Scrapping entrepreneurs' relief 'would be short-sighted'

Peter Morley of Pinsent Masons, the law firm behind Out-Law, said: "Ensuring that entrepreneurial business owners and investors maintain the view that the UK is an attractive place to live and do business is essential to the UK economy and a competitive tax rate on capital gains is part of this."

"In a world with the technology to allow businesses to be started and run anywhere, it is important that the UK retains an incentive to encourage new and existing business ownership in the UK," he said. "The economic benefits and tax revenue generated by UK based businesses go far beyond the CGT paid on disposal.”

Morley's comments followed publication of a new research by the IFS, which showed that tax reliefs for company owner-managers do not boost investment. According to the report company owner-managers are very responsive to taxes, but changes to income taxes are more likely to result in business owners adjusting how and when they take money out of their company, rather than changing the amount of income they create or how much they invest.

The Association of Accounting Technicians said that the report reinforced its call for entrepreneurs' relief to be scrapped and that the money saved should be invested in helping small businesses to start and scale up. Sir Edward Troup, former head of UK tax authority HM Revenue and Customs has also called on the government to abolish the relief, which he said was costing the country £2 billion a year and had "minimal impact on encouraging entrepreneurship in the UK."

The IFS research found no evidence that there is a link between increased profit retention and increased investment in business capital, leading to speculation that company owner-managers may be motivated to retain income in their companies for long periods of time in order to be able to access entrepreneurs' relief.

Morley cautioned against linking profit retention and entrepreneurs' relief. “The tax regime already contains restrictions to ensure that business owners do not retain excess amounts of profits in a company and benefit from capital gains tax treatment on disposal," he said.

Entrepreneurs' relief reduces the capital gains tax (CGT) payable by individuals on gains realised on disposals of shares in companies from 20% to 10% subject to a number of conditions. For the relief to apply, the individual selling the shares must be employed or hold an office in the company or group in which the shares are being sold. Various tests relating to the ownership of the shares also need to be met.