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Tax

PKF praises draft Entrepreneurs’ relief

Friday, 29 February 2008

Tax experts at accountants PKF have welcomed the draft legislation for the new Entrepreneurs' relief, which has been released by the Treasury.

They condemned the stress and uncertainty that the business community has suffered, however, following the Government's hasty announcements in the Pre-Budget Report.

Proper advance consultation

PKF national tax director Lisa Macpherson described the legislation as 'simple and sensible' and said the rules demonstrated that the Government can draft good tax legislation when it listens to tax professionals and the taxpayers affected.

She hoped that it took note of the distress this has caused and would deliver proper advance consultation for the future.

"It's a shame that so many entrepreneurs have had to go through a period of massive uncertainty up against a tight deadline because the Treasury rushed through a proposal and didn't fully consider the impact on small and medium sized businesses,” Macpherson said.

PKF said that many owner managers had begun or pushed forward the process of selling off their companies in order to secure existing relief before 5 April 2008.

It added that they had incurred costs in doing so at a time when the credit crunch had lowered company valuations overall.

“Many will now feel it better to abandon 'fire-sales' but others may feel that having started the process, they have to see it through. Once you take the decision to sell, it's not something you can easily stop,” Macpherson noted.

Relieving measure

In response to pressure from the business community, the Chancellor announced a relieving measure for small businesses in January 2008.

The new entrepreneurs' relief is to be introduced on 6 April 2008 and, subject to certain conditions, will mean that business asset owners can effectively achieve a 10 per cent tax rate on the first £1 million of gains.

Draft legislation issued by the Treasury detailed how the new relief will operate. As a result of representations, some sensible transitional provisions have been included.

For example, gains realised on the sale of a business some time ago, but frozen and invested in Enterprise Investment Scheme (EIS) shares, will qualify for the relief when they are "unfrozen" on sale of the EIS shares after 6 April 2008.

Family members as non-executive directors

Macpherson outlined two new planning issues that business owners will need to consider.

She said that business owners selling their company by share-for-share deals would have to elect to pay CGT in relation to the year of exchange if they were not going to work in the purchasing company and hold at least 5 per cent of its shares.

Macpherson explained that the rules may encourage family companies to have a number of family members as non-executive directors.

She warned that caution is needed, however, since if they are not careful with the capital contributions that each shareholder makes, they could fall foul of the new income shifting rules when dividends are paid out.

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