A row has broken out between the government and businesses over plans to scrap the entrepreneurs’ relief tax scheme, which small firms have warned will “destroy retirements”.
Separately, a report has found that the use of the scheme is growing more than twice as fast in the north of the country than in London, questioning the chancellor’s rationale for axing the relief.
Plans have been drawn up by the Treasury for chancellor Rishi Sunak to scrap entrepreneurs’ relief in the 11 March budget, it emerged yesterday, in a move that would give the UK’s coffers a £2.7bn annual boost.
The scheme, launched by then-Prime Minister Gordon Brown in 2008, cuts the amount of capital gains tax paid when business-owners sell their firms from the usual 20 per cent to 10 per cent on up to £10m of lifetime gains.
Entrepreneurs’ relief was set up with the intention of encouraging people to start businesses. But Sunak is set to scrap it on the grounds that it disproportionately helps richer people in the south of England.
Prime Minister Boris Johnson’s government is planning an expansionary Budget that it says will address regional inequality and “level up” spending across the country.
Yet the government has faced a backlash from the Federation of Small Businesses, whose chairman Mike Cherry said: “Everyday entrepreneurs throughout the country who are about to retire will be left permanently poorer by this change.”
He argued that the majority who benefit from the tax scheme, 38,000 each year, are “everyday entrepreneurs” who would lose on average £15,000 as a result of the charge.
The tax scheme has many critics, however. Last week, the leading Institute for Fiscal Studies (IFS) think tank called entrepreneurs’ relief “misleadingly named”.
“In 2017–18 three-quarters of the £2.3 billion cost of entrepreneurs’ relief benefited just 5,000 individuals, with an average tax saving among that group of £350,000,” the IFS said.
Cherry said the government should reform rather than scrap entrepreneurs’ relief, for example by making it only apply to the first £1m of business sales.
A separate report found that use of the scheme is growing much faster in the north than in London, suggesting that scrapping the relief could damage the government’s regional agenda.
Law firm Boodle Hatfield said the value of capital gains against which entrepreneurs’ relief was claimed rose 23 per cent in the north in 2017-18, increasing to £5.1bn from £4.2bn in 2016-17.
The firm said this compared to a seven per cent increase in London over the same period, rising to £4.1bn from £3.8bn.
Hayden Bailey, partner at Boodle Hatfield, said: “Entrepreneurs’ relief does not just benefit billionaires as some commentators have recently suggested. The relief is a vital incentive for small business owners to continue to grow their businesses with a view to an exit.”