The trade body believes the plans are “some sort of compromise”
Insurtech UK has raised its concerns over the scaling back of entrepreneurs’ relief by 90% in the Spring Budget 2020.
Yesterday, new chancellor of the exchequer Rishi Sunak announced his initiative to slash entrepreneurs’ relief in his first Budget speech.
Entrepreneurs’ relief is an initiative designed to benefit businesses. It was originally launched by former prime minister Gordon Brown under the Labour government in 2008, with the intention of encouraging people to start businesses by granting them a reduced rate of capital gains tax.
The scheme cuts the amount of capital gains tax paid when owners sell their business, from the usual 20% to 10% on up to £10m of lifetime gains. This will allow business owners of two years or more to pay fewer capital gains tax when they sell.
However, Sunak yesterday confirmed a new reduced limit on this tax break available to those selling their businesses - this has decreased from £10m to £1m over a lifetime, effective from 11 March 2020.
Previously, entrepreneurs’ relief cost the taxpayer over £2bn a year.
The plans to overhaul entrepreneurs’ relief stopped short of abolishing the tax break completely.
In the Budget report published yesterday, the government confirmed that this reduction in entrepreneurs’ relief is in response ”to evidence that it has done little to incentivise entrepreneurial activity and that most of the benefit accrues to a small number of very affluent taxpayers. [The changes] will help ensure that the tax system is fair and sustainable while leaving over 80% of those using the relief unaffected.”
Some form of compromise
Trade body Insurtech UK has been in correspondence with officials at HM Treasury in a bid to express its concerns over this change.
In a statement, it said: “Whilst the changes will undoubtedly have an effect to some Insurtech UK members, we are satisfied that the government have listened to the concerns raised. The reform to reduce the lifetime limit from £10m to £1m is some form of compromise, given that the Budget has outlined other additional initiatives to support startup businesses.
“We were also encouraged to see that there were measures within the Budget to address R&D tax credits, [enterprise managment incentive (EMI)] options, [insurance premium tax (IPT)] and [value added tax (VAT)] for financial services. These are all issues that Insurtech UK are already engaging with government about and their inclusion offers a fresh opportunity to secure reforms to these areas for the benefit of insurtech startups.
“Of prime importance for Insurtech UK is that the government continues to support Britain’s ability post-Brexit to maintain and strengthen its position as an international hub for innovation and talent. We will continue to work closely with government to make the UK the most attractive place to set up an insurtech business.”
Meanwhile Sunak said in his speech that he had listened to representations for the tax break to be scrapped completely but admitted, “we need more risk taking and creativity in this country, not less”.
’This budget gets it done’
The chancellor steered away from calls to abolish the relief completely, claiming that the government should not discourage genuine entrepreneurs that rely on the relief. He stated that he has allocated £7bn to support self-employed and vulnerable people.
Sunak vowed: “We [the government] promise to back businesses to innovate, invest and trade – this budget gets it done. We promise to invest in science and research – this budget gets it done.”
With this in mind, the government is investing £10m to increase its Growth Hub capacity - these provide additional business support and high-quality advice to small and medium-sized enterprises (SMEs). There are currently 38 hubs.
The government will additionally invest £13m to expand the British Library’s network of business and intellectual property centres.
In the interest of supporting a thriving private sector to drive growth, create jobs and improve living standards, Sunak added: ”The second part of our plan for prosperity is to unleash the power of business. Businesses need support to start up, grow and export, so today I provide £130m to extend start up loans, £200m to the British Business bank to invest in scale ups.”
But he said that businesses also need a fair tax system, therefore after review he said: “Entrpreneurs’ tax relief is expensive at a cost of £2bn a year, ineffective with less than one in 10 claimants saying the relief was an incentive for them to set up their business and unfair with nearly three quarters of the cost going to just 5,000 individuals; just because its called ’entrepreneurs’ relief’ doesn’t mean it’s entrepreneurs who mainly benefit.”
Sunak remained sympathetic to those entrepreneurs that do rely on the relief - he added that he is opting for a “sensible reform” and will not completely abolish the scheme.
The changes aim to save £6bn over the next five years.
Sunak vowed to give almost all of this saving back to businesses with three additional measures:
- RDEC (Research and Development Expenditure Credit) will be increased from 12% to 13%
- Structures and buildings allowance will be increased from 2% to 3%
- Employment allowance will be increased by a third to £4,000
He dubbed the tax cut, affecting nearly half a million small businesses, “another step towards a dynamic low tax economy”.
Addressing the House of Commons, Sunak said: “We promised to cut taxes for small businesses, we are getting it done.”
Meanwhile, Luke Hamm, chief executive of innovation tax credits specialist GovGrant told Insurance Times: “It’s the right call to overhaul entrepreneurs’ relief. Tax reliefs that encourage innovation need to stand up to public scrutiny and not be a vehicle for abuse.
”The chancellor reaffirmed the government’s commitment to ideas, innovation and business with generous support including the increase to the RDEC scheme so has continued to back the things that work.”
The government will also use corporate social responsibility (CSR) measures to make it easier for businesses to access information and relevant support. This will start with the Department for Business, Energy and Industrial Strategy (BEIS) leading the development of a digital service to provide businesses with tailored information about appropriate information sources.
The Budget report explains that supporting enterprise is an important part of the government’s ambition to “level up opportunity” across the UK; it will do this by extending the British Business Bank’s Start-up Loans programme to the end of 2021-22, supporting a further 10,000 entrepreneurs across the country to access finance to start a business.
The government also earmarked the UK as a global financial centre, with world-leading finance hubs in London, Edinburgh, Birmingham and Leeds that support jobs across the country.
Niall Barton, chair at Insurtech UK, alluded to its aim of making the UK a “global insurtech hub” when it launched as an official trade body last year in June.
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