It is no secret that Entrepreneurs Relief (ER) has come under increased scrutiny in the past few years. Originally introduced by Gordon Brown’s Labour Government in 2008, it was sold to the public as a tax break for successful business owners once they sold their enterprise. The theory was that it would encourage them to reinvest the revenue from selling up into a new company to further encourage British business and support the economy.

Although on the surface it appears that ER helps the already wealthy become even richer, the idea of government-controlled tax breaks is not a new one and each is created to incentivise business and investment. However, that doesn’t mean they are immune to scrutiny.

How does it work?

Currently, ER operates by reducing Corporate Gains Tax (CGT) from 20 percent to 10 percent on the first £10m of qualifying gains. However, the frequent misuse and exploitation of the policy means that the Government is under more pressure than ever to reform it.

For example, it is entirely possible to work on a freelance or contractor basis, run all revenue through a personal services company, take home income as dividends, and then dissolve the company to benefit from ER and a lower rate of CGT on undrawn profits. This method allows the business owner to benefit from a low rate of income tax because income was taken as dividends, which isn’t subject to higher tax brackets, and further avoid having to pay National Insurance Contributions because, on paper, the entrepreneur has a low salary.

ER can also be applied to the sale of shares in a trading company and assets in use on the cessation of a business, as well as sales of personal assets associated with the enterprise.

Further to this, the policy is not subject to the company owner’s income tax band. So, even if the entrepreneur does pay a higher rate of tax, it doesn’t affect their ability to benefit from ER, and there is no limit to how many times it can be claimed, so long as the £10m cap isn’t exceeded.

Some may say this is unethical, but it is important to remember that it is entirely legal, which is why it has become such a contentious issue. It is also worth noting that several measures have been put in place to reduce the ability to do this, but gaps do still exist in the system. Indeed, there have been attempts at reform. George Osborne tried to implement significant changes to the policy, but he never had the majority to support his approach.

When could it change?

Following the resignation of Sajid Javid in February, the new chancellor, Rishi Sunak, will deliver his first budget on 11th March. This is when the earliest changes to the policy could come into effect. We won’t know exactly what the Government has planned for ER until this time, but it would be safe to assume that reform is on the horizon. It was recently reported that three-quarters of the £2.3billion cost of ER went to just 5,000 individuals in 2017-18 alone. Each saving an average of £350,000 in tax. This has added fuel to people’s claims that it is a tax break that only benefits the already rich.

As the new Conservative Government announced the biggest increase in spending on public services in 15 years as part of its manifesto, it also stated that rates of income tax, national insurance nor VAT would be raised. However, the extra injection of revenue must come from somewhere. Bearing this in mind, it is probable that reduction or reform of the 1,000 or so tax breaks that exist in the UK is a good place for the Government to start. Plus, with ER being so contentious, it wouldn’t be a surprise to see it firmly on the agenda come Budget day.

What does this mean for entrepreneurs?

Regardless of the outcome of the budget, it seems likely that the days of ER are numbered. So, if you are planning on selling-up, now might be the time to take advantage of the current tax system and the benefits it presents to entrepreneurs.

Whatever your current plans, make sure you talk to your accountant to get the best advice and ensure that you remain compliant.