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Tax Reliefs: Killing Tax’s Sacred Cows (Revisited)?

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Tax Reliefs: Killing Tax’s Sacred Cows (revisited)?

Introduction

It was announced in Summer 2018 that there would be an additional injection of £20bn in to the NHS over a five-year period.

A lot of bunce.

We suggested in an article in October 2018 that in order to ‘fund’ such a manoeuvre, the the Government faced the prospect that it would need to sacrifice one of tax relief’s sacred cows.

With further spending commitments made in the recent manifesto the latest Chancellor needs to run a tight ship.

From the Conservative manifesto and recent press briefings, it appears that Entrepreneurs’ Relief is the big beast with its head on the block. It has seen as expensive (a claim I dispute, if one compares to taper relief) and also does not act as an incentive to business creation.

But what about the other sacred cows?

How do they stand up to scrutiny?

Business Property Relief (“BPR”) on AIM shares

I have said this before and I will say it again, I can see no reason why there should be a general exemption against inheritance Tax (“IHT”) for someone who has merely AIM company.

This relief – Business Property Relief (“BPR”) – was primarily designed to allow the owners of family businesses to pass on the shares to the next generation without a tax hit.

The position re AIM stems from the fact that these shares are ‘unquoted’ for BPR purposes. If one holds shares in an unquoted trading company for at least two years to get a 100% exemption..

My view is that it makes sense from a policy perspective. Whether you agree with it or not, there is a rational reason why shares in family businesses can be passed to the next generation without the tax man taking a chomp.

Can the same be said for a pensioner who has merely invested their cash in to a retail portfolio of shares?

Can the same be said for a pensioner who has merely invested their cash in to a retail portfolio of shares?

My view is that it can’t.

Research and development (R&D) tax credits

To mix metaphors, this is now top dog… or, er, top cow.

Under this relief, when an SME incurs expenditure on qualifying R&D, it can receive up to 230% tax relief. There is a separate regime for large companies.

Recent statistics show that the current cost is about £4.3bn a year – quite a bit more than ER. £1.8bn of this went to large companies rather than SMEs.

It is of course difficult to criticise R&D. It makes us all warm and fuzzy inside. For the time being at least, even HMRC are happy to dispense the relief like someone giving out cans of the latest custard apple flavoured Pepsi Max on Euston concourse.

It is of course difficult to criticise R&D. It makes us all warm and fuzzy inside

However, I make two observations about this relief which I find troubling:

  1. the nature of some of the claims do not constitute what the average person would consider R&D;
  2. significant proportion of this relief leaks in to the hands of claims companies and other advisers by means of contingent fees.

I suspect these points are strongly linked.

I think your layman, and many business owners, would consider a claim could only be made where you a business employed armies of people in white coats… or gaggles of computer scientists feverishly tapping away at their computers bashing out new code.

Indeed, it is true that BIS guidelines requires there to be scientific and technological advancement.

However, the picture is different. One can see claims made by bakers and breweries for their new recipes, local restaurants making claims for their newly-created dishes and all manner of ‘new’ customer relationship management systems that hardly extend the boundaries of human ingenuity.

In respect of the second point, the market is saturated with R&D claims companies charging 25% of the benefit claimed. For example, if a profitable company made an investment of £100k, had received a corporation tax deduction of £230k it would pay tax at 19% – or £43,700. The fee charged for doing this might be £10,925 and would come out of the relief that was paid by the Government. Often, the client will be tied in for multiple years to use the same company.

Of course, there are accountants and other tax advisers providing this service on different charging bases. Some companies will make their own claims.

However, out of the £4.3bn mentioned above, a significant slice will be going to middlemen. If they looked at this, I do not think the Government would feel it  represents good value for money.

However, out of the £4.3bn mentioned above, a significant slice will be going to middlemen. If they looked at this, I do not think the Government would feel it  represents good value for money.

Clearly, having a tax relief encouraging investment in R&D is probably something that most people can support. But should it be 230%? Should a company be able to sell its trading loss back to HMRC for 14.5%?

HMRC still (surprisingly) operates a light touch – nearly non-contact – approach in this area. It is noticeable how favourably they treat this relief when compared to both Seed EIS and EIS claims. It is perhaps only a matter of time before the wheel turns.

My view is that the R&D regime should also be tightened. However, I am very much swimming against the tide on this one!!! In fact, it is much more likely that there will be an increase in the relief on offer, than a reduction or tightening as R&D is such a good political story.

What Should Happen?

I personally do not think that ER will be scrapped. I think there will be further tinkering around the qualifying conditions.

A lowering of the lifetime limit here, an increase in the ownership requirement from, say, 5% to 20% there.

But there should also be a bit of tinkering to BPR as well. BPR should not merely be a shelter for wealthy pensioners.

My view is that the general exemption for AIM shares should be removed and replaced by a qualified one that would also require the individual to hold, say, 5% of the shares and / or work in the business (such that it mirrors Entrepreneurs’ Relief).

The issue with this is that I suspect it might create a hole in the AIM market. If this were the case, then it might be necessary to phase out the relief over, say, a seven-year period to prevent the market from falling off a cliff.

In terms of R&D, my view is that it is untouchable. The Elliot Ness of tax reliefs!

 

If you, or your clients are concerned about any changes to Entrepreneurs’ Relief then please get in touch to discuss possibilities.

 

If you have any queries about this article or tax reliefs in general then please get in touch.

 

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