07/04/2011

By Richard Mannion, National Tax Director at Smith & Williamson

The increase in EIS (Enterprise Investment Scheme) income tax relief to 30% was one of the positive developments for entrepreneurs coming out of the Budget. Together with the proposed increase in the annual amount qualifying for EIS relief for individuals to £1 million, this was a helpful change for UK enterprise. In short, it should mean more investment in smaller companies.

Changes to the employee limit and gross assets limit should substantially increase the number of companies which can qualify for investment under the EIS and VCT (Venture Capital Trusts) rules. The measures should increase the popularity of the schemes in the coming years and go some way towards plugging the so called ‘equity gap’.

Meanwhile, the Budget also revealed the Government’s latest attempts to simplify taxation. It had already set up the Office of Tax Simplification (OTS) and asked it to review all the tax reliefs in the tax code and to recommend improvements for taxing small businesses.

Progress on reliefs

The OTS identified 1,042 reliefs and set out to review 149 in detail to see if they were still required and, if so, whether they needed updating. The list included capital gains tax entrepreneurs’ relief (ER). This was very much an after-thought when CGT (Capital Gains Tax) was simplified in 2008 and the rules reflect the fact that they were rushed in.

The OTS concluded that ER was performing an important role, but questioned why it was limited to £5m if its purpose was to encourage serial entrepreneurs. The Chancellor responded by raising the lifetime allowance to £10m in the Budget, potentially giving a total tax saving of up to £1.8m to an individual, so this was another positive development for entrepreneurs.

The OTS also pointed out that the relief is over-complex and recommended that the Government should look again at the requirement for a shareholder to own at least 5% of shares in order to qualify. We wait to see if this point is also taken on board.

Dysfunctional system for small business

The OTS has also reported a depressing picture of a dysfunctional tax system that has grown like topsy over many years and which is clearly no longer fit for purpose. Amongst a number of other recommendations the OTS suggested that Government should consider merging income tax and NIC (National Insurance Contributions) paid by individuals.

In his Budget speech the Chancellor noted that income tax and NIC have operated as two fundamentally different systems, resulting in unnecessary costs for employers, and he confirmed that the Government will consult on ‘merging the operation of income tax and NIC’.

From this, it appears that the Government has backed off a full merger of income tax and NIC, with a single rate of tax on earnings, and is just thinking in terms of keeping the two taxes running in parallel but with identical definitions.

Whilst the latter course would improve the position slightly, it will not simplify the tax code significantly. However it remains to be seen whether this is just the first step towards a full merger of the two taxes.

For the latest on how the Budget and Government tax policy might impact on your business, contact Richard Mannion on 020 7131 4252 or email richard.mannion@smith.williamson.co.uk

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