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In 2020, the lifetime limit for the business asset disposal relief, often known as BADR, was reduced to only £1 million. Now, the HMRC is issuing advisories to anyone who claimed the relief in 2020/21, informing them that it is possible that they did not pay enough tax.
Entrepreneurs’ relief (ER) was amended in 2020. Apart from being renamed BADR, the relief’s mechanics didn’t change. On the other hand, the limit on the total amount of gains accumulated over a lifetime was reduced from £10 million to £1 million. This did not affect gains before 11 March 2020; for instance, if a gain of £8 million had been recorded on 10 March, it would have been eligible in its whole, but the next day, the remaining £2 million would have been lost.
HMRC is worried that taxpayers (and their advisers) may not have realised that the lower £1 million limit applied to gains made before 11 March 2020, making it a retrospective test. So it is now contacting taxpayers who claimed BADR in 2020/21 and who it considers fall under one of the following two categories of contexts:
- Before the change, more than £1 million in gains were subject to ER; therefore, the allowance for 2020/21 was £0; or
- Where a claim for less than £1 million gains was previously made, but the claim in 2020/21 implies the limit has been surpassed, for example, where a claim for £500,000 was previously made, a claim for £1 million was made in 2020/21.
Most of the time, a “nudge” letter like this one comes before a formal inquiry. Anyone who receives a letter has to check their BADR/ER claim history (dating back to 2008) to identify the position, and they should revise their return if required. If they do so, they will be subject to late payment interest, but it would seem that they would not be subject to penalties as long as the adjustment is made before a compliance check is initiated.