FRS 102 represents a major change to the UK financial reporting landscape. Understanding how the changes will impact on your company’s tax position will help you…
In its General Election manifesto, the Conservative Party committed to Britain being “the best country in the world to start and grow a business – a place where entrepreneurs know they can build on their ideas and find success”. At the core of the manifesto was backing entrepreneurial behaviour but there has been sustained criticism that current tax incentives are not supporting start-ups and successful scale-ups, with Entrepreneurs’ Relief (ER) a particular focus of discontent.
|ER is a 10% tax rate on sale compared to the 20% main rate of capital gains tax (CGT). The lifetime limit is £10m so the potential tax benefit per individual is £1m.|
Sir Edward Troup, former head of HMRC, has suggested that there is “a very strong case for whichever party wins the election to ramp down entrepreneurs’ relief immediately”. However, supporters of the relief argue that it has helped to make the UK an attractive place for entrepreneurs want to establish and grow their business.
Criticism of a policy that benefits the few
Labour has been vocal in its condemnation of a tax that is “largely just a handout for a small number of people” but what do the numbers show? The HMRC Bulletin (19 October 2019), estimated the cost of ER for 2019/20 at £2.1bn. Figures relating to the 2017/18 tax year showed 43,000 taxpayers paid CGT on gains of £24bn at a rate of 10%, instead of the most likely 20% rate, which resulted in an estimated cost to the Exchequer of £2.3bn. Included in these figures were 5,000 taxpayers who made capital gains in excess of £1m claiming ER and saving themselves around £1.7bn in CGT.
So, the majority of the tax cost goes to benefit very few individuals which is what makes ER so exposed to change given the need for more tax revenue to meet NHS and other commitments. Also, are the individuals benefiting truly entrepreneurs or are they simply taking advantage of a beneficial relief.
A simple reform or abolish completely?
Since it was first introduced by Gordon Brown in 2008 we have seen a number of changes to the relief. In the initial years of the relief the amount of lifetime gains that can benefit increased from £1m in 2008 to £10m by 2011. However, a turning point occurred in 2014 when HMRC started tightening the conditions reflecting a change of attitude towards ER.
The Conservative manifesto stated that some of the changes to the relief had worked in their bid to increase entrepreneurial and innovative behaviour but they also had to ‘recognise that some measures haven’t fully delivered on their objectives’. There is heightened uncertainty over the changes that might be announced, and whether the relief might be abolished altogether, but with a significant majority, and many first time Conservative voters in previous Labour heartlands, the pressure to implement a crowd-pleasing revision is high.
There are possible restrictions that could be introduced to effectively water-down the relief, instead of abolishing it altogether, including:
- A longer qualification period – potentially increasing the period from two years to perhaps five years or more
- Lower lifetime allowance limit – potentially reducing it back down to £1m as it was originally in 2008 or linking it to the pension lifetime allowance
- Requiring a minimum age to qualify for the relief – possibly qualifying at the age of 50 or 55, bringing it in line with old style ‘retirement relief’, but this change wouldn’t necessarily encourage individuals to maintain their entrepreneurial thinking and continue innovating.
The Conservative government have committed to making Britain the place to start and grow a business so we could see the relief approached from a completely different angle with potentially a 100% relief for the first element of the gain and another tapered relief for gains in excess of that.
Being prepared for a new regime
So, what happens on 11 March if, in his first budget, Rishi Sunak proclaims that ER will cease to exist or conditions are severely restricted?
Firstly, the issue will be when this change in the tax regime will come into force. The new tax year begins on 6 April 2020 so any new rules will be most likely to come into effect then subject to the government incorporating “anti-forestalling” provisions. This could mean the rules come into effect on 11 March.
For a business owner who wants to benefit from the current ER rates, perhaps to provide certainty of the rate of CGT payable, then the date of disposal for CGT purposes is pivotal.
Sale, what sale?
There are possible solutions for business owners who have not yet begun the sale process but wish to benefit from current ER legislation. There are some aggressive planning tactics but some uncontroversial planning approaches which include:
- A gift of qualifying assets to family members, for example between unmarried couples or to children although this would mean paying tax with no cash proceeds being received;
- Family and management buy-out (FAMBOs) although timescales are short to achieve what are usually complex transactions;
- Incorporating a business where there is significant asset value other than goodwill; or
- Disposing of, or reducing, an interest in a partnership.
If a business owner has already disposed of shares in their trading company receiving a mixture of consideration, for example a combination of cash, shares and loan notes, they may have paid CGT at ER rates on the cash received, with the assumption that future redemption’s on the shares or loan notes would also qualify for ER. Depending on the transaction date it might still be possible to crystallise the whole of the gain immediately to qualify for ER.
Given the significant sums at stake and the very large potential tax benefits than it is important to seek appropriate specialist advice before taking action, if a form of action is deemed to be the desirable approach. However, it is all still speculation and whilst there appears to be an immediate will to make changes there may also be a hesitation to abolish altogether and a fear of bringing in an ill-conceived replacement.