Tax planning: Don’t count on the status quo

Without a clear mandate to proceed, the government’s position could become untenable – potentially leading to a change of government, and tax policy, explains Richard Godmon, head of tax at Menzies LLP

Change is in the air following the snap election, and depending on the way things play out for prime minister Theresa May, there could be significant fiscal and cultural repercussions for small and medium-sized businesses.

The hung parliament and uncertainty about whether the current Conservative government can attain a working majority has brought additional uncertainty. The prospect of delays to parliamentary process could force some key tax legislation, such as measures due to be introduced as part of the Finance Bill 2017, to be put back or even shelved altogether. Without a clear mandate to proceed, the government’s position could become untenable – potentially leading to calls for yet another General Election, with the increased probability of a change of government.

For SMEs, a change of government could alter the tax landscape significantly – forcing a fundamental re-evaluation of their business model and investments. Based on the Labour Party’s manifesto published ahead of the snap election, tax increases would be expected across the board. The rate of income tax could increase to 45% for those earning more than £80,000 per year and 50% for those earning more than £123,000 – forcing high-earners to rethink their personal investment and pension plans. Corporation tax could also increase to 26% by 2020, leaving less scope for businesses to invest in capital expenditure and job hires.

In addition to changing headline rates of tax, the opposition party’s manifesto also promised an immediate independent review of tax reliefs, with the aim of raising £3.8bn in revenues. While it is not clear which reliefs would be targeted, changes to the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) could discourage investment in SMEs and make it even harder for growing businesses to raise finance. Any move to reduce or remove the Annual Investment Allowance (AIA) could also undermine investment.

While it has not been mentioned directly, Entrepreneur’s Relief could also be removed or altered significantly. Currently, this relief, which is designed to encourage entrepreneurial investment, allows individuals who own more than 5% of a company’s shares to benefit from a reduced rate of Capital Gains Tax (CGT), payable at 10% on any gains they realise when selling them.

While it is impossible to know which changes would be most likely, SME business owners should review their current plans and where possible bring forward key decisions that could carry a big tax cost in the future. For example, if the business is thinking of introducing an EIS or SEIS to incentivise investment, it would make sense to do this now. If a key shareholder is planning to exit and wants to realise value by selling their shares, they might want to do this sooner rather than later to ensure they benefit from Entrepreneur’s Relief. Business owners planning to invest funds back in their business by buying new plant or machinery should make use of their AIA too.

Any changes to Business Property Relief could have the biggest impact on the UK’s SME sector. Established to allow businesses to continue trading following the death of a principle shareholder without being forced to break up the business or pursue a sale in order to pay an inheritance tax liability, this relief is highly-valued. Any move to tighten the rules could force businesses to find other ways to mitigate risks to business continuity in the future.

For owner-managed businesses and individuals, there are practical things they could consider doing immediately to reduce the impact of tax hikes in the future. For example, they could use income-splitting arrangements to minimise the impact of any increases in income tax. In addition, if the business has recently sold a major asset and intends to use the proceeds to buy another, rather than make use of the three-year window allowed in which to do this, they may wish to bring forward the planned investment to make the most of roll over relief.

Of course, a change of government could bring opportunities and benefits too. For example, the National Transformation Fund could bring specific rewards for businesses that deliver government contracts and a review of company law could help to increase transparency and stamp out tax evasion for good.

In uncertain times, it becomes even more important for businesses to plan. Major tax changes could make it harder for businesses to balance the books and for individuals to plan their futures. SME owners should consider bringing forward key transactions and stay open minded about how tax legislation might change in the future.

Richard Godmon is head of tax at Menzies LLP.