Impact of the 2017 Budget for SME entrepreneurs pondering exit or investment
Speculation was rife in the lead up to the Budget last week – in the face of waning growth and declining productivity, and against an overriding econo-political narrative that our public services are struggling and living standards falling – that Chancellor Philip Hammond would be forced to introduce sweeping changes affecting entrepreneurs and SMEs. Commentators foretold an overhaul of Entrepreneur’s Relief and the rules impacting private and institutional investors in SMEs (via the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)); owing to the tax advantages these schemes confer.
In the build up the media labelled the Budget interchangeably as one which would at the very least make or break Hammond’s career; in more grandiose terms as an opportunity to recapture the political narrative, or even to reaffirm capitalism works (yes, I may have been reading The Telegraph). Against this backdrop, taking away tax advantages offered to those invariably perceived as the ‘better-off’ in society might have been an easy-sell, or at least a move to outflank Labour.
After two paragraphs of build-up, you’re probably asking “so what happened to Entrepreneur’s Relief?” The answer: “The reverse of what was expected: nothing.” In the lead up to the Budget, a number of our clients took measures to lock in Entrepreneur’s Relief and secure the 10% capital gains rate utilising their full £10m lifetime allowance. The Chancellor may notice a small windfall in tax coffers next year arising from entrepreneurs who gambled on changes being introduced.
Interspersed with rhetoric on the Opposition being stuck in the past (and the Top Gear joke), individual limits for EIS investments were doubled for Knowledge Intensive Companies (KICs), as were the annual limits for KICs receiving EIS and VCT funds; some of a few measures introduced to tackle the skills-gap and encourage entrepreneurs – particularly those at the forefront of the ‘technological revolution’. Investment in VCTs is expected to grow to £800m in 2017, the highest annual total on record. Whilst pre-Budget speculation focused on potential reductions in tax advantages offered to VCT investors, these failed to materialise. However, measures were adopted to prevent VCTs from offering secured loans to investee companies; as well controls to ensure funds are invested in younger, growing companies where there is a real risk to capital.
In the longer-term, those entrepreneurs who acted to secure maximum Entrepreneur’s Relief may still be proven wise. Uncertainty is a persistent smear on the UK economy; in some ways it has remained the new normal since the 2008 Global Financial Crisis. However, today’s headwinds are more national and political than global and financial – I’ve made it thus far without referring to the B-word – yes ‘Brexit’, not to mention the prospect of a Corbyn-led Government. The 2016 Barclays Entrepreneur’s Index found 505 businesses were sold in the UK in 2016, a 28% increase on 2015, some suggest this is a direct result of amplified uncertainty for entrepreneurs.
Whilst Entrepreneur’s Relief remains unchanged for now, it is not hard to envisage it might be a case of ‘when’ and not ‘if’ reform will happen. Business owners may therefore be well-placed examining options available to spread risk and utilise available Entrepreneur’s Relief allowances – equity releases and partial exits are a viable options to do so. If reforms do come to pass, we may even find entrepreneurs increasingly seek to sell off some or all of their companies to Employee Ownership Trusts as a succession solution; especially as these transactions enjoy a complete capital gains exemption.
Making decisions on these matters should not be undertaken in a vacuum, and my business school professors would insist strategy should remain at least as flexible as the environment is unpredictable. The MHA MacIntyre Hudson Corporate Finance team is well-versed in working with entrepreneurs to assist with the development, crystallisation and implementation of a strategy for the growth and the partial or full realisation of business assets.