Entrepreneurs' relief could be reformed

Tuesday 27 January 2015

There are concerns that entrepreneurs' tax relief could face reform during the next government, with elections due to be held in May.

This follows on from criticism from politicians based on the cost of the relief to the exchequer. A removal of the relief seems to be unlikely but eligibility for it could be tightened, which could affect some limited companies, sole traders and contractors who use it.

Entrepreneurs' relief came under fire back in November when the National Audit Office (NAO) revealed analysis of the cost of it. NAO said that it had gone up from £475 million in 2007 to 2008 to £2.9 billion in 2013 to 2014. That is an increase of 500 per cent and NAO questioned whether this increase might be partly to do with the relief being misused.

This analysis was part of a larger report on tax relief administration, titled The Effective Management of Tax Reliefs. NAO claimed that the administration of some tax reliefs, which included entrepreneurs' relief, cannot be value for money because HM Revenue and Customs (HMRC) and The Treasury do not monitor it often enough.

Head of NAO Amyas Morse said: "HM Treasury and HMRC do not keep track of tax reliefs intended to change behaviour, or adequately report to Parliament or the public on whether tax reliefs are expensive or work as expected. We found some examples where HMRC and HM Treasury proactively monitored and evaluated tax reliefs, but in general the Departments do not test whether their aims for the reliefs are being achieved. Until they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury’s administration of tax reliefs cannot be value for money."

Following this report, Labour chair of the parliamentary public accounts committee Margaret Hodge criticised HMRC, saying that it had failed to monitor the cost of entrepreneurs' relief routinely. She said that the relief should be scrutinised more closely to prevent potential cases of abuse or fraud.

The relief is intended to help people who are selling a business to pay capital gains tax as a reduced rate of ten per cent rather than 28 per cent.

HMRC predicted that there had been a rise in the cost of the relief but its estimate was around £2 billion less than the figure found by NAO.

Part of the reason for the discrepancy, NAO said, was that there had been a number of changes to the tax relief. However, NAO added that HMRC should have considered these changes thoroughly in terms of how it could reflect the cost of entrepreneurs' relief. It also said that HMRC should have reviewed the accuracy of its forecasts.

Entrepreneurs' relief was expanded during this government, although the Liberal Democrats party has become more critical about it.

The party said in a statement that it would consider "refocusing" entrepreneurs' relief to make sure that only genuine entrepreneurs are aided by it and that the super-rich do not merely use it as a tax loophole.

By Victoria McDonnell

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