The National Audit Office (NAO) has said that HMRC has done little to investigate why entrepreneurs’ relief has cost the public £2 billion more than expected last year.
The NAO said that HMRC did not monitor or report the costs and benefits of tax reliefs intended to change behaviour in a way that would allow the government, parliament or the public to know if such reliefs were working as intended.
The BBC reported that HMRC was accused of carrying out ‘only limited analysis’ to find out why the cost of the relief has risen by more than 500% to £2.9 billion in the five years to 2013/14 and whether it might have been down to misuse. However, a spokesman for HMRC said, “It is nonsense to suggest that our administration of tax reliefs loses money.” He stressed that “we robustly monitor the implementation of reliefs, and identify and tackle abuse as a routine part of our compliance work” and measures in place to manage tax reliefs were “highly effective”.
By way of reminder, entrepreneurs’ relief applies in respect of capital gains arising on ‘material disposals of business assets’ where certain conditions are met.
Broadly, for an individual these are:
- a disposal of the whole of a business, carried on by an individual alone or in partnership,
- a disposal of part of a business carried on by an individual alone or in partnership,
- a disposal by a partner of the whole or part of his or her interest in a partnership,
- a disposal of an asset previously used in a business carried on by an individual alone or in partnership within 3 years after the business has ceased,
- a disposal of shares in (or securities of) a company which is either a trading company or a holding company of a trading group, where the individual
– is an officer or employee of the company or of one or more companies in the group, and either
– held 5% of the ordinary share capital of the company and was able to exercise 5% of the voting rights in the company, or
– for disposals on or after 6 April 2013, the shares were acquired by the individual on or after 6 April 2012 on the exercise of an option under the Enterprise Management Initiative (EMI) scheme.
Entrepreneurs’ relief may also apply in cases where an ‘associated disposal’ takes place as part of the ‘material disposal’, for example, sale of an asset personally owned by a partner or company employee.
To qualify for relief, the individual taxpayer has to meet all qualifying conditions throughout the period of one year ending with the date of disposal.
Gains which qualify for relief are taxed at 10%, subject to a cumulative lifetime limit of £10 million since April 2011.
For more information on entrepreneurs’ relief please see our library document here.
It would be interesting to know just why the relief is costing so much more than anticipated. There could be a number of reasons for this including more sales, sales giving rise to bigger gains, more businesses qualifying for relief etc… Or, more importantly, if more people are becoming or being made aware of this valuable relief – this is when an adviser may be able to provide relevant assistance.
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