Entrepreneurs’ Relief, R&D incentives and inheritance tax – the key issues for business in new Budget

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New Chancellor Rishi Sunak will unveil his first Budget this week – and business eyes will be on the impact on pensions, R&D incentives and particularly Entrepreneurs’ Relief.

Sunak took on the role from outgoing Chancellor Sajid Javid only last month, but has been charged with drawing up the first Budget strategy of Boris Johnson’s majority government.

There has been much speculation from the UK’s business community about the likely changes, with leaders and experts especially vocal on the potential reduction – or even abolition – of Entrepreneurs’ Relief.

But what should British businesses expect from Wednesday’s announcement? A number of experts have shared their views with Business Leader.

Entrepreneurs’ Relief

Expectation varies on the future of this scheme, which is intended to encourage business investment by providing a favourable rate of capital gains tax to owners who exit their businesses.

The Institute for Fiscal Studies has called for the system – which saves business owners an estimated £2.2bn a year – to be scrapped, saying it benefits too few to be making a meaningful difference.

However Mike Cherry, Chairman of the Federation of Small Business, says the move would prove catastrophic for the retirement plans of business owners around the UK.

Cherry said: “Scrapping Entrepreneurs’ Relief would destroy the retirements of thousands of business owners over the coming years (and) make a mockery of the idea that it’s ever sensible to build up a business rather than invest in property, land or secure a gold-plated pension.

“The Conservative Party made a clear commitment to reform – not scrap – this relief in its general election manifesto. They should keep to their word.

“The vast majority of those who claim Entrepreneurs’ Relief do so on sums of less than £1m, with an average saving of around £15,000. For many entrepreneurs approaching retirement today, their business is their pension. The few thousand they stand to save through this relief pales into insignificance when compared to the sums that many employees will gain through reliefs, the state pension and employer pension contributions.

“Removing Entrepreneurs’ Relief would disincentivise employee ownership – a model we know is proven to increase motivation and productivity levels – by taking a chunk out of the value of businesses as they’re handed over.

“Fundamentally, we’re trying to make the UK a more, not less, attractive place to start an enterprise. Removing Entrepreneurs’ Relief is not sending the message that Britain is open for business – quite the opposite. If this incentive goes, we risk losing entrepreneurs to other climes.”

Erika Jupe, Partner in the corporate tax practice at Osborne Clarke, believes ER could be scrapped.

She said: “This has been under the microscope for several years now. Many have questioned whether the relief is actually delivering on its objectives.

“All the political parties raised the issue of ER as part of their manifestos and whilst the Conservatives didn’t go as far as Labour and the Liberal Democrats (who committed to abolishing the relief), the Conservatives did say they would ‘review and reform’ ER.

“However, the comments made by Sir Edward Troup (who was executive chair of HMRC until 2018) highlight that ER costs the UK £2bn a year in lost tax yet has provided no incentive for real entrepreneurship. Additionally, the arrival of Rishi Sunak as the new Chancellor, promising that the Budget will deliver on the promise of ‘levelling up and unleashing the country’s potential’ could sound the death knell of ER with many commentators, including the Institute for Fiscal Studies, calling on the Chancellor to fund an increase in spending with tax rises.”

Rachel Nutt, National Head of Tax at MHA MacIntyre Hudson, says the Government should think carefully before changing such a key benefit for businesses.

She said: “The rumoured abolition of Entrepreneurs’ Relief in the Budget has left many business owners rightly concerned.

“After a difficult period with limited growth in many sectors, positive news to boost business is much needed. Despite commentary that Entrepreneurs’ Relief only benefits the rich, it is of great benefit to small entrepreneurial business owners, many of whom have risked their houses and personal savings to build their business. We hope the Chancellor will listen to the business community and maintain the 10% tax rate, essential to those entrepreneurs that invest everything into their company.”

However Richard Godmon , Tax Partner at accountancy firm Menzies LLP, is less convinced that ER will be dropped entirely.

He said: “While it would be a big step for the Government to completely remove the idea of rewarding owners and investors for risking their capital, we may see reform of the relief, designed to reduce the tax cost. This might involve reducing the £10m lifetime allowance, or limiting access to new businesses, or those who reinvest their sale proceeds within a limited window.

“We hope that any restrictions to ER will be offset by measures to enhance incentives for start-ups and growth businesses. This would continue to communicate the message that Britain is open for business, helping organisations to plan their long-term investment strategy.”

R&D incentives

Businesses do expect positive news in the form of support for research and development projects, which can not only help to rouse the nation’s dormant productivity levels, but also mitigate uncertainty from Brexit.

