Entrepreneurs’ Relief reform – the Evolution Capital take on the 2020 budget

12 March 2020

Yesterday’s budget signalled just how serious a threat to the British economy the coronavirus crisis has become. 

New chancellor Rishi Sunak’s announcement of the biggest budget giveaway for almost 30 years, including £12bn of immediate measures for the NHS, public services and small businesses in a coordinated move with the Bank of England, had to be funded by something and it seemed entrepreneurs were to pay the price.

One of the most significant revenue raisers came from the decision to limit Entrepreneurs’ Relief, which Sunak described as “expensive, ineffective and unfair”. He said the lifetime limit would be reduced from £10m to £1m, a move that will raise £6bn.

Paul Davies, M&A adviser at Evolution Capital, commented: “The reform to Entrepreneurs’ Relief was expected as the benefits fell to very few people. Indeed, for larger businesses, the relief has effectively been removed. From our research at Evolution Capital, we do not feel that there will be a material impact on business valuations at the point of sale. M&A activity in the TMT sector remains buoyant and we have a number of buyers who continue to be interested in acquiring high quality businesses with strong recurring revenues. Such businesses are still in short supply and remain attractive to potential purchasers.”

The tax break had previously been heavily criticised by economic think tanks including the Institute for Fiscal Studies and the Resolution Foundation, who said it was not well targeted and caused distortions in the tax system. 

Entrepreneurs’ Relief, which halves the capital gains tax paid when people sell their businesses, was introduced by Gordon Brown’s Labour government in 2008 in a bid to incentivise people to create new businesses and was expanded by the Conservative government after 2010. 

However, it is said to benefit just 4,000 business owners a year, who tend to use the tax relief as a retirement pot, rather than stimulating new start-ups. It costs the Exchequer an estimated £2.7bn a year to operate without stimulating start-up business.

Under Sunak’s revamp, the relief on capital gains tax when selling a business was significantly scaled back. Business sellers will pay 10% on lifetime gains of up to £1m, compared with the previous upper limit of £10m. Above £1m, business owners will be charged standard capital gains tax rates, which is 20% for higher-rate taxpayers.

Sunak said fewer than one in 10 claimants said the relief had acted as an incentive to set up their business, and almost three-quarters of the cost went to 5,000 people. Indeed, it is said some 80% of small business owners would be unaffected by the change.

The money raised by the Entrepreneurs’ Relief reform will be used towards other measures to help businesses, including an increase in the tax relief available for businesses investing in research and development, or buildings and structures.

The employment allowance, which small businesses can apply for and put towards employer national insurance contributions and first introduced by George Osborne in 2014, will be increased by a third to £4,000.

The tax reform was praised by Mike Cherry, the chairman of the Federation of Small Businesses as a “sensible compromise”.

However, many business owners will find the decision a tough one to accept. Some argue there is a risk the reform will dis-incentive business owners to sell and would deny any reward for entrepreneurs who have taken risks and experienced hardship during the set-up phases of running their businesses.

Miles Dean, head of international tax at Anderson Tax UK, claimed Entrepreneurs’ Relief was an “easy target” and that it sent out a negative message to people setting up new businesses.

“Politicians must consider what this means commercially and what it will do for an economy that relies very heavily on entrepreneurs. It is a great shame. The message is loud and clear from this government: take all the risk you like in setting up a new business, it doesn’t count for anything,” he told Citywire.co.uk. 

Meanwhile, IPSE (the Association of Independent Professionals and the Self-Employed) welcomed Sunak’s “historic Coronavirus stimulus package” but criticised the government’s plans to extend the changes to IR35 to the private sector, claiming it would undermine the contracting sector.

Chris Bryce, CEO of IPSE, said: “This Budget is a mixed but overall still gloomy event for most of the self-employed. The measures to support the self-employed and small businesses through the coronavirus outbreak are very welcome – and in-line with what IPSE has been calling for. However, just as the government tries to protect freelancers’ incomes with these measures, it destroys their work by forging ahead with the disastrous changes to IR35, despite heavy criticism.” 

Elsewhere across the business sector, the budget was broadly welcomed as a positive. 

Ian Stewart, chief economist at Deloitte, said: “Major shocks to economies need to be resisted with a swift, aggressive and co-ordinated policy response. Mark Carney and Rishi Sunak have produced a forceful and convincing response to the crisis. In economic policy terms, they just deployed the big bazooka.”

Evolution Capital prides itself on offering bespoke M&A advice to clients in the TMT sector. Our carefully chosen tax experts are on hand throughout the transaction process to ensure all outcomes are as tax-efficient as possible. If you’re a business owner looking to buy, sell or accelerate, please get in touch with our transaction team. 

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