Entrepreneur's Relief and the Brexit

Many see Brexit as a disaster, some of the small businesses owners were fearing the Brexit so much that they were even considering selling the businesses.

Before you decide the fate of your business, it is worth considering the following points:

The fluctuating exchange Rates:

The fluctuating exchange rates created by Brexit can actually go in your favour. This is actually an opportunity for businesses who export their services and goods abroad to attract more international buyers as British goods and services become more affordable to them. A research by PayPal revealed that SME saw international sale increase due to post Brexit currency fluctuations.

Welcoming Inward investment:

After the Brexit decision there is an increase in the number of EU nationals leaving the jobs. As EU nationals won’t be able to live and work in UK without the Visa requirements. This will potentially create more opportunities for the British citizens. Also, as a result of the weaker pound firms will be able to invest far more in UK industries, thus being able to safeguard local businesses and keep thousands of jobs where they should be. So, in case you are planning to leave your business you might need to avail the job opportunities that are expected to be created post Brexit.

Import Tax changes:

If you are a small business importing goods from Europe, you might have to look for new suppliers from within the UK to keep your costs controlled. This is because the Small businesses will be forced to pay VAT upfront on all goods imported from EU. Which means that in addition to the cost of the product itself there will be an additional VAT cost, extra duty tax which the business will have to bear.

This might create cashflows issues for UK importers and retailers which in turn will affect the realisation of the profits. Currently the cost of VAT is passed along the supply chain when importing from EU. In 2020 these costs will be handed to the small business owners who will have to pay immediately.

Small businesses that do not have consistent profits might have to cut costs in other places to pay for the upfront Vat costs, there is a risk that they compromise the quality of the product.

Changes in the Entrepreneur`s Relief:

You may be able to pay less tax (capital Gains tax) when you sell all or part of your business.

Entrepreneurs’ Relief means you’ll pay tax at 10% on all gains on qualifying assets.

Government has also introduced some changes in the Entrepreneur`s relief in its Autumn budget 2018. The changes are following:

  • An extension of the qualifying holding period from one year to two years (introduced for disposals on or after 6 April 2019); and
  • A tightening of the rules governing the share rights an individual must benefit from before they qualify (introduced with immediate effect) requiring the claimant to have a five percent interest in both the distributable profits and the net assets of the company.

The extension of the qualifying holding period from one year to two years will mean that shareholders need to consider their position at least two years in advance of any potential transaction to ensure their position is protected.

Share rights

This change ensures a shareholder must benefit from a genuine economic entitlement to five percent of a company in order to qualify for Entrepreneurs’ Relief,

The new legislation means that shareholders will need to continually monitor their position to ensure they qualify for Entrepreneurs’ Relief. In particular, special consideration will need to be given to any companies which have issued preference shares or which have incentivised key management with ?growth shares’.

It is now important that equity arrangements are reviewed well in advance of a transaction to understand whether shareholders can expect to benefit from Entrepreneurs’ Relief.

In addition, the changes further increase the attractiveness of shares received through an Enterprise Management Incentive option-plan (which must now be held for 24 months but are not subject to the additional restrictions relating to five percent of economic share rights).

Our Clients & associated Partners