The Office of Tax Simplification (OTS) has published a business lifecycle report which considers the tax charges and reliefs available throughout a business’s lifecycle. The OTS is also seeking views from those with personal experience of Inheritance Tax to inform its simplification review

Business lifecycle report

A number of areas have been identified where simplification is possible and desirable and there are other areas where further work is considered worthwhile. While there is no guarantee that any of the observations will necessarily be taken on board, past experience suggests that the review will be given serious consideration and may form the basis of future change.

Lifecycle event: financing

• The main tax-advantaged venture capital schemes have common features but also a number of differences. This may mean the reliefs are not targeted most effectively
• The absence of an entry relief for companies making venture capital investment is inconsistent with the other reliefs
• The administrative processes around authorising SEIS/EIS companies, and granting tax relief for investors need to be improved
• Complexities built into the SEIS/EIS legislation often catch out unwary companies. This can cause good businesses to lose necessary venture capital, or result in relief being denied. A review of the complexities to remove unnecessary ones, or to build in de minimis thresholds, would be useful

Lifecycle event: succession

• When a business is disposed of by way of a gift, relief from CGT is potentially available under entrepreneurs’ relief (ER) or CGT gift relief essentially offering the option of paying 10 percent tax upfront or potentially paying at the full rate at a later point. The reliefs are mutually exclusive, but determining which is better to claim depends on often uncertain future intentions. Some simplification of the interaction would help to make the choice clearer and simpler
• ER and gift relief are available in respect of transfers of shares in trading companies where the non-trading element of the business is not more than 20 percent. In contrast, for IHT relief the test is less than 50 percent. This is confusing and can lead to commercially unnecessary/complex structures to preserve the reliefs

Lifecycle event: disposal

• The cost of tax relief on claims to ER is greater than that of any of the other reliefs considered in the review. While those other reliefs appear to be designed to encourage investment in young and growing businesses, or to preserve existing business from break-up in the event of succession, ER does not seem to achieve either of those objectives. Its place in the range of reliefs, and its purpose, warrants a closer look
• The tax treatment of certain contingent consideration can influence owners to sell for cash when a sale with the consideration being tied to future business performance may be more appropriate. Simplifying the treatments by bringing them into line would remove a distortion
• The ‘double taxation’ of the sale proceeds of a business by a company and the subsequent distributions when the company is wound up is disadvantageous compared to selling the company. In contrast, the purchaser enjoys more favourable tax treatment by buying assets not the company. Aligning the tax treatments would help to reduce such a conflict of interest