Contractors, act now and before Budget 2020 to get Entrepreneurs’ Relief

Maybe he forgot his audience, but the reported comments of Boris Johnson to a group of entrepreneurs that some “staggeringly rich” people use Entrepreneurs’ Relief  to “make themselves even more staggeringly rich,” suggests the popular tax break on winding-up a company has its card well and truly marked, writes Leila Ghazzali of WTT Consulting.

Or perhaps the prime minister didn’t forget his audience at all. Maybe he knew exactly who he was talking to and was actually warning them ahead of the fast-approaching Budget 2020.

What is Entrepreneurs’ Relief?

For the uninitiated, Entrepreneurs’ Relief (ER) is an important relief for those who wish to sell their business, as it offers preferable Capital Gains Tax rates. For those who are considering the disposal of their business, planning should be considered now -- in light of the PM’s comments.

ER has been criticised by successive governments, with the oft-claim being that the relief is too generous and fails to impact genuine entrepreneurs seeking to start up a business. Instead, and as Mr Johnson says he now believes, ER is disproportionately benefiting the rich.

The benefit lies in the application of ER reducing the Capital Gains Tax rate to 10% for those who qualify when disposing of a business or part of a business, from 20%. The lifetime limit of the use of the relief has risen from £1 million to £10 million over the past 10 years.

Politicians’ problem with Entrepreneurs’ Relief

The shot across the bows of ER from the Tory leader has precedent. In their 2019 General Election manifesto, the Conservatives promised to “review and reform” Entrepreneurs’ Relief. And, the party noted, “some measures haven’t fully delivered on their objectives.” So the government’s view is that ER has had a negative impact, contrary to what was originally intended when the legislation was introduced (by Labour) in 2008.

Now that the Conservatives have been re-elected (with a vast majority), it seems to be a very real risk that ER is in the process of being completely abolished, or at least significantly reformed.

When the relief was first announced in 2008, the measure was intended to benefit owners of small businesses and their investors holding a 5% or greater stake in the company at the point when the owner chose to sell. It was estimated that in the first year of the relief being available, around 80,000 business owners would qualify for the relief at a cost of £200 million per year. Additionally, it was claimed that it would also keep the tax systems as simple as possible.

However, over 10 years later, the relief has become increasingly complex and a report from the Institute for Fiscal Studies estimates the actual cost to the government as £2.4billion a year. This is clearly substantially more than budgeted.

‘Repeal & Replace’ (and ‘Repeat,’ potentially)

When ER was introduced it replaced business assets taper relief which itself replaced retirement relief. Therefore, based on this propensity to repeal and replace, it is likely that a similar relief will be introduced in ER’s stead. The relief has always been perceived as a key incentive to entrepreneurs in the UK, encouraging them to invest or start-up businesses. Encouraging enterprise has always been a priority for UK policy-makers, who have made many other investment reliefs available (i.e. EIS, and VCTs).

However, the impact of the costs of ER should not be ignored. When policies are introduced, there is an assessment of the cost to the exchequer. If the cost is significantly exceeding the estimated impact, then the legislation will likely be reviewed, and changes considered in order to ‘cover’ the costs.

One tax in, one tax out?

This comes at a time when new tax legislation with regard to IR35 is due to come into force in the private sector. This has led to contractors’ end-clients actively discouraging contractors trading through a Personal Service Company (PSC). As a result, contractors are seeking alternative options away from PSCs -- in order to negate their IR35 risk, which would potentially see them being financially worse-off.

These changes to IR35 therefore may mean that a limited company may no longer be of the financial benefit that it once was. With the continuous threat of ER being abolished or at the very least reformed, planning should be considered now to take advantage of the relief.

Why? Well, a Budget has been announced for March 11th 2020 – just in time for the beginning of the next tax year. So if there were any changes to ER it will likely start from the April 6th 2020, or later. 

Act now

ER can be a sensible relief for planning your affairs, but it is also complex and failure to prepare can substantially damage your position. You should therefore seek a specialist in this field who, like us, would thoroughly review your circumstances to both decide if a claim for Entrepreneurs’ Relief is likely to succeed and manage the entire process of liquidating your PSC. Traditionally, the liquidation from start to finish takes six months, so with possible changes on the horizon we urge those considering ER to take steps to consider their options not even sooner rather than later -- but now.