SELLING PART or all your business can be fraught with tax and legal issues. One aspect which many get wrong is the extremely valuable tax relief on disposal of a business asset. The relief, known as business asset disposal relief (“BADR”), has a lifetime limit of £1 million – an amount which was reduced in 2020. Now, HMRC is sending letters to individuals who claimed this relief in 2020/21, warning that they may have underpaid tax.

In today’s Shipleys tax brief we look at what’s going on and what should you do if you are unfortunate to receive a letter.

Now, HMRC is sending letters to individuals who claimed this relief in 2020/21, warning that they may have underpaid tax.

What is business asset disposal relief?

Business asset disposal relief was previously known as Entrepreneurs’ relief (ER). This was revamped in 2020 and, aside from being rebadged as BADR, there was no change to the underlying mechanics of the relief. However, the primary change was that the cumulative lifetime limit for gains (i.e., “profits”) on disposal of qualifying assets was slashed from £10 million to £1 million. This did not affect gains arising before 11 March 2020. So, for example, if a gain of £8 million had been realised on 10 March, it could qualify in full, but the unused £2 million disappeared the next day!

…the primary change was that the cumulative lifetime limit for gains (i.e., “profits”) on disposal of qualifying assets was slashed from £10 million to £1 million.

What’s the problem?

HMRC is seemingly concerned that taxpayers (and by extension, their advisors) may not have understood that the reduced £1 million limit had to include gains arising prior to 11 March 2020, i.e. it was a retrospective test. It is now writing to taxpayers that claimed BADR in 2020/21 that it believes fall into one of two sets of circumstances:

• more than £1 million of gains have already been subject to an ER claim prior to the change, meaning the allowance for 2020/21 was £nil; or

• where less than £1 million gains were previously subject to a claim, but the claim in 2020/21 means the limit has been exceeded, e.g. where, say, £500,000 had previously been claimed, then a claim for £1 million was made in 2020/21.

HMRC is seemingly concerned that taxpayers (and by extension, their advisors) may not have understood that the reduced £1 million limit had to include gains arising prior to 11 March 2020…

What should you do if you get a letter?

Although, this type of “nudge” letter is usually a precursor to the opening of a formal enquiry, you should not panic. Anyone receiving a letter should check their BADR/ER claim history (back to 2008) to check the position and amend their return if necessary. We recommend you promptly speak to a tax advisor to establish the position and determine the best course of action.

If you do so, although there will be late payment interest, it appears that no penalties will be charged as long as the correction is made before a compliance check is started.

What no to do would be to ignore the letter hoping HMRC will go away. They won’t. This type of “fishing” exercise conducted by HMRC is based on yielding returns and HMRC will not relent until it is satisfied there is no potential tax underpayment at stake.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.