Pre-budget blow to entrepreneurs

by Catherine Woods - Wednesday, 10th October 2007 - (6) comments

There have been howls of disapproval from the business community to news that the capital gains tax taper relief will be replaced by one rate of 18 per cent.

No doubt aware of the hullabaloo his first pre-budget report was going to cause, Chancellor Alistair Darling argued that 18 per cent is “one of the most competitive single rates of any major economy”.

Apparently, Darling wants to make sure those naughty private equity firms that have taken advantage of the tax system pay their fair share. He said making changes to capital gains tax and getting rid of tax loopholes will achieve this.

But Ernst & Young head of tax Paul Davies is certain entrepreneurs are going to suffer as a result. “Complete abolition of the taper removes a large incentive for entrepreneurs and challenges the ‘Dragon’s Den’ success of the UK,” he says.

The Federation of Small Businesses has also had a go at the Chancellor, labelling the entire report “bad news” for SMEs.

FSB policy chairman John Walker says the sector will “not be helped by increased business rates and a less generous capital gains scheme”.

The UK head of entrepreneurs and private companies at PricewaterhouseCoopers, Kevin Nicholson, reckons we might see a raft of businesses being sold before 6 April 2008 when the new tax rate applies to all gains on disposals.

"As with all changes to the tax regime, there will be significant winners and losers. The main losers would appear to be the private business owners that government has been seeking to encourage to grow in recent years," he tells us.

In other pre-budget news, Darling revealed that inflation will be on target at two per cent next year and the year after. Economic growth this year is expected to stand at three per cent, although it’s forecasted to fall to between two per cent and 2.5 percent in 2008.

The main rate of corporation tax will be cut by 2p to 28p next year and, if Darling is a man of his word, we’re going to get a simpler tax system.

This is what he had to say about the latter measure: “I am announcing three reviews proposing simplification to the tax system that will let three million self-employed people pay their tax and National Insurance contributions more easily, and 500,000 businesses reduce their paperwork by removing a separate payroll.

“Taken together with other measures I am proposing today, this will save British business up to £100m a year.”

Darling needs to deliver what he’s promised when it comes to our complicated tax system. It’s in dire need of simplification; as we all know, red tape strangles small business.

The capital gains tax changes don’t sound good. We can’t afford to put any more barriers in the way of would-be entrepreneurs. Ever the optimist, though, I can only hope that the dire predictions of Messrs Davies, Walker and Nicholson don’t come to fruition.

Reader, is my optimism misplaced? Do you think this is bad news for entrepreneurs? What’s your verdict?

Pre-budget report: hot or not?

6 Comments

October 12, 2007 11:29am
Caroline Plumb Says:

Join the protest... 1) Online petition on No. 10's website itself http://petitions.pm.gov.uk/SaveCGTrelief/ 2) By joining a Facebook group 'Entrepreneurs against the abolition of taper relief' http://www.facebook.com/group.php?gid=5191990138

October 12, 2007 10:01am
Michael Weaver Says:

Overlooked in the ugly fallout from the Pre-Budget Report is one silver lining for any investor considering a private equity stake in a fledgling business. Capital Gains Tax is still exempt under Enterprise Investment Schemes on investments of up to £400,000 per annum per investor. This now takes on a whole new relevance despite earlier attempts to mute the benefits under this scheme. Not only are EIS investments, held for more than three years, exempt from CGT but also from Inheritance Tax. As a business angel network with 1,500 members, we will be encouraging any fundseeker approaching us to apply for EIS relief as a pre-requisite for their business plan. Indeed of the 30 start-ups exhibiting at our next biannual investment fair in less than a month’s time, we expect to see over half with EIS approval status.

October 11, 2007 12:55pm
Andrew Hawkins Says:

Darling has made a massive howler with this. Using private equity 'fat cats' as cover to appropriate 8% of every private business in the land is an obvious sham and it could take years for the Labour Party (and esp Darling) to redeem itself with the business community. Just wait - I bet within 12 months they'll be moaning that the UK doesn't have a proper enterprise culture.

October 10, 2007 6:19pm
Ed Baines Says:

I wouldn't describe it as a masterclass in how to win friends and influence entrepreneurs. You'd be crazy to suggest that it will affect the ambition and drive of our company founders - that will burn on. The trouble for My Darling is twofold; 1) That entrepreneurs will be quizzing their advisors about how to set up offshore for their next ventures 2) This is really the first time he'll have come onto the UK Entrepreneur radar as Chancellor and it's a big old punch in the face of a 'hello'. First impressions last and I think he may have trouble looking entrepreneurs in the eye for a while - not a great party trick for a Chancellor...

October 10, 2007 1:54pm
Paddy Willis Says:

I agree. If entrepreneurs are inclined to hang on longer before selling, to recoup some of the profit that will now be 'lost' at sale, then they are not releasing capital that could be re-invested in new enterprises. Meanwhile, the growth potential that could be expected within their own business after sale is likely to be delayed. What will this cost the economy long-term? "Sledgehammer" and "nut" are two words that come to mind, amongst others...

October 10, 2007 12:19pm
Simon Massey Says:

Bad news.

I cannot see the logic of trailing a series of pro business comments over the years and making a big thing about attacking the disguised remueration packages of the city to then make such a dramatic move as this.

The tax rate of 18% is much lower than the 40% the private equity community would pay on their salaries but is substantially more than a hard working business person is currently liable for when they sell their business. This measure really seems to have missed the point.

There is now less incentive to sell which may slow down the British Economy.