Giving entrepreneurs a BAD name – unfortunate timing and unplanned consequences?
This blog was written by Alastair Wilson, Tax Partner.
In an attempt to do some actual tax related blogging, this blog has nothing directly to do with COVID-19. However, it is relevant to funding businesses and encouraging investment, both of which are important in the current economy.
On 11th March 2020, the Chancellor of the Exchequer, Rishi Sunak, delivered his Budget statement which included a variety of announcements. One topic that was closely watched by many entrepreneurs was the change to the relief formerly known as Entrepreneurs’ Relief.
It is well known and well publicised that policymakers at HMRC strongly disliked Entrepreneur’s Relief and were keen to see it removed entirely. In the months prior to the Budget in March 2020 (so pre COVID-19), the press was repeatedly briefed on the Treasury’s intentions to remove it altogether. And it was made clear that if it was retained, business owners should count themselves lucky.
Technically, HMRC succeeded entirely in their aim as they have (technically) got rid of Entrepreneurs’ Relief. Entrepreneurs’ Relief will from Royal Assent be called the Business Asset Disposal relief.
In tax, we always use acronyms for reliefs to save time and space when writing articles, reports or letters, but presumably HMRC knew this and so now we have the “BAD” relief. Maybe this was seen as a chance for a little bit of subliminal “nudging”.
Maybe renaming it “BAD” was someone at HMRC’s way of getting the message across how disliked the relief was and “nudging” taxpayers away from seeking to benefit from this type of relief. We can imagine the future HMRC queries:
- We see your client has claimed the BAD relief?
- Please can you confirm why your client believes they qualify for the BAD relief?
- Are the shares BAD qualifying shares?
- Is the company a BAD trading company?
- Has the person held the BAD shares for the qualifying period?
The main change from the announcement was the lowering of the lifetime limit from £10 million to £1 million. Our previous blog on Entrepreneurs’ Relief summarised the changes. However, the changes made to the BAD relief were conceived prior to COVID-19, so alterations to the BAD relief now seem a long time ago and in a different economy.
With the benefit of hindsight, the reduction in the lifetime limit now seems poorly timed and ill judged. In the economic environment that will exist following the lockdown, we’re likely to need to encourage as much entrepreneurial activity as we can get and the tax system may need to support and stimulate entrepreneurial activity, rather than being felt to discourage it.
Our associated blog on tax reliefs for investors sets out the range of reliefs available.
As we head into a period of recession, it seems more than a little contrary that the BAD relief is less beneficial for the persons who have set up and run the business than for external “passive” investors under the Investors Relief. External investors who simply put money in, but take no role in running the business, can benefit from tax reliefs far in excess of those who have the risk and responsibility that goes with running a SME business. Those owner managers who will have felt the heavy burden of that responsibility during the lockdown.
With the benefit of hindsight, still having a relief which encouraged “Entrepreneurs” and wasn’t “BAD” and which rewarded running a SME business more than passively investing in one, might help nudge the activity which spurs a faster recovery.
If you would like to know more about the tax reliefs which encourage entrepreneurs to invest in and grow their business, or investors for equity funding those run by owner managers, please contact Ryan Keltie or Alastair Wilson.