Date23 Nov 2020
As we all start to get used to Lockdown2 and virtual Christmas parties, Praveen Gupta, Tax Partner will, over the next few weeks, be sending a virtual letter to the Chancellor which will include some innovative tax changes that he could reflect on over the well-earned Christmas break, as he turns his attention on how he could kick-start the economy in 2021 and really support our important SME’s.
It has been a difficult climate for many businesses over the past year due to the significant unprecedented external challenges that have arisen from the likes of COVID-19 and Brexit. Whilst this has led to the widespread struggles for many business around the world, it has also presented many opportunities for investors and businesses that have been able to adapt and act quickly.
To ensure the UK economy continues to grow, it is important that measures are implemented to continue driving business forwards and provide confidence to both investors and consumers. This could come in the form of additional tax reliefs, as well as cheaper and easier borrowing for investors.
Currently, it could be considered as the perfect time for investors to be borrowing money to fund mergers and acquisitions due to the low interest rates, and lack of alternative high yield investment opportunities. This, combined with a number of distressed businesses in the markets, may act in favour of opportunistic investors that are seeking a bargain. However, this is not risk free as given the uncertainty surrounding the future of many markets, and the fast paced changes to the way people now envision both their home and working lives going forward will mean that businesses have to be agile, and able to adapt to these changes at short notice.
To combat the risk of failure in these businesses, it begs the question as to whether there could scope to introduce a new corporate Enterprise Investment Scheme (“EIS”) type of relief to encourage investment into Small and Medium size enterprises (“SMEs”). Broadly, this extends from just providing tax relief on a gain made on the sale of a business, but also offers tax relief where the investment is unsuccessful and thus results in a tax loss being able to be offset against other profits at an enhanced rate. Currently, this type of relief is only available to individuals and limited at £1 million of investment per annum in certain qualifying companies. This type of relief could help to provide Private Equity investors with the reassurance needed to continue investing in the SME market. Subsequently, this would aid in preserving and creating many jobs in this type of businesses that are fundamental in stimulating the economy in these troubling times.
A further potential consideration for boosting the job market, especially for the younger population, whom are often leaving university with fewer jobs in the pipeline could be to introduce a more targeted version of the Enterprise Management Incentive (“EMI”) tax relief. Could a relief that specifically encourages employers to look at the under 30 job market be used effectively? A relief such as this could be implemented to provide individuals under the age of 30 with the option to have a share of the company that they are joining. Not only would this act as an incentive for the individual financially, but it would also increase the motivation of these individuals, and ensure they feel valued within the business. The employer would also receive an upside for offering this type of incentive to these individuals as when the share options are exercised, they would subsequently be entitled to additional tax relief. The employer should hopefully also benefit from increased staff retention on the basis that this type of relief is more of a medium to long term incentive for the individual. Therefore this type of arrangement could provide both the employers and individuals with the benefits that they seeking both financially and in job security to lead to a stronger economy.
The Government may also choose to consider revisiting the recently reduced Entrepreneurs Relief (“ER”) limit from £10 million to £1 million, now known as “Business Asset Disposal Relief”. Broadly, this provides entrepreneurs (individuals) with a reduced rate of capital gains tax at 10% applicable to the profits up to this threshold when selling their shares in the business. This relief is extremely beneficial as it ensures that these individuals are rewarded accordingly for their hard work in successfully growing their business. We are aware of a number of business owners who are in the early 50’s, who would really consider an exit due to the challenging business environment, however, the reduction in the ER limit, together with the adjustment to their business valuation, is impacting on their decision.
Overall, whilst there are many tax reliefs currently available to certain individuals, this is still very limiting in many scenarios. Specifically, where investors may be seeking to invest through corporate vehicles, it is clear that whilst there are key reliefs such as Substantial Shareholding Exemption (“SSE”) it only provides relief for an upside in the investment. In cases of unsuccessful investments,
there are limiting ways to make use of the losses realised and a lack of incentives for businesses to take on the risk of investing in a turbulent economic climate where the risk of failure is high.
So in summary, possible changes for 2021 include:
Happy to discuss and will provide some more thoughts next week.”
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If you have any queries in relation to the areas raised in this insight, or to discuss in more detail, please speak with your usual Azets contact or a member of our tax team.