The government is set to scale back a tax break for entrepreneurs in the Budget in March amid concerns that “entrepreneurs relief” is overly generous to the wealthy, according to a senior cabinet minister.
Sajid Javid, chancellor of the exchequer, is drawing up plans to curb the £2.4bn-a-year tax break which allows company owners to pay a reduced levy when selling their businesses.
Entrepreneurs relief was introduced by Gordon Brown’s Labour government in 2008 and was designed to encourage people to start new companies. It allows entrepreneurs to pay a lower rate of capital gains tax at 10 per cent instead of the usual 20 per cent on up to £10m of gains.
But the break has been criticised by many groups who believe that the relief should be targeted at start-up companies rather than those who have already made a small fortune.
Robert Palmer, head of pressure group Tax Justice UK, said the relief was a “massive handout” to business owners when they sell up. “It is a very bad use of government money, because it gives money to those who are already successful and does nothing to help people when they are starting out,” he argued. “If you wanted to help create entrepreneurs this is one of the most inefficient ways of doing it.”
The Institute for Fiscal Studies said last year that the relief was “unfair” and was not successful in its stated aim of encouraging business investment.
In the Tory manifesto in December, the party promised to review the tax as part of a broader drive to “redesign the tax system so that it boosts growth, wages and investment and limits arbitrary tax advantages for the wealthiest”.
Earlier this month Boris Johnson, the prime minister, told a group of female entrepreneurs in his constituency of Uxbridge that the tax break was making some already rich people “even more staggeringly rich”.
One senior government figure said ministers were more likely to recalibrate the tax break than to remove it altogether.
Craig Beaumont, director of external affairs at the Federation of Small Businesses, said the relief should be reformed in order to focus on helping smaller entrepreneurs.
“Unlike employees, most don’t have a pension and have been planning to sell their business to fund their retirement,” he said. “A reform to limit ER to £1m, for example, would align well with the pensions pot limit.”
Entrepreneurs relief, which was introduced over a decade ago to replace another relief called “business asset taper relief”, is currently available both to entrepreneurs and to major investors in a company. Philip Hammond, the former chancellor, introduced some minor tweaks in 2018.
Whitehall officials said the Budget will also include an increase in research and development tax credits from their current level of 12 per cent to 13 per cent — while also expanding their remit — according to Whitehall officials.
Ministers have meanwhile signalled a rise from 2 per cent to 3 per cent in the structures and buildings allowance that benefits companies investing in new or renovated commercial premises.
Mr Javid is also expected to confirm that the government will no longer proceed with a drop in corporation tax from 19 per cent to 17 per cent, a move that will save £6bn. The levy has already fallen from 28 per cent since 2010.
In tune with Mr Johnson’s announcements during the election campaign, the chancellor is also likely to raise the National Insurance threshold to £9,500 —at the cost of £2.8bn a year.