Spring Budget 2020: Mixed reaction to reform of Entrepreneurs’ Relief

March 12, 2020

The Chancellor’s decision to cut, rather than scrap, Entrepreneurs’ Relief received a mixed response from Bristol advisors but his increase in investment in research and development was widely welcomed.

Campbell McKellar, a solicitor in Bristol law firm Meade King’s company and commercial team, said many of its clients in the midst of selling their businesses had been concerned by rumours surrounding Entrepreneurs Relief (ER) leading up to the Budget. 

The relief - a reduced Capital Gains Tax rate aimed at incentivising the building of successful businesses – has been criticised in some quarters for mainly benefiting wealthy business owners rather than entrepreneurs.

In the Budget, Rishi Sunak slashed the relief by 90% – a move the Treasury calculates will raise £6.3bn over the next five years.

Mr McKellar, pictured right, said: “We anticipate there was a collective sigh of relief when the Chancellor announced the lifetime limit - the total ‘relief’ that can be claimed - of £10m will be reduced to £1m instead of the tax break being reduced or being scrapped entirely.

“To the majority of business owners looking to sell their small and medium-sized businesses, this will come as music to their ears. Some serial entrepreneurs may, however, feel hard done by the reduction to a level not seen since the introduction of the relief in 2008.”

Jon Gill, a partner at Bristol-headquartered national law firm TLT, pictured below left, said the expectation of a significant change to ER in the Budget had accelerated deal activity for the South West’s corporate finance community in the past few months.

“However, in the medium to long term, the reduction in the lifetime allowance from £10m to £1m sends a confusing message to the region’s entrepreneurs,” he said. 

“We know that scale-up companies are the engines of wealth creation and employment growth, and we are fortunate to have such a concentration in the South West region.

“We want more companies to follow in the footsteps of Graphcore and Ovo Energy, yet [this] change seems to suggest that the tax regime wishes to encourage entrepreneurs to play it safe and realise their gains early.

“It also has the potential to constrain continued investment by founders in their own companies, as the tax differential between investing for long-term growth and short term extraction of value has now been reduced.”

However, Ian Brokenshire, a senior partner with international accountancy group KPMG in the South West, said investors and the region’s business owners would be “somewhat relieved” that ER was not abolished.

“This incentive has been under the microscope for a while following concerns that it is costing far more than was originally anticipated and didn’t entirely deliver on its objective to act as a catalyst for investment in and growth of entrepreneurial businesses,” he said.

“The tax relief costs the wider UK over £2bn a year and with the Chancellor tasked to find the money to help the government deliver on its promise to ‘level-up’ regional inequality. it was in the firing line as an expensive initiative that benefitted the few and could help the many.

“ER is one of several incentives for start-up and fast-growth businesses, and this announcement should help businesses in the South West to plan their long-term investment strategies whilst reassuring investors and innovators that the region remains open and supportive of new businesses.”

Karen Kirkwood, global accountancy group EY’s head of tax in the South West, pictured, said the Chancellor quoted criticisms of ER in his Budget speech. noting concerns that it was only encouraging one in 10 entrepreneurs to start up. 

“However, the original aim of the relief was instead to encourage those successful entrepreneurs to stay in the UK and pay tax on their success, and then to reinvest and continue to contribute to the UK’s growth,” she said.

“Perhaps in light of this, the Chancellor chose to return the reliefs limit back to the £1m, the limit when it was introduced in 2008. This will be a help to many entrepreneurs but, in today’s environment, this may not be effective in seeking to retain the more successful. Those arguing for the limit to be made per investment, rather than per life, and hence to reinforce serial entrepreneurship, will be disappointed.

“The Chancellor will be hoping that removal of this allowance for the most successful will not encourage them to leave the UK thereby paying no tax, hence losing the 10% they would otherwise have paid and costing the Exchequer rather than filling the coffers.”

Simon Denton, tax partner at regional accountancy firm Milsted Langdon, which has an office in Bristol, said the cut in ER would not be welcomed by SME owners, raising fears that it may slow down or stop ongoing and future business sales, mergers and acquisitions, as owners consider the additional tax that they may incur.

“Changes to ER had been suggested in the Conservative manifesto, but the immediacy of this cut means that many will see the amount of relief they can receive against Capital Gains Tax (CGT) slashed,” said Simon.

“This change may mean that business owners, pay significantly more CGT when they come to sell their business or shares, as the effective rate that they pay increases from 10% under ER up to the regular 20% rate.”

There was, however, support for the Chancellor’s boost in research and development (R&D) investment from £11.4bn to £22bn a year by 2024-25 and the increase in R&D expenditure credit from 12% to 13%.

But Rachel Finch, managing director of Clevedon-based R&D tax consultancy Finch and Associates, pictured, said while she welcomed the increase in the RDEC (R&D expenditure credit) scheme this primarily benefits only large businesses. 

“With all of the existing financial challenges facing small businesses in the UK, we would have liked to have seen an increase in the R&D tax credit scheme for SMEs, as it is these small cutting-edge businesses who need the most support,” she added.

She also welcomed the announcement of a plastic recycling tax but pointed out that it was actually only a consultation exercise at this stage.

“Based on previous consultations the final tax, if it is actually created, will differ significantly from the consultation proposal,” she said.

“However, we have a large number of clients undertaking research and development work in the recycled plastic market, and these changes will help to support and expand the work that they are doing.”

EY’s Karen Kirkwood said the R&D investment was good news for innovative South West businesses and region’s universities

“The ongoing investment by the University of Bristol on its Temple Quarter Enterprise campus provides the region with an incredible opportunity for new education and research activities, with innovation at its heart,” she said.

“This development will benefit the city and the wider South West region as it will act as an incubator for business.”


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