Small businesses and tax experts have warned against changes to a popular tax break for company owners which has been criticised for its rising cost to the exchequer.
Supporters of entrepreneurs’ tax relief are concerned that it may face reform by the next UK government following the May election, though its abolition is seen as unlikely.
The relief has come under scrutiny from opposition politicians since analysis by the National Audit Office revealed in November that its cost had increased from £475m in 2007-8 to £2.9bn in 2013-14.
Following the NAO report, Margaret Hodge, the Labour chair of the parliamentary public accounts committee, criticised HM Revenue & Customs’ “failure to routinely monitor the costs” of entrepreneurs’ relief and called for closer scrutiny to prevent abuse or fraud.
The tax authority had forecast that the relief, which allows those disposing of a business to pay capital gains tax on their profits at a rate of only 10 per cent — rather than 28 per cent — would cost only £900m in 2013-14, £2bn less than was ultimately claimed.
“Where governments are struggling for revenue and hunting for politically painless ways to garner income, £3bn a year is not an insignificant sum,” said Rob Donaldson, head of corporate finance at accountants Baker Tilly.
Although the Conservative-led government has expanded the relief, extending the lifetime limit for qualifying gains from £2m to £10m, the party’s coalition partners are more critical.
In a statement, the Liberal Democrats confirmed that the party would look at “refocusing the entrepreneurs’ relief to ensure it only helps genuine entrepreneurs and isn’t used as a tax loophole for the super-rich”.
Mr Donaldson said that while the withdrawal of the relief was unlikely, irrespective of the composition of the next government, it could be curtailed in a similar fashion to tax-free pensions allowances, which were reduced last year.
Patrick Stevens, tax policy director at the Chartered Institute of Taxation, said that while the lifetime limit for entrepreneurs’ relief could be lowered under a future Labour-led government, he sees a tightening of eligibility rules as more likely.
“I find it inconceivable that [a Labour-led government] would remove entrepreneurs’ relief altogether. It would lead to such an outcry from small businesses.”
Labour introduced the tax break in 2008 as a replacement for CGT “taper” relief, which was itself introduced by the party in 1998. The party said Labour’s most recent policy paper on business tax explicitly praised the tax relief for rewarding business owners.
Supporters of the relief argue it provides an important incentive for owners to expand their companies in the knowledge that the ultimate gains will not be so heavily taxed.
John Allan, national chairman of the Federation of Small Businesses, said: “It is important we maintain and build on this relief as a key part of the framework of tax incentives that encourage investors and entrepreneurs to create the business success stories of the future.”
Robert Pullen, tax manager at accountants Blick Rothenberg, warned that the cost of entrepreneurs’ relief to the government is widely misunderstood.
Not only do rising claims reflect improvements in business activity over the past five years, he said, but the lower rate of CGT encourages business owners selling up to pay UK tax.
“There is no way that the Revenue would have been able to raise the same amount of tax if entrepreneurs were paying tax [on the sale of their business] at a rate of 28 per cent.”