Jupe said: “A positive message which we expect to come out of the Budget is the Government’s support for companies carrying out R&D in the UK.

“The UK currently supports business investment in R&D by allowing companies to claim corporation tax relief or credits on their R&D costs. Currently large companies can claim a R&D expenditure credit (RDEC) for working on R&D projects. The Conservatives have pledged to increase the current RDEC rate (of 12%) to 13% which should increase the incentive for large companies to undertake R&D in the UK.

“The Conservative manifesto also promised to review the definition of R&D so that important investments in cloud computing and data are also incentivised. These measures will help improve the reach and extent of the tax relief for companies carrying out R&D, thereby helping boost productivity and innovation in the UK.”

Godmon agrees. He said: “With many UK businesses trading internationally, certainty surrounding future trading arrangements with the EU and the rest of the world is urgently required. However, if this can’t be delivered in the short-term, then the Chancellor must step up to the plate and provide support in the form of clear fiscal incentives and allowances, to help businesses to improve their cash position and facilitate investment.”

And Stuart Weekes, Corporate Tax Partner at national accountancy firm Crowe, said greater R&D benefits need to be extended to SMEs too if the national economy is to truly thrive.

He said: “The government must create a business economy that really fosters innovation, makes the UK a place where ideas flow, where failure is part of the research and development process and where innovation is nurtured and leads to commercial success.

“While we expect a small increase in the rate of credit large companies can claim for investment in R&D, this does not help the many SMEs who undertake R&D. SMEs are the bedrock of innovation and the UK’s R&D scheme for SMEs should be extended.

“The additional benefit to SMEs is currently 130% of qualifying R&D costs, this should be increased to 150%. This would mean that an SME investing £100,000 in qualifying R&D costs would save corporation tax of £47,500 – real value to SMEs who can reinvest that saving in further innovation.

“If the government is serious about the UK rising like a phoenix in the post-Brexit world, it needs to welcome and foster innovation. Instead of committing the patent box to history the government should be enhancing it.

“Mr Sunak is in an enviable position with the power and opportunity to make the right decisions. The world is waiting to see what the UK can offer. Mr Sunak, please recognise that UK businesses will continue to innovate, they have no choice; but they still need your support!”

Tax relief for SMEs

More than 600,000 UK SMEs are rated at risk of collapse in 2020, according to research by business insurance provider Simply Business – after 508,865 were dissolved on Companies House in 2018-19.

This is the most closures since 2009-10, and a slow economy and Brexit uncertainty could trigger even more closures this year without government support.

Alan Thomas, UK CEO of Simply Business, commented: “Small businesses provide vital services and jobs in our communities. They are the heartbeat of our economy, contributing an enormous £2trn annually. Evidence that over half a million small businesses might close this year should cause alarm. Loss on this scale would represent a substantial blow to the UK financially, as well as to community life up and down the country.

“We’re calling on the new Chancellor to use his first budget to enable more start-ups and help small businesses thrive. The financial benefit to our economy that SMEs provide should not be taken for granted.”

Jonathan Dudley, Head of Manufacturing at Crowe, endorsed that view. He said: “To make a success of Brexit, the UK needs to be renowned as a strong export nation and one at the forefront of innovation. In order to encourage capital investment in Industry 4.0 technology and equipment, the Chancellor should consider implementing an enhanced level of capital expenditure relief, at least for SMEs and at a level greater than currently available through Annual Investment Allowance.

“Likewise, enhanced revenue reliefs for SME export activity should also attract enhanced tax relief. By implementing such initiatives, in a similar method to the tried and tested R&D tax relief, the government could fairly swiftly go some way in securing the UK’s future as a major global player in innovation and international trading.

“This would be a solution that could be easily legislated to benefit SMEs and would improve both productivity and global competitiveness.”

Business rates

The FSB is calling for a comprehensive review of the current system, with extension of the retail discount for small high street firms extended to other industries.

Cherry said: “While we welcome the Government’s commitment to a fundamental review of business rates to decrease the burden of this regressive tax, it should avoid any moves that bring unintended consequences.

“A land tax would put more power into the hands of landlords, potentially giving those looking to unfairly increase rents an excuse for their actions. Such a move could well kill off meaningful reform until the late 2020s. The priority here has to be taking more of the smallest firms out of the business rates system and removing quirks that disincentivise growth and investment.”

Annual investment allowance

Further certainty is needed surrounding the Annual Investment Allowance, which is currently set at £1m but is expected to revert to £200,000 in 2021.

