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Entrepreneurs' Relief should be scrapped to pay for the NHS

Entrepreneurs’ Relief is expensive, ineffective, and regressive – and the government should scrap it as it looks for ways to fund its £20bn NHS pledge, according to the Resolution Foundation (RF).

Entrepreneurs’ Relief allows people selling companies to pay half the normal rate of capital gains tax (10% rather than the current top rate of 20%) on up to £10m of gains. The Resolution Foundation claims it is expensive, regressive and ineffective.

It says spending on the relief is over £2bn by 2011-12 and HMRC estimates that last year it cost £2.7bn which it argues is more than the entire Budget for the UK intelligence services and enough to give £100 to every household in the country annually. The high cost, it adds, is highly concentrated amongst a few very wealthy individuals in that in 2015-16 52,000 people claimed the relief, benefitting by an average of £75,000 but that 6,000 people made claims on gains of over £1 million benefitting by an average of £450,000 of tax relief each. It concedes those average gains will have reduced more recently but adds that is only because the top rate of capital gains tax has been cut.

As to its effectiveness RF says even those entrepreneurs claiming the relief more were unaware of it when founding or disposing of their businesses than said it influenced their decisions. There is no evidence that it has led to any substantial increase in genuine entrepreneurship, with the number of self-employed people that have employees falling during the financial crisis and remaining at or below 600,000 since 2010.

Adam Corlett, Senior Economic Analyst at the Resolution Foundation, said: “The UK’s £2.7bn Entrepreneurs’ Relief is hugely expensive and overwhelmingly benefits a small number of wealthy individuals. There has also been no serious evaluation of the relief, despite it costing £22bn over the past decade. As the Treasury wrestles with how to raise revenues to fund the Prime Minister’s pledge of £20bn for the NHS, they should start by scrapping this expensive, regressive and ineffective tax relief”.

However, Luke Davies, CEO, and Founder of investment firm IW Capital called the claims ‘short-sighted.’ 

Davies said: “We need to think about what this tax relief does to the wider economy, and not just the individual tax relief, which adds up to £2.7bn. The Resolution Foundation even states that, with limited information, it estimates that individuals are saving six-figure amounts on their tax bill. However, it does not account for where else this money goes, such as investing to pay employees, grow businesses, invest in training, invest in the local economy, or open new sites.

“Where does it stop? If schemes like this are scrapped, do investment schemes, such as Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Schemes (EIS) go next? That will affect billions of pounds per year, stifling SME growth, sacrificing jobs, prospects, significantly affecting the national economy than the £2.7b tax relief for entrepreneurs. If plans like this are enacted, there will be catastrophic consequences for the UK's economy.”

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