The respected thinktank the Resolution Foundation calls it “the worst tax break” in the UK. Analysts at the Institute for Fiscal Studies can find no evidence that it does what ministers claim. Yet entrepreneurs’ relief has cost the public nearly £25bn in just over a decade.
At next week’s budget, the first of Boris Johnson’s premiership, this costly and ineffective bung for the rich should be scrapped and the savings ploughed into something of real public value. Suitably enough for this sorry subsidy, entrepreneurs’ relief began life as an apology. In the autumn of 2007, the Labour chancellor Alistair Darling acted on newspaper reports that private-equity barons were paying less in tax than their cleaners by clamping down on the capital gains tax (CGT) regime.
That sparked a wave of protest from business lobby groups, which within a few months forced Mr Darling into a partial U-turn and the introduction of an “entrepreneurs’ relief”. Put simply, the idea was that business owners selling their companies would pay half the normal rate of CGT, 10% rather than 20%, on their first £1m of gains. It was a sop, a compromise, an olive branch that the chancellor described as part of his programme to “do as much as possible to encourage entrepreneurship in this country”.
The then shadow chancellor, George Osborne, hailed the announcement as a “humiliation” yet, in his own stint at No 11, not only kept the relief but extended it. The result is that a tax break which Treasury officials originally costed at £200m a year now sucks an annual £2.7bn from the public purse. What the public gets for that is highly debatable. Rather than drive up investment in business, the IFS found last year it really helped business owners avoid tax.
Imagine you work as a tax consultant paying 40% higher-rate tax; if you form your own firm that retains much of your income, you can avoid paying so much to HMRC. And when you sell your enterprise, you are liable for only 10% tax on the gains. All of this is quite legal, but it hardly lives up to the government’s promise of boosting enterprise. It is, rather, a very generous payout to comparatively few wealthy people. In 2017-18, the IFS found that three-quarters of entrepreneurs’ relief benefited just 5,000 individuals, who made an average tax saving of £350,000. It cannot be right that those who own their own company are asked to pay proportionately less in tax than those who work for them.
The frontbench of neither main party today defends this giveaway. At the last election, Mr Johnson ran on a manifesto that acknowledged “some measures haven’t fully delivered on their objectives. So we will review and reform entrepreneur’s relief”. Next week is his big chance. At the budget on Wednesday, the government should scrap this terrible tax break. Those lobbyists who still wish to defend it should explain why paying 20% tax (the current rate of CGT) is so punitive when it is still half the higher rate of income tax. If any entrepreneur is seriously considering not launching a productive, sustainable company because of the extra duty they will pay when they eventually sell up, they should come forward and make their case. Instead of handouts to the rich, the government ought to be properly funding public services.
