With the new Chancellor and new Government’s budget today, and the confirmed news that Entrepreneurs Relief looks very likely to be scrapped, it is worth looking at the other end of the business cycle – what can be done to help fledgling businesses get to the stage where sale is a realistic issue?
The current policy thinking seems to be that saving the £2.7bn which Entrepreneurs Relief cost the Treasury last year will mean there is increased funding available for public services – and there seems to be a view that the savings could be used a part of a series of measures to address the north/south divide.
While there are serious concerns about the abolition of Entrepreneurs Relief – more so than ever at a time when it is imperative the UK is and is seen to be open for business - it is important to focus on what can be done to help business grow from the start up stage and flourish.
It is a truism that you only pay tax on profits – and to make sure entrepreneurs and investors have profits the UK needs to really focus, at a policy and at a granular level, on getting early stage reliefs and incentives right.
What does this mean?
It is hard to disagree with the proposition that business activity should be encouraged through the tax system, and since, as the saying goes, from little acorns mighty oaks grow, helping the little acorns take root is hugely important.
There is no shortage of tax incentives designed to attract investors in early stage businesses – and in many ways therein lies the problem. While there are a host of tax reliefs for investors at this stage, the rules are detailed and complicated and often somewhat counter intuitive. Business often cannot afford detailed advice to ensure they comply with the rules, and so often cannot take full advantage of the reliefs. So it is no surprise to hear that simplification would make things better, and indeed mean the reliefs were better able to do what they are meant to do.
What are the reliefs?
The main reliefs designed to enable smaller, higher risk businesses to attract investors through offering tax reliefs are the Enterprise Investment Scheme (EIS), introduced in 1993-94, the Seed Enterprise Investment Scheme (SEIS), introduced in 2012, Venture Capital Trusts (VCTs), introduced in 1995, Investors Relief (IR), introduced in 2016 and Business Investment Relief (BIR), introduced in 2012.
While I don’t wish to go at length into detail about the intricacies of these five different reliefs, it is important to understand what they offer investors and the detailed conditions that businesses must meet (and continue to meet) to be able to guarantee investors will benefit from those reliefs.
A particularly surprising aspect is some of the restrictions around what can be done with funds raised using, for example, the Enterprise Investment Scheme.
Bizarrely, one might say, funds cannot be used to acquire another business. While of course it makes sense that funds should be used for the business invested in, there are many cases where acquiring another business is the next sensible growth step.
Essentially, the aim of the main income tax reliefs here (so EIS, SEIS and VCT relies) is to make sure investors have money at risk in early stage businesses. This makes perfect sense. We recognise that the rules must ensure investors don’t get relief for passive investment companies, for example – however this does not mean genuine trading businesses should be restricted from growing through acquisition.
What next
We would welcome a commitment to simplifying and, if possible, expanding early stage reliefs, and again this could and should, in our view, be part of the broader tax policy roadmap we have recommend in earlier commentary on the budget.
This would also lead to a chance to engage in early stage consultation with key stakeholders so that the Treasury and HMRC could take on board the problem caused by the complications of the reliefs and also how to minimise these and make sure businesses are not restricted at the crucial early stages.
We hope to see a commitment to this in today's Budget.
While there are a host of tax reliefs for investors at this stage, the rules are detailed and complicated and often somewhat counter intuitive. Business often cannot afford detailed advice to ensure they comply with the rules, and so often cannot take full advantage of the reliefs.
