Is this the end for Entrepreneurs' Relief?
08 November 2019
There is a growing chorus of voices urging the government to scrap Entrepreneurs' Relief. The Institute for Fiscal Studies which suggested that business owners respond more to changes in taxes by adjusting how and when they take money out of their companies rather than by changing their investment plans. It also claimed that many owner managers hold significant sums of cash in their companies in order to access lower CGT rates and to save tax - no sh*t Sherlock! IFS issue with the system is that while higher income tax rates encouraged lower income take from companies, especially if it kept owner managers just below the next tax threshold, but that the cash retained wasn't invested just squirreled away.
Now the former head of HMRC has called for ER to be scrapped, as it costs the country c£2bn a year in lost tax but with "no real incentive for entrepreneurship"
An earlier HMRC research paper by IFF, found that in most cases ER was not the primary motivating factor for entrepreneurs when making decisions about investing in assets, or disposing of them. But it did find that those most likely to be influenced by ER at the point of making their initial investment were those most likely to planning to set up a new company. Perhaps it's motivating serial investors - and so perhaps this is a driver for enterprise?
It's difficult to predict anything in British politics, and that's also true about the future of ER. Phillip Hammond tinkered with it in his 2018 budget but resisted calls at that time for it's abolition. So perhaps more tinkering is the likely outcome post election?
Whether or not a transaction will qualify for ER is always an agenda item in exit planning discussions. And it's relevant in any M&A activity, whether you're selling your business, doing a management buyout, or even if you're buying business (because it will influence the seller). But we're now finding, in discussions with entrepreneurs around Cambridge and East Anglia, that the availability of ER is becoming a factor for some in accelerating their exit plans before possible tax regime changes. It's certainly true to say that it's unlikely to get any more benign.
Ultimately exit decisions are driven by personal factors such as age, and a desire to do something else in life. Or by business factors such as the value of the company, and it's strategic plans. So the tax tail actually doesn't often wag the dog, but it would be helpful to have some certainty on how capital gains on the sale of businesses are going to be taxed.
In the short term the best way for business owners to wrest back some control from the politicians is to have some exit planning discussions, work out a range of dates and values for you exit, and what needs to happen to deliver that. We're always happy to have this kind of discussion, because it makes it easier for business owner and adviser to act swiftly when opportunity arises. If you'd like to read more about exit planning and selling your business have a look at the PEM Corporate Finance website https://www.pemcf.com/services/selling-a-business/