Using entrepreneurs’ relief? Sell up fast

There’s an interesting blog by tax lawyer Jolyon Maugham. In it, he points out that while we pay a huge amount of attention to whether or not we are getting value from taxpayer-funded public spending, we don’t pay as much attention to the value we get from the 1,000-odd tax breaks we offer various interest groups.

This is an important point; after all, the value of a tax break to a degree represents tax not collected – and so creating and/or cancelling them has much the same effect as raising or cutting spending. We should be as sure that we get value from a break as from public spending.

A shame, then, says Maugham, that, according to the Public Accounts Committee, “HMRC rarely, if ever, assesses whether a tax relief is an economic, efficient and effective way of meeting its policy objectives”.

As an example of a hugely expensive but not much studied relief, Maugham gives entrepreneurs’ relief. At the moment, some £3bn a year in tax breaks is given to entrepreneurs who pay capital gains tax at a reduced rate of 10% (rather than 28%) on the first £10m of gains made from selling companies. That’s real money.

If we could be sure that letting it go encouraged people to set up companies and that the result was a more dynamic UK economy – one that was creating enough extra great jobs and businesses as a result of the relief to offset the cost of the relief – that would be just fine. But we don’t know that. None of the relevant agencies  have the data that might give the answer. At MoneyWeek, we have always wondered about this.

We can see why you might want to give entrepreneurs tax breaks to get going via Enterprise Investment Schemes and the like – start-up capital is hard to come by. But why give them a break when they sell up?

Is incentivising them to sell a business (paying 10% on capital gains) rather than to keep building it up (paying much more on income and dividends) really a good idea? Surely if we want (as we always say we want) to build up a German-style Mittelstand, this isn’t the way to go? And how many entrepreneurs start businesses thinking about their exit? Surely more relevant than their exit is their entrance and their existence. My bet, for what it is worth, is that entrepreneurs would get more out of a little tax simplification than they do out of exit relief.

Finally, on the subject of entrepreneurs’ relief, it is worth noting that it is routinely abused. George Osborne has had a go at tightening things up but it has, nonetheless, been perfectly possible to work as a contractor or a freelancer, run all your earnings through a personal services company, take your income as dividends, and then to dissolve the company and claim entrepreneurs’ relief on the capital remaining within it. A lovely example of how it is not possible to have a tax relief without a tax dodge, too.

It seems that Osborne might be wrestling with this one too. According to the FT, entrepreneurs’ relief is one of the things he might have a go at in the autumn statement.

I have written before that while there is much talk about the well-off not paying their share, they are in fact being hit by a barrage of new taxes all the time. This would be one more to add to the pile.