Tax avoidance crackdown threatens tech whizz-kids and retiring entrepreneurs

21 January 2016

Entrepreneurs selling their start-up or retiring could see the tax costs of selling their company soar after April 2016, warns insolvency trade body R3.

Under current rules, Capital Gains from solvent companies being sold or liquidated are eligible for Entrepreneurs' Relief, which sees gains taxed at 10% rather than the standard 28%.

Government proposals due to come into force from April 5th mean that Entrepreneurs' Relief will not be available to those who sell or liquidate their company and then continue to undertake a similar trade or activity during the next two years.

This is designed to stop business owners avoiding higher taxes on income or dividends by storing up funds in their company, going through a solvent liquidation and claiming Entrepreneurs' Relief on Capital Gains before setting up a new company to carry on their work.

R3 is worried that genuine entrepreneurial activity could be affected by the changes.

Andrew Tate, vice-president of R3, comments: "The changes are designed to stop ‘phoenix' companies being used as a tax avoidance technique, which is understandable, but the rules as drafted will catch others too."

"Entrepreneurs who have built a successful start-up might want to wind-up their company should they receive an offer to join a much larger competitor. This is fairly common in the tech sector where start-ups are hoovered by big beasts like Facebook."

"Likewise, retiring business owners will often sell their company to a third party but be required to stay on for a short period to help manage the transition of their customers to the new owners."

"Unless the rules are changed, there is a risk genuine entrepreneurial activity could be punished rather than rewarded."

"Ahead of April, we are likely to see further rises in the number of solvent liquidations as entrepreneurs try and close down their companies before the rules change."

Solvent liquidations in England & Wales have more than doubled in the last five years following reforms to Entrepreneurs' Relief from 2010 to 2012.

In 2010, the lifetime cap on the value of Entrepreneurs' Relief an individual can claim was raised from £1m to £2m, and then to £5m. In 2011, the cap was raised to £10m. In 2012, solvent liquidations became the only way to qualify for Entrepreneurs' Relief from Capital Gains above £25,000.

Andrew Tate adds: "Those worried about being caught out should speak to an insolvency practitioner as soon as possible. Entrepreneurs thinking about retiring this year need to set the wheels of a business sale in motion soon, so distributions from the sale can happen by April."

NB. Red lines indicate years with changes to Entrepreneurs' Relief Allowance