Entrepreneurship and innovation is something the government has long aimed to encourage through a variety of tax reliefs, including R&D Tax Credits, R&D grants, the Patent Box and Entrepreneur's Relief. But the future of Entrepreneur's Relief especially is uncertain, with all eyes on the upcoming Chancellor's 2020 Budget.
What is Entrepreneurs’ Relief?
At some point an entrepreneur may well decide to give away their business, or to sell it. This can be down to any number of reasons; some may no longer have time to run the business, or they may wish to retire, have family commitments or perhaps have simply lost interest. Whatever the reason, entrepreneurs may achieve a tax benefit by giving away or selling their business at a reduced tax rate - this is what’s known as “Entrepreneurs’ Relief”.
Unveiled back in 2008, the relief rate has changed incrementally in the years since - eligible gains are currently taxed at the rate of 10%. The lifetime limit on capital gains qualifying for Entrepreneurs’ Relief has risen from £1 million twelve years ago to £10 million now. It’s available in respect of certain business assets, including the disposal of some types of shares.
What are the key things to know about Entrepreneurs’ Relief?
Entrepreneurs’ Relief can only be claimed by an individual, i.e sole traders, those who hold shares in a limited company or those in a partnership. Additionally, it can only be claimed when all or part of a business is given away or sold and applies to business assets or shares in the company only once it has stopped trading. It’s worth noting that limited companies - that may own shares in other companies - cannot receive Entrepreneurs’ Relief, although certain trustees can.
The final point is that the business must have been owned by the entrepreneur for at least a year prior to the date on which it ceases to trade.
How are claims made for Entrepreneurs’ Relief?
There are a couple of ways that Entrepreneurs’ Relief can be claimed. It can either be done via a Self Assessment Tax Return, or by filling out Section A of the Entrepreneurs’ Relief fact sheet. Numerous claims can be made over time, however gains that exceed the £10 million lifetime allowance will be taxed according to the standard 10% capital gains tax rate (or at 18% for higher rate taxpayers).
Claims must be submitted to HMRC within 12 months from the 31st January in the year after the business stopped trading.
The success of Entrepreneurs’ Relief since its inception
Entrepreneurs’ Relief has appeared to have a significant and highly beneficial impact on the UK start-up culture since it was launched. In fact, the number of companies registering with Companies House has increased by around 62%. In conjunction with the other innovation-related tax breaks we’ve mentioned, Entrepreneurs’ Relief has helped to build the UK’s reputation for being a progressive and supportive place to start up a business.
What changes may be announced in the 2020 Budget?
There are set to be changes made to Entrepreneurs’ Relief in the upcoming Budget (due on the 11th March 2020). As yet it’s unclear what these are, however some tax uncertainty is inevitable. The government may be stricter on issues around qualification, perhaps by increasing the length of time the asset must be held. It could also change the ownership thresholds, making fewer individuals eligible. There’s a chance that the relief may even be abolished completely, instead making such business disposals subject to the normal rates of capital gains.
Varying the Entrepreneurs’ Relief tax rate is another option, as even small rise of perhaps 2% or 3% would have a substantial impact on the Treasury’s coffers.
Is a scrapping of Entrepreneurs’ Relief likely?
Not necessarily, but only time will tell. Recently it has been mooted that Entrepreneurs’ Relief is no longer fit for purpose. On analysing UK tax records, the IFS has in fact indicated that company owner-managers generally respond to income tax changes by altering when and how they take money out of their company. It also says that such individuals do not in fact altar the amount of income they create or make significant further investments due to these changes.
Furthermore, the IFS claims that their findings show many company owner-managers retain significant sums of cash in their companies by way of accessing lower capital gains tax rates, therefore making large tax savings. It seems that by lowering taxes on business income, those individuals with the most wealth stand to gain disproportionately more than those at the lower end. The practice of systematically retaining income within owner-managed companies can be of huge benefit for higher income individuals particularly. Cash and equivalent assets are perhaps now being stockpiled, rather than leading to investment in business capital.
It’s a contentious subject, and one which will remain so for some time to come.
How Myriad Associates and the Tax Cloud portal can help you to help your clients
At Myriad Associates (developers of Tax Cloud UK) we’re only concerned with innovative companies and helping them achieve the tax reliefs they deserve. We deal with no other area of accountancy at all, and work alongside a range of clients including accountancy firms on this niche tax area. With our two decades of research and development (R&D) tax knowledge and 100% success rate, we can assist you in offering your clients the best R&D advice possible.
Don’t forget to try our Tax Cloud portal for accountants too. Offering a great value, complete end-to-end service it will help you work out your client’s entitlement and offer support - so you can get on with everything else.
Call us today on 0207 118 6045 or fill in our contact page and we’ll get back to you.