Godmon said: “Investment requires confidence, and this can’t happen in a climate of uncertainty. Businesses need to know what is happening to the AIA so they can understand the cost of new plant and machinery and invest in their growth plans. The Chancellor could address this by either increasing the allowance or extending the current limit until at least the end of 2022.

“Alternatively, if a blanket increase in the AIA limit is considered too costly, the Chancellor could select specific areas of capital expenditure, which might qualify for enhanced tax relief (say, of up to 110 per cent of cost) – for example, investments in robotics, AI systems, data integration, 3D printers and other value-driving tech.”

Digital services tax

The Government is also expected to deliver a final decision regarding the controversial UK Digital Services Tax; if it goes ahead, the tax could impact UK competitiveness significantly, warns Godmon.

He said: “It’s important to bear in mind that the Digital Services Tax would operate solely within the UK, rather than being EU-wide. As such, the UK could find itself isolated and at odds with trading partners should other countries choose not to introduce a similar tax.

“This could leave the UK at a considerable disadvantage when it comes to attracting international orders and so could have a negative ripple effect on UK-based SMEs. Hopefully we will see this tax deferred for a year pending the outcome of the OECD work on taxation of the digital economy, which it is hoped will reach an agreement by the end of 2020.”

Pension tax relief

The treasury is believed to have drawn up plans to cute the rate of relief for higher earners down from 40% to 20%, which would raise £10bn a year.

Tim Bennett, Head of Education at investment management firm Killick & Co, said: “Saving for life after work is a huge challenge for most people, and especially those that do not enjoy final salary pensions. In that context, any move that disincentivises pension saving, such as scrapping higher rates of tax relief after contributions, would be counterproductive.”

And Louise Somerset, Partner and head of private client tax services at Smith & Williamson, said: “It’s no secret that people are not saving enough for retirement. The Chancellor should take this opportunity to simplify the pensions rules. In particular, the method of calculating the capped pension allowance is far too complex, leaving people baffled by the best way to save for their future. It should be sufficient just to have the lifetime cap and allow people to make annual contributions more flexibly and without reference to annual limits.”

Housing and property

With Brexit uncertainty still negatively impacting property sales, the Government could do more to get the housing market, traditionally a key driver of economic growth, moving and improve housing supply, says Godmon.

He said: “After seven years of punitive tax changes, buy-to-let property investors are hoping for a period of relative stability and maybe even a fiscal ‘escape hatch’ too.

“A temporary reduction in the rate of Capital Gains Tax (CGT) payable on gains from the sale of B2L properties, made unprofitable by recent tax changes, could help to release stock onto the market. The new 30-day payment rules for CGT also means the Treasury’s coffers would feel the financial benefit immediately.”

“Further housing changes could see the Stamp Duty Land Tax (SDLT) threshold raised to £500,000 for all buyers, the introduction of a 3% SDLT surcharge for non-UK resident buyers of UK property, and the expected tightening of tax reliefs on the sale of individuals’ main residences.

In contrast, Somerset believes the Chancellor should abolish higher rates of SDLT, including the 3% surcharge, to encourage more activity and make buying a home a more achievable dream for those who live in areas that have seen house prices soar.

She said: “A range of measures is also needed to support people who run residential property portfolios, of all sizes, as a substantial business. Tax changes in recent years have made these businesses less sustainable.”

Inheritance tax

A potential review of Business Property Relief (BPR) has been rated as ‘deeply concerning’ to the UK’s family run businesses.

Family businesses employ over 13 million people and generate 28% of the UK’s GDP. Every year 85,000 family SMEs are expected to transfer ownership of their businesses to the next generation. Removing BPR would force family run firms to pay a tax penalty on transfer, which others don’t have to.

Fiona Graham, from the Institute for Family Business, said: “Family firms are the driving force across all regions, communities and sectors of the UK.

“Inheritance tax relief is essential to their future prosperity.  Scrapping it would have a catastrophic impact on family firms. It would lead to family-run businesses being sold or broken up to pay an Inheritance Tax bill, with knock-on effects on employment.

“The introduction of BPR positively impacted the health of family businesses and the wider economy by giving business owners the confidence to invest and expand.

“The majority of British businesses are family businesses.  They are dependent upon BPR for their current and future prosperity. Any change to it would inevitably result in a decline in growth and investment coupled with stagnation in the number of new jobs being created.

“The future of the family business sector – and ultimately the Government’s ambitions for regional growth and investment – rely on maintaining BPR.”

Cherry agrees. He said: “Bringing small family businesses into the scope of inheritance tax would do far more harm than good – causing families to break up or shut their businesses in order to afford new tax bills.”

 

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