On Budget Day, the Chancellor announced that two additional conditions would be introduced to the definition of “personal company” for the purposes of Entrepreneurs’ Relief (ER). The tests take effect from 29 October 2018, and are intended to ensure that an individual benefiting from ER on a sale of shares has a material stake in the company. The two new tests are included within paragraph 2, Schedule 15 of Finance (No. 3) Bill. They require the individual to have a 5% interest in both the distributable profits and net assets of the company through the one year (increasing to two year) period prior to disposal.
A number of concerns were raised about both how the tests would operate in practice. Representations were made by a number of professional bodies (including the CIOT who met and discussed with HMRC a number of times) and individual firms about a range of potential unintended consequences.
We have now been notified by HMRC that the government has tabled an amendment to the clause, details of which can be found here.
We have received the following from HMRC
“Thank you all for taking the time to share your concerns about and suggestions on the recent entrepreneurs’ relief changes with us, whether at the meeting last week, or in writing. I’m writing to let you know that on the basis of your advice and recommendations, the government has now tabled an amendment to Paragraph 2 of Schedule 15 of the Finance Bill, which contains the changes to the definition of ‘personal company’ for ER purposes. The amendment will add an alternative test based on the shareholder’s entitlement to proceeds in the event of a sale of the whole [of the ordinary share capital in the]* company, which can be used instead of the tests based on profits available for distribution and assets on a winding up. The original tests have been left in to provide certainty to those with straightforward company structures, but the new test will help those who are not able to meet the original test for commercial reasons, and does not rely on the definitions in the Corporation Tax Act 2010.”
*Addition by CIOT for clarification.
Further guidance on the changes is expected from HMRC.