Since it was brought in under Labour in 2008, Entrepreneurs’ Relief has spent much of its life under the threat of abolition, as Sam Dumitru detailed on CapX a few months ago. It is a regular target for Treasury officials (and plenty of economists) who see it as an unnecessary tax break just waiting to be done away with.
There may be a point, but it is not nearly as clear-cut as some critics would have you believe. That’s why we at the TaxPayers’ Aliance want to give the Chancellor a few reasons to hold on to Entrepreneurs’ Relief.
1. Capital Gains Tax is awful
As our tax briefing room note on capital gains tax explains, it’s a double tax which weakens the financial incentives to sell assets and discourages investment by reducing post-tax returns.
Entrepreneurs’ Relief helps mitigate some of the negative effects. Without it, Capital Gains Tax would encourage founders to hold on to start-ups for too long, meaning they do not start as many new companies as they might otherwise. Without reform of Capital Gains Tax, retaining Entrepreneurs’ Relief is that much more important.
2. Most claimants are ordinary entrepreneurs
For all the Guardian’s claims that Entrepreneurs’ Relief is a ‘handout to the rich’, the vast majority of those who benefits are small businesspeople. Indeed, according to ONS figures highlighted by the Federation of Small Businesses, 89% of claimants had gains of less than £1 million, with an average tax benefit of just £15,000. Half of this group were claiming relief on less than £100,000. Far from a bung to billionaires, this is a vital measure for everyday entrepreneurs, for whom enterprise and investment may not be viable without the relief.
3. Doubling tax on entrepreneurs is seriously risky
Anyone familiar with London’s ‘flat white’ tech economy will know how important shares are to its success. In the start-up and tech world, founders and staff often give up a certain amount of their salary in exchange for shares in the company – with the prospect of a big pay-off in the future a crucial motivating factor. Abolishing Entrepreneurs’ Relief would effectively double the tax these people pay when their company is sold. Most people might not notice, but they certainly will.
4. The EMI scheme is especially valuable
Start-ups with under 250 employees can apply for Enterprise Management Incentive (EMI) status, which grants employees the option to buy shares in future for the same price as when they are bought. The gains are taxed as capital gains and are automatically eligible for, guess what, Entrepreneurs’ Relief.
Without this relief, the tax burden on these employees would be far higher and it would be far more difficult for firms to use the EMI scheme to encourage highly-paid employees to leave established companies for a lower salary, as happens regularly today. The ability to attract top level employees via the scheme both eases cashflow difficulties for new businesses and reassures potential investors that the employees have confidence in their employers.
5. Abolishing it outright means an unfair and retrospective tax hike
Unfortunately, it may be the case that these arguments fall on deaf ears and the abolition of Entrepreneurs’ Relief is too tempting for the Chancellor to resist. If that is the case, then it’s important that it’s not abolished in a manner that creates unjust, retrospective taxes.
If it were abolished outright, it would hit all the businesses founded since 2008 whose owners assumed they would enjoy Entrepreneurs’ Relief when they eventually sold up. Britain’s vaunted reputation for tax fairness and stability would take a major hit were the change to apply to those businesses sold in the future.
The only fair way to make the change would be to apply it on disposals of assets purchased after the change was announced, rather than merely on the date of sale. Having it kick in from April 2021 would also ensure live transactions were not impacted.
Conclusion
Entrepreneurs’ Relief isn’t perfect, but consigning it to the dustbin is hardly the no-brainer that critics would have the Chancellor believe. If the Conservatives are serious about being a pro-business party, they should hold firm and keep this important measure in place.
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