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!

Further FB 2013 relaxation for EMI shares

The Budget 2012 announced that measures would be introduced in the FA 2013 to dispense with the 5% entrepreneurs’ relief (ER) voting shareholding requirement for shares acquired under an EMI option after 5 April 2012 (where they were sold after 5 April 2013).
Under the original proposals, the employee option holders would only benefit from the 10% ER CGT rate where they have held their ‘EMI’ shares for at least twelve months before they are sold. However, since the vast majority of EMI share options are only exercised immediately before a sale of the company, these proposals did not really ‘hit the spot’ since, in practice, employees would only hold their EMI shares for a very short period and could not therefore meet the ‘one year’ ownership requirement.
The Government have listened to the various representations made over the summer and have revised the proposals. Under the revamped legislation the qualifying period for the EMI shares will now start from the date the option is granted. This will enable employee option holders to obtain the beneficial ER 10% CGT rate on a sale of their EMI shares (irrespective of the percentage held) provided their options were granted at least 12 months before the shares are sold.

The Finance Bill 2013 achieves this relaxation by inserting an additional set of qualifying ER conditions for EMI shares. These enable ER to be claimed on EMI shares where the option grant date falls before the ‘beginning of the period of one year ending with the date of the disposal’ provided the other ER ‘trading’ and ‘employment/officer’ tests are met throughout this period.

Peter Rayney