Philip Hammond is under pressure to deliver a bold statement when he delivers his Budget in just six weeks.Word on the street is that he is looking for a 'youth Budget' – taking from the 'old' to give to the 'young'.
Attacking pension relief is on the cards yet again, but there is one relief which could be abolished (plus save the Exchequer at least £2bn a year) that might go down well with the youth and that is Entrepreneur Relief (ER).
This article will not be describing the rules that are ER (which can be found here), but will consider the reasons for and against the relief remaining.
Available statistics show the poor take-up of this relief. Those who do are more likely to be business owners whose tax advisers are aware that such a relief exits.
The average tax saving for each claimant is £600,000 (2013 figures) and at that amount then the cost of setting up schemes to claim ER is worthwhile for those taxpayers, if not automatically claimable. However, notice that this statistic was set four years ago and is now most likely to be higher).
Since 2013, CGT rates have fallen such that there is no disparity for basic rate taxpayers, whether the claim is under ER or the main CGT rate (after annual allowance) and a difference of 10% for higher rate taxpayers. With these rates the ability to claim under ER will be of interest only to higher rate taxpayers.
This can only result in an increase in schemes using the rules to gain advantage of the lower tax charge (if not automatically claimable) which can only result in an increase in interest from HMRC.
A change every year
ER is now 10 years old and was introduced as a reaction to representations from various professional bodies to the then chancellor's idea of the month for a standard tax rate of CGT for all.
Since then no one has thought (or had time?) to review the rules being added to rather than consolidated. Simplification is the mantra of the current government, but the rules covering ER are hardly an advert for tax simplification.
The few years post-introduction saw the ER rules as implemented stay intact with just an increase in the lifetime cap. Then in 2015 things changed.
Why the claim exists
The rules started out as being basic enough, based on the old retirement relief rules and were possibly introduced because HMRC was hard pushed to think up anything else at the time.
When it was announced that the taper relief rules were to be withdrawn, one argument for retention of some sort of relief was that without such relief business owners who had been planning their retirement for years would be met with a tax bill they had not catered for and as a result this could discourage entrepreneurs from building businesses, generating employment and creating wealth.
The first part of the reasoning cannot be argued with – it is the second part that is questionable. Another reason given for retention was that such a relief would encourage people to set up in business because if successful then their reward would be a lower tax rate.
However, ask any business owner why they set up and although you will get a variety of reasons none will mention ER. Possibly business owners are unaware that such a relief exists (as has been mentioned) or that the disposal of the business or shares is such a long way off that they cannot appreciate the importance.
As there are so few business owners who take advantage of the relief anyway, the proof is in the numbers.
HMRC is known for being reactive rather than proactive and in 2015 it realised that ER rules were being what they would term as 'abused'.
Again, the lack of forethought on what impact the measures introduced in the Finance Act 2015 would have on joint ventures and partnerships such as those set up for legitimate commercial reasons meant that the rules were abolished in the following years' Finance Act.
The 2015 measures were too wide-ranging and captured legitimate tax planning.
However, ER is such a valuable relief that whilst it exists you will always find someone taking advantage that arguably should not have been able to claim under the rules as originally envisaged.
Such a scheme (Sept 2016) is described in HMRC's Capital Gains Tax: Entrepreneurs' Relief tax avoidance scheme document.
This scheme is currently on HMRC's hit list and shows the lengths that some will go to achieve the reduction in tax.
Under this type of scheme:
- Individuals sell the beneficial ownership of their company to a Cypriot entity.
- As part of the deal, they take up employment with the Cypriot entity.
- They remain director of the company and the company continues to invoice for its services.
- Monthly payments are received by the taxpayer and ER is claimed.
Go v stay
If ER was not available in the first place then these schemes would not be needed. There has been an increase in the number of tribunal cases brought over the last couple of years although the last one was over a year ago (July 2016 – Dilip Amin v HMRC  UKFTT 515 (HMRC won).
The number is nothing compared with the number of cases brought under the other valuable CGT relief (i.e. PPR), but this increase can only mean that more of HMRC's resources are being deployed.
When you think of the cost of bringing such cases it needs to be asked whether it is worth it for the relatively little money being gained (in Mr Amin's case a total of £4,907.91 (tax payable of £3,954.33 and a penalty of £953.58)). HMRC staff could be deployed elsewhere in some other department where their skills would be put to better use in reducing the 'tax gap'.
It has been said that ER produces a positive effect for the UK economy by encouraging serial entrepreneurs, but it could also have an opposite effect as a claim is possible after only one year in business. This could mean that a successful business is sold too quickly for full expansion to be reached or may be so dependent upon the person setting up the business that his leaving so soon could have an adverse impact.
Why ER will remain
Unless replaced by another (more generous?) relief as some AccountingWEB members suggest is needed, then the likelihood is that ER will remain in place next month with any alterations/amendments being introduced as and when needed; at least for the next couple of years.
The main reason is Brexit. The chancellor will not want to do anything that might be interpreted as penalising British business and their owners.
About Jennifer Adams
Jennifer Adams is Consulting Editor of AccountingWEB and is a professional business author specialising in corporate governance and taxation. She runs her own accounting and consultancy business with offices based in Surrey and Dorset.