Time to end this unfair tax break to help save Health?

30 Aug 2018 Nick Garbutt    Last updated: 30 Aug 2018

The health service desperately needs more money, with or without reform.

Without a functioning government the policy changes required for reform are not possible. However even with one, Ministers would be severely constrained.

That is because it is ultimately Westminster that controls public spending and a Northern Ireland government can only work with the budget it receives through the Barnett Formula.

And raising the required money involves hard choices. Most of the debate to date has involved tax rises – and many appear prepared to pay a little more if that means better care.

Yet as the population continues to age that leaves a smaller workforce, and therefore tax base, footing the bill. Ultimately this will be unsustainable. At Scope we have previously examined some of the other ways the gap can be filled.

This week the British think tank The Resolution Foundation proposed a means by which we could provide an additional £2.7 billion per annum across the UK by abolishing a benefit enjoyed by a small number of business owners that most of us have never heard of: Entrepreneurs Relief.

For those of us dazzled by large figures this would be around £50 million per week.

Entrepreneurs Relief was introduced by then Labour Chancellor Alistair Darling in 2008 in order to encourage people to start their own businesses. It was designed to provide relief on Capital Gains Tax (CGT) when a business was sold. The maximum rate for CGT is 20% but Darling’s scheme reduced this to 10% for the first £1 million, meaning that those holding at least 5% shares in a business could get up to £100,000 relief when they sold them with any additional monies charged at 20%.

In the years that followed the cap was increased – and now stands at £10 million. Therefore business owners can get up to £1 million relief on selling.

In 2016/17 around 52,000 people across the UK got this benefit, with 69% going to just 6,000 people. As more was paid out that year, that worked out at £450,000 each.

This does seem difficult to justify when you compare the overall cost to the state with other areas.

According to analysis from the Resolution Foundation whilst we invest £2.7 billion in benefiting business owners, many of whom are extremely wealthy, we spend £0.7 billion on medical research; £0.8 Million on Affordable Homes; and £2 billion on winter fuel allowances.

Entrepreneurs Relief costs us more than the entire Intelligence Services. It would cost around the same to give every household in the UK £100 per annum.

Winter fuel allowances are under pressure, welfare reform is further squeezing the poor. Every aspect of public spending is under intense scrutiny. There are public policy debates about who should pay what in income tax. Yet little is said by government about this enormous sum.

Yet the Entrepreneurs Relief is just one a raft of tax breaks, officially called “tax expenditures” that add up to £155 billion per annum from the public purse.

Many of these contribute to the economy and help to offset monies that otherwise would have to be spent by the state. That’s fine but these benefits need to be subject to the same rigorous cost benefit analysis applied to benefits for the poor.

The Resolution Foundation suggests that if there are benefits from this relief scheme they are far from obvious.

For a start 82% of beneficiaries are male of an average age of 57. A majority of them live in London and the South East of England.

No detailed explanation has been given as to why the scheme is in place. We can assume that government thinks that unless it was less people would be motivated to start their own business.

There is little evidence to suggest this is correct. One survey conducted by the government revealed that only 16% of those who benefited knew about the existence of the scheme when they made their investment and only half of these said that it was a factor for them at the time.

Of course there will be a number who set up their businesses before the scheme was introduced. But, as the Resolution Foundation points out it is hard to understand why, at such difficult financial times, the government is prepared to give massive tax cuts to retiring businessmen who had no idea that they would get this bonus when they invested.

Further surveys suggest that most recipients were people who were retiring anyway, such as dentists selling their practises at the end of their careers.

It is hard to imagine a more unfair tax break than this.

When the Resolution Foundation made the recommendation Blick Rothenberg which advises corporate clients on tax was quoted in Business Leader magazine:  “The UK has an attractive business regime, which is envied by many other countries, and the Government’s business agenda should be encouraged further, and entrepreneurs’ relief has become a key cornerstone, since its introduction over 10 years ago.”

Perhaps not surprisingly, this bold assertion is not backed by any evidence.

If it were to be abolished and the money saved allocated to health that might bring in at least £75 million to Northern Ireland. Under its supply and confidence agreement with the Conservatives the DUP secured £300 million for health and mental health and an additional £50 million to address immediate pressures on the service.

The abolition of  Entrepreneur Relief would mean that one off agreement being exceeded within four years.

Reform does not depend on having a government at Stormont. It’s a reserved matter for Westminster.

There is need for a debate. The more that the rest of us are squeezed, the harder it is to justify tax breaks whose benefits appear to be confined exclusively to those who receive them.

Any system of tax and benefits needs to be manifestly fair. It is an essential element of the social contract between those who govern and are governed. Entrepreneurial Relief is not fair and needs to go.

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