Estimated Reading Time 6:00 minutes
Chancellor Rishi Sunak unveiled the Government’s first Budget on Wednesday (11 March) in the House of Commons.
Among the expansionary fiscal plans, the chancellor allocated billions to combat the economic disruption caused by COVID-19 with investments in public services, promised significant investments in infrastructure and made headline-grabbing R&D and business rates relief commitments.
However, whilst we welcome the measures to protect the economy in the short run from large and sharp shocks, we are disappointed to see the swingeing cuts made to Entrepreneurs’ Relief in Budget 2020.
In his first Budget, the new Chancellor committed the government to a £175 billion splurge in spending over the next five years, equating to £35 billion per year.
Infrastructure projects, emergency response funds to support the NHS during the Coronavirus crisis, an extra £900m for research into nuclear fusion, space and electric vehicles and business rate reforms are just some of the many policy announcements that were made in the House of Commons on Wednesday (11 March).
However, whilst we welcome the relief to aid essential public services during the Coronavirus outbreak, we strongly disagree with the government’s decision to dramatically overhaul Entrepreneurs’ Relief in Budget 2020.
Effective immediately, Entrepreneurs’ Relief in Budget 2020 has been slashed by 90%.
The swingeing cut to the lifetime limit means that entrepreneurs will now pay 10% on lifetime gains of up to £1m, compared with the previous limit of £10m. Founders selling their business will subsequently pay the standard capital gains tax rate of 20% on any profit over £1m.
The chancellor described the relief “expensive”, “ineffective” and “unfair” and stated that the £2 billion costs to the Treasury were a valid reason to drastically reduce the lifetime limit. We believe this dispels the notion that the Conservative Party is working with a ‘business-friendly agenda’.
The Budget in its entirety seems to be the kind of fiscal pledge that the Leader of the Opposition would have been proud to deliver and its contents would have kept a 2010 George Osborne up at night.
The draconian curtailment of Entrepreneurs’ Relief in Budget 2020 is significant and severe, especially given the potentially stormy years that lie ahead for UK entrepreneurs and foreign business owners in the context of Brexit.
It seems that the government has been heavily influenced by think tanks and lobbying groups, such as the Institute of Fiscal Studies and The Federation for Small Businesses. Reports from these organisations have attempted to justify the chancellor’s decision by perpetuating the view that entrepreneurialism and the generation of wealth are somehow immoral.
Supporting his decision and with the proviso that the money raised by the tax alteration would be allocated to help businesses, the chancellor announced an increase in the tax relief available for businesses investing in R&D through initiatives such as the Research and Development Expenditure credit.
However, the more experienced reader may notice that the government’s definition of R&D in this context is very loose and does not necessarily only apply to R&D conducted by technology, life sciences, biotechnology or health diagnostics companies.
Similarly, the general emphasis on science is welcomed, but it needs to be considerably more targeted if it is to radically promote the type of activities that will make a real difference to the economy.
Surprisingly, the chancellor also announced heavy investments in local roads, alongside a new £2.5 billion pothole fund. Considering the supposed savings of £2 billion harvested from the cuts to Entrepreneurs’ Relief, allocating £2.5 billion to potholes seems like the government is prioritising potholes over people.
Despite our criticism of the decision to modify Entrepreneurs’ Relief in Budget 2020, we are keen to see the progression of the £800 million investment in two carbon capture and storage clusters in Teesside, Humberside, Merseyside and Scotland. Although, it should be noted that if you compare this investment to the aforementioned pothole fund you will see that this investment in the future represents just 32% of the local roads fund.
Additionally, we strongly disagree with the 2% Stamp Duty surcharge for foreign buyers of properties in England and Northern Ireland from April 2021. At a time when the UK should be saying we are open for business, we are essentially saying foreigners and their money are not welcome.
In summation, this Budget goes some way to fix the chronic shortage of investment observed during the years of austerity but does little to promote the activities required to pay for such sizable investments.
It seems that this spend, spend, spend Budget is a deflection tactic to distract from the more potent issues that businesses may face in the years ahead.
With the macroeconomic events of the past two weeks creating uncertainty and supply-side issues, we suggest this £2 billion tax windfall generated by cutting Entrepreneurs’ Relief, just like the £350 million per day saving on the side of a bus, will vanish into thin air. Business exits are a windfall and should never be taken for granted. At just the wrong time, the chancellor has snatched a key incentive from entrepreneurs and will get very little in return.