The Chancellor announced cuts to Entrepreneurs’ relief, with the lifetime allowance reduced from £10m to £1m with immediate effect. The move followed a review, which found the relief was “expensive, ineffective and unfair” and cost the Government over £2bn a year, with 75% of the relief being given to 5% of the claimants.
By reducing the relief to £1m the Chancellor believes that 80% of entrepreneurs will not be affected but what does it mean for the other 20% and will these cuts deter aspiring entrepreneurs from starting new businesses and taking financial risks?
For those already owning shares, there are other commercially driven alternatives – and we expect the use of Employee Ownerships Trusts , which in some cases be an alternative route to a CGT-free exit for shareholders, to increase. Interestingly, investors’ relief has remained untouched, which allows investors to access the 10% rate up to £10m so this could be another area for entrepreneurs to explore.
For those owners who haven’t hit the lifetime allowance for pensions (increased to £1,073,100 for 2020/21) the Chancellor announced an increase in the threshold income and adjusted income for the purpose of calculating the tapered annual allowance. Individuals with a threshold income of below £200,000 or adjusted income below £240,000 will not be affected by the tapered annual allowance. For individuals who continue to be affected by the tapered annual allowance, the minimum tapered annual allowance will be reduced to £4,000 (currently £10,000) in line with the money purchase allowance.
There were several other measures announced by the Chancellor which are important for owner managed businesses:
- Research & Development – Delaying the implementation of the PAYE cap on the payable tax credit in the SME R&D scheme until 1 April 2021. The Government will also consult on changes to the design of the PAYE cap and whether expenditure on data and cloud computing should qualify for R&D tax credits.
- Capital allowances – Increasing the rate of the structures and buildings allowance (SBA) from 2% to 3% with effect from April 2020. The allowance provides relief for eligible construction costs for new non-residential structures and buildings incurred on or after 29 October 2018 and is given on a straight-line basis.
- Corporation tax rate – Confirmation that the rate of corporation tax will remain at 19% from 1 April 2020. This measure (cancelling the enacted cut to 17%) is likely to be substantively enacted for UK GAAP on the passing of the resolution, though it will not be enacted for the purpose of IFRS and US GAAP until Royal Assent.
- Off-payroll working rules in the private sector: The Government confirmed that its reform will be implemented on 6 April 2020. Unless covered by the small company exemption, businesses engaging off-payroll workers will need to ensure that their systems are set up correctly to deduct PAYE and NIC from 6 April.
- Other employment tax changes: The Chancellor announced a new national insurance holiday from April 2021 for employers employing veterans in their first year of civilian employment. The government confirmed the rise in the employment allowance from £3,000 a year to £4,000 a year which should take a significant amount of businesses out of paying NICs entirely.
- Business rates: The Government has announced several measures to assist businesses in this area and support businesses through COVID-19. These include an increase in the business rates retail discount from 50% to 100% and an increase in the business rates pub discount from £1,000 to £5,000. The government will undertake a business rates review in the Autumn.
For more on the budget, including a full break down, visit Smith & Williamson’s budget 2020 hub.