With the focus on austerity continuing, concerns are growing that the Chancellor could remove some tax breaks intended to incentivise entrepreneurial investment. This could have disastrous consequences for the UK economy.
Since its introduction in April 2016, Investor’s Relief has been welcomed as a tax break for individuals wishing to invest in a trading company without necessarily being a direct employee or a named director. As the tax relief requires individuals to hold shares for a minimum period of three years, no one has yet benefited from the tax break, which will allow them to pay tax on eligible gains from share disposals at the discounted rate of 10%.
When the former Chancellor first introduced this tax break in April 2016, it was intended to incentivise an important group of investors, who wouldn’t normally qualify for Entrepreneurs’ Relief because they aren’t remunerated by the business they are investing in.
While it is too early to say how many individuals are expecting to benefit from the tax break, it is likely to be at least as many as currently claim Entrepreneurs’ Relief, and possibly more.
Tax reliefs in this area have begun to attract more attention from the Treasury however, as they are costing more than expected. A report published by the National Audit Office in 2013 revealed that the cost of Entrepreneurs’ Relief was £2.9 billion in 2013/14, three times more than originally expected. Part of the increase was probably due to the fact that the annual threshold for Entrepreneur’s Relief claims has risen from £1 million to £10 million, but the NAO also wondered whether there was undetected avoidance.
Based on these figures, it would not be unreasonable to assume that Investor’s Relief, which has a similar threshold for claims, could cost the Chancellor a similar figure when it kicks in from April 2019 onwards.
An uncertain future
Uncertainty surrounding the future of these tax reliefs could create issues for some entrepreneurial investors because Entrepreneurs’ Relief and Investor’s Relief are mutually exclusive. It is possible that an individual has chosen to make certain investments, as a non-employee, with the expectation that they would be eligible for tax relief when disposing of the shares three years later. If this opportunity is removed, their tax liability would double.
If the Chancellor decides to restrict Entrepreneurs’ Relief or to remove Investor’s Relief before it has had chance to get started, this could leave individuals holding investments that will attract a higher tax liability than they had expected. This could undermine investor confidence and discourage future entrepreneurial activity.
Growing speculation about a potential increase in interest rates could further impact investor confidence. If interest rates rise and the cost of borrowing starts to increase, investor confidence could weaken further. Any decision to reduce or abolish tax reliefs at this time would have a significant impact on small and medium-sized businesses that rely on entrepreneurial investment to fund their growth strategies.
For more information or to talk through the implications of post-budget changes in tax reliefs for your business contact Menzies Tax Partner Richard Godmon, by phone on 01489 566709 or by email at firstname.lastname@example.org.