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 new analysis published today (Wednesday) by the Resolution Foundation.
Entrepreneurs’ Relief, which was introduced by the Labour government in April 2008, allows people selling companies to pay half the normal rate of capital gains tax (10 rather than the current top rate of 20 per cent) on up to £1m of gains. It was significantly extended by the coalition to raise the maximum capital gains that could be tax relieved to £10m. Both governments argued the relief would encourage entrepreneurship, bringing wider benefits to society.
The Foundation’s analysis of Entrepreneurs’ Relief however finds that it has a good claim to being the worst of Britain’s main tax reliefs, which collectively cost around £155bn a year. The note shows that the relief is:
Expensive: When first announced by Alistair Darling in 2008, Entrepreneurs’ Relief was expected to cost £200m a year. Because of increased generosity and greater than expected use, actual spending on the relief had ballooned ten times to over £2bn by 2011-12 and HMRC estimates that last year it cost £2.7bn. This is more than the entire Budget for our intelligence services and enough to give £100 to each and every household in the country annually.
Regressive: The benefit of Entrepreneurs’ Relief’s high cost is highly concentrated amongst a few very wealthy individuals. In 2015-16 52,000 people claimed the relief, benefitting by an average of £75,000. 6,000 people made claims on gains of over £1 million, but this small group (12 per cent of beneficiaries) accounted for 69 per cent of the gains, benefitting by an average of nearly half a million pounds (£450,000) of tax relief each. Those average gains will have reduced more recently, but only because the top rate of capital gains tax has been cut. 82 per cent of the beneficiaries are male with a typical age of 57.
Ineffective: Despite only being introduced in 2008 to diffuse a political row, Entrepreneurs’ Relief has been hugely extended and run up a cumulative cost in a decade of £22bn without a serious evaluation of its effectiveness. Even amongst those entrepreneurs claiming the relief, far more say they were unaware of it either when founding their business or when disposing of it than say 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.
The Foundation is calling for the tax relief to be scrapped as part of Treasury plans to raise taxes to meet some of the costs of the £20bn spending increase planned for the NHS. It says that too often tax reliefs, even when very expensive and poorly designed, go unexamined when decisions are taken on ways to raise tax revenues.
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”.