Business Asset Disposal Relief: Use it, or risk losing it - either from dormancy dithering or the next government

They are still a point of query for the odd IT contractor, but time limits on claiming Business Asset Disposal Relief are simple enough.  

The two, three-year rules

Your personal service company (PSC) must have been trading for at least two years before you can claim BADR, and if the limited company is dormant, any disposal or distribution of its assets must be made within three years of it ceasing to trade. 

But in the fog of political warfare triggered by the General Election 2024 campaign, it’s worth factoring in the risk of potential changes to BADR (formerly Entrepreneurs’ Relief), and even the possible abolition of this key incentive for UK entrepreneurs, writes Nick Hood of Opus Business Advisory Group. 

Yet that’s not the only topical BADR debate. Let’s first consider BADR in the context of the IR35 reform-infused scenario of keeping a dormant PSC on legal life support while the director-contractor works through an umbrella company, or else is under someone else’s PAYE. 

Pros and Cons of keeping a dormant PSC going while working via umbrella company

The disadvantages of keeping a dormant PSC going while you operate via a brolly centre on the costs, predominantly by way of filing fees and your accountant’s bill for preparing accounts for filing, plus keeping HMRC generally happy. 

The advantages centre around the convenience of having an ‘oven-ready’ company if a contractor suddenly can come out from under the umbrella or escapes the clutches of inside IR35. Related, there’s a benefit in being able to track and demonstrate how long your commercial contracting activities have been established. And there’s a hint the PSC’s name might have either commercial value as a personal brand or just sentimental value. 

The £100,000 crumb to fall from HMRC’s table

But to many contractors we advise money matters! So what if there are valuable business assets locked away, slumbering in the dormant PSC’s balance sheet?  

Well, BADR allows the sale or distribution of such assets to be subject to a concessionary tax rate of only 10%, compared with the current standard capital gains tax rate of 20% -- subject to a lifetime limit of £1 million of assets.  

So in theory, there’s up to £100,000 waiting to be saved, and that’s a heck of a crumb to fall off HMRC’s table! 

Lingering, lurking, and the 11th hour

But from what we’re picking up from social media posts and anecdotally, it seems there’s more than a few contractors who are just double-busy, so they’re waiting (or should that be ‘hoping’?) for the IR35 offset to do its thing. As a result, these contractors have opted to let their PSC linger on as a dormant company, while they lurk under the shade of that handy umbrella.

The thing is; potentially distracted or reassured by still getting some level of take-home via the brolly, it’s not difficult to imagine the scenario where a couple of years have passed and before you know it, a third dormant year-end is looming. 

If this sounds like you or it could be you, be careful. Typically, turning the assets into cash or distributing them in specie to the shareholder(s) through a liquidation takes at least a little time. So this isn’t something we’d recommend leaving until the 11th hour, due to the fear and prospect of losing BADR through tardiness. 

Election 2024: How Labour, Lib Dems, and Conservatives view BADR /CGT reform

Equally, election curveballs beware.  

Can anyone be certain that BADR will survive or remain unchanged under the watch of whoever wins on July 4th? The Tories are big into the game of promising not to increase pretty much any tax you can think of, but that doesn’t mean that there won’t be any reform of Capital Gains Tax. Oh, and they have mentioned the desirability of reviewing BADR in the past. 

But “the Conservatives aren’t the favourites to win” I hear you shout!  

True. But some years ago, when BADR was still called Entrepreneurs’ Relief, Labour – who are favourites - mooted a threat to abolish the concession altogether.  

While that mooting was in the days when the party was careering ever leftwards, more recently in the autumn and from the avowedly ‘fiscally-responsible’ shadow chancellor Rachel Reeves, there was no mention of a future with BADR in her speech to the Labour Party Conference. 

Reeves and BADR (cont.)

Instead, Reeves stressed the importance of having preferential tax treatment to make the UK the ‘best place to start and grow a business.’ By then Labour had already published its "Start-up, Scale-up" policy paper, which talks about expanding existing incentives, such as the SEIS (Seed Enterprise Investment Scheme) and the EIS (Enterprise Investment Scheme) and the R&D tax credit system. BADR not getting a look-in regarding Reeves’ business incentivisation plans may or may not mean that BADR will be changed under a Sir Keir Starmer-led government.  

Finally regarding Labour, there was no mention of BADR in Labour’s manifesto (2024 edition). And while the 142-page document does reassuringly pledge to “support entrepreneurship” it’s unfortunately not director-contractors who the party has in mind with that pledge; it’s striving shop-owners on the high street struggling with business rates.  

Bottom line? It’s worth contemplating the potential impact of financial and fiscal reality on the revenue side of the likely government’s finances post-election, and whether that could make BADR a target. 

Similar to Labour, the Liberal Democrats’ latest public statement on fiscal matters makes no mention of BADR. 

The final nail in the coffin for (at least) some PSCs is probably here

Overall and in the eyes of cautious-types like us, the political uncertainty clouding BADR’s future puts a potent additional argument on the list of reasons to reject dormancy and end the lives of at least some PSCs. Time here will be of the essence, depending on how quickly the next government might have to propose an emergency Budget to reverse any unsustainable but vote-winning promises made between now and July 4th.