A KEY measure aimed at closing tax loopholes - to ensure those working in the lucrative world of private equity pay a fairer share to the Treasury - has backfired on the Chancellor.
Alistair Darling announced that he planned to withdraw
capital gains tax (CGT) taper relief, under which there are different rates of CGT for different kinds of investment, down to as low as 10 per cent, replacing it with one rate of 18 per cent.
But the move drew almost universal criticism from all sides of industry, especially groups representing small businesses.
A new rate will mean CGT will be higher in Britain than in France, where it is 16 per cent), Italy (12.5 per cent), and the US (15 per cent) - let alone countries such as Switzerland, which have no CGT.
Business advisers said the old system had encouraged entrpreneurship, and they expected the most immediate reaction to be a flurry of companies selling up before the new rate of CGT comes into force, on 6 April, 2008.
Bernard Sweet, director of corporate tax at planners Chiltern, said the move would "strike far beyond private equity". He added: "Many smaller companies, their staff and investors will suffer as this relief is withdrawn. This could backfire on the government - it is a blow to hard-working entrepreneurs."
Paul Kenny, general secretary of the GMB union, which has led criticism of private equity firms, said it welcomed the Chancellor's recognition that tax loopholes for private equity needed to be closed.
"But the solutions that he proposes are far too little and are still unfair. The new rate still leaves the multi-millionaire elite paying a lower rate of tax on their income than ordinary working men and women."
The Treasury had carried out a six-month review of the tax treatment of private equity groups in response to growing criticism that rich owners of such companies pay virtually no tax in Britain.
Taper relief reduces the capital gain according to the number of years an asset has been held. The longer you hold the asset the lower the rate. For business assets - shares in private trading companies - the rates are more favourable, giving an effective tax rate of 10 per cent after 2 years. But for non-business assets - shares in investment firms or quoted companies - the effective tax rate is 24 per cent after ten years.
From April, there will be no taper relief and all gains will be subject to the 18 per cent rate, meaning entrepreneurs who have built up businesses over their lifetimes and were perhaps looking forward to selling up to fund retirement will find that unless they do it before next April, they will pay 8 per cent more tax than they were expecting to.
Mike McCusker, head of tax at Grant Thornton in Scotland, said: "Before, if you sold your unincorporated business, after two years of trading, you paid 10 per cent tax because you had been willing to take the risks - but after summer next year, you are going to face higher taxation."
Andrew Watson, head of parliamentary affairs at the Federation of Small Businesses in Scotland, said the plans to introduce supplementary business rates and changes to CGT would hit many of the UK's 4.5 million small businesses directly.
"This comes as a big disappointment to small businesses still reeling from increases in corporation tax announced in the last Budget. The small business community - 99 per cent of businesses in Scotland - which contributes over half of the UK's GDP, will not be helped by increased business rates and a less-generous capital gains scheme.
"Starting up a new businesses or making a going concern profitable before selling it on for a higher price and starting up another is what being an entrepreneur is all about. This will simply act as a disincentive to the very people we should be trying to encourage."
Rhona Irving, head of tax at PwC in Scotland, said: "This will be a bitter pill for those that had built up their business with the expectation of selling out with only a 10 per cent tax charge. It will be interesting to see how many of these businesses are sold in the period up to 5 April.
"As with all changes to the tax regime there will be significant winners and losers. Those who held non-business assets such as many properties will see their tax rate fall from 24 per cent to 18 per cent.
"Similarly taxpayers who would have faced the highest 40 per cent tax charge on assets like buy-to-let portfolios and quoted share portfolios will be pleased by these new measures. But the main losers would appear to be the private business owners that government has been seeking to encourage to grow in recent years."
KEY TAX ISSUES
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INHERITANCE tax threshold for married couples and those in civil partnerships rises to £600,000 immediately and to £700,000 by 2010.
? The main rate of corporation tax cut by 2p in the pound to 28 per cent by next year.
? White paper on supplementary business rates indicates government wants to tax businesses further to bridge the gap in transport spending.
? New rules on "income shifting" by couples in business together mean every business now has to account for every single item of work carried out.
