PKF Welcomes Entrepreneurs' Relief

by Amanda Banks, Tax-News.com, London

04 March 2008

Accounting firm PKF has welcomed the draft legislation for the new Entrepreneurs' relief, which was released on Thursday by the Treasury, but condemned the stress and uncertainty that the business community has suffered, following the Government's hasty announcements in the Pre-Budget Report.

PKF National Tax Director, Lisa Macpherson, described the legislation as 'simple and sensible' and continued: "The rules demonstrate that this Government can draft good tax legislation when it listens to tax professionals and the taxpayers affected. I sincerely hope that it takes note of the distress this has caused and delivers proper advance consultation for the future."

However, she added that: "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."

The PKF Tax Director continued: "Due to the delay in releasing draft legislation showing how the new relief will operate, many owner managers have begun or pushed forward the process of selling off their companies in order to secure existing reliefs before 5 April 2008, and have incurred costs in doing so at a time when the credit crunch has 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."

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 April 6th, 2008 and, subject to certain conditions, will mean that business asset owners can effectively achieve a 10% tax rate on the first GBP1m of gains. Draft legislation issued on Thursday detailed how the new relief will operate.

As a result of representations, some sensible transitional provisions have been included, PKF observed.

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 April 6th, 2008.

Ms Macpherson went on to outline two new planning issues that business owners will need to consider.

"Business owners selling their company by share for share deals will have to elect to pay CGT in relation to the year of exchange if they are not going to work in the purchasing company and hold at least 5% of its shares."

"The rules may encourage family companies to have a number of family members as non-executive directors. However, caution is needed - 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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