It is probably fair to say that the removal of entrepreneurs’ relief (ER) on business incorporations came as a complete surprise to everyone. I received calls from a number of accountants after the Autumn Statement 2014 querying whether this in fact was true! Sole traders, partnerships and LLPs had been able to do sell their goodwill at a 10% CGT rate on incorporation for well over a decade now.
It is well known that HMRC did not particularly like this form of tax planning, which effectively enabled owner-managers to extract profits from their businesses at very low tax rates. In recent years, HMRC have only really been able to attack the goodwill valuation itself. Many will testify to long running correspondence with HMRC – Shares and Assets Valuation, which often appeared to adopt a stance of slowly ‘grinding’ the taxpayers into submission for a much lower valuation. HMRC also resisted the sale of personal goodwill on incorporation.
Furthermore, the ability to enjoy corporation tax relief on the amortisation of the purchased goodwill charged against the company’s profits has also now been blocked. Before 3 December 2014, the corporate intangibles rules enabled the company to receive tax relief on its goodwill amortisation in such cases, provided the unincorporated business had started trading after 31 March 2002. However, businesses that had already incorporated (in such circumstances) can continue to claim goodwill amortisation relief and are not affected by the new rules.
Those businesses that were decisive and had already incorporated will have breathed a huge sigh of relief. On the other hand, those businesses that were still dithering about incorporating must be kicking themselves. This golden opportunity has now passed!