Question marks over entrepreneur relief

The new entrepreneurs’ relief on capital gains tax is only due to come into
force on 6 April, but MPs are already questioning how it will be policed.

Chancellor Alistair Darling announced the relief in January this year as a
concession to business following his controversial decision to scrap taper
relief and introduce a flat capital gains tax rate of 18%.

The entrepreneurs’ relief will offer individuals a 10% CGT rate on the first
£1m of gains they make over a lifetime. In order to gain the relief, the seller
of a business or shares must own at least 5% of the business and be an employee
or officer.

But as the introduction of the new regime looms, MPs are unsure how exactly
the government will make sure that nobody exceeds that £1m limit.

At a Treasury select committee meeting last week, Conservative MP Philip
Dunne asked officials how they planned to enforce the £1m lifetime gains rule
when HM Revenue & Customs only had the power to look back at a taxpayer’s
records for six years.

Dunne said this raised that possibility that HMRC and the Treasury were
‘extending the requirement to keep records beyond six years’.

Mike Williams, director of personal tax at the Treasury, said the government
would be able to keep a ‘running tally’ of the disposals made by individuals.

Bill Dodwell, head of tax policy at Deloitte, said things like roll-over
relief also applied to lifetime and that HMRC could monitor the CGT
entrepreneurs’ relief in a similar way.
But Dodwell did express reservations about the practicalities of enforcing the
£1m lifetime gains cut-off.

‘HMRC is supposed to have permanent files on all taxpayers, but I think they
will be concerned about entrepreneurs’ relief. Advisers are worried too because
nobody wants to make a mistake,’ he said.

The relief could also be vulnerable to tax avoidance – a development the
government seems to have assumed will be inevitable.

In the Budget the Treasury said: ‘The government will continue to monitor the
CGT regime for any signs of avoidance or abuse and will not hesitate to act
should such activity come to light.’

The CGT battle looks set to run for some time yet.

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