Pressure builds on Darling to rethink CGT changes
Friday, 12 October 2007 12:00 AM
Unions and employers are pushing the chancellor Alistair Darling to rethink his proposed changes to capital gains tax (CGT), announced in the pre-Budget report this week.
Mr Darling is proposing introducing an 18 per cent flat-rate CGT - replacing the taper relief system that sees a ten per cent tax rate on profits from the sale of assets held for over two years if investors work for the firms.
The 18 per cent rate will also apply to those paying 20 per cent and 40 per cent on CGT.
The proposals to end taper relief are seen as a way for the government to make private equity groups pay more tax.
In 1998, Labour were feted for creating entrepreneurial culture by introducing the taper system.
But, following the chancellor's attempt to cut down on private equity by introducing the 18 per cent flat-rate levy, businesses now are accusing the government of stifling commercial enterprise.
Paul Kenny, general secretary of the GMB union, has welcomed the move to close tax loopholes for the private equity industry, but is calling for the chancellor to "go back to the drawing board".
In a letter to Mr Darling, he wrote: "The ability of the multi-millionaire elite to package what is income - a form of payment by results - as a capital gain is what should have been tackled and has not been.
"These elite will still be able to present income as capital and pay a lower rate of 18 per cent tax which is below that paid by ordinary working men and women.
"There is no justification for affording privileges to this elite and indeed proposing to continue to do so is scandalous. It is time that the few were treated like the many."
Meanwhile, the director-general of the Confederation of British Industry (CBI), Richard Lambert argued the removal of taper relief "undermines the ten-year effort by this government to promote enterprise and risk-taking within the UK."
Ms Lambert went on: "By removing taper relief you have deployed an extremely blunt instrument that will deeply damage a much wider community [than private equity alone], and in so doing, risk the medium-term health of our economy.
"The abolition of taper relief provides for some simplification of the CGT regime, but at the cost of hitting a number of groups who are taking significant risks in investing in and building the businesses that generate so much of our employment and wealth."
He added that while the move was aimed to tackle a "perceived problem relating to a few wealthy individuals operating in private equity" it would hit small business owners.
Speaking on BBC Radio 5 Live's Wake Up To Money, Justin Urquhart Stewart from Seven Investment Management explained the removal of taper relief could cut impetus for small business owners to develop their firms.
Mr Urquhart explained: "What incentive people had before, whereby over a period of five years you could possibly get down to a ten per cent tax, now of course it's 18 per cent flat, so you might as well just sell it straight away."
The chancellor announced the changes to a jeering Commons on Tuesday, after bowing to pressure from the Conservatives to cut down on private equity.
Andy Burham, chief secretary to the Treasury, defended the changes to CGT.
"For many years business have been saying to government, quite rightly, that the capital gains system was very complex," he told BBC Radio 4's Today programme
"The call was for simplification and that is what this reform is delivering."
He added: "There is a rise and there will be losers from this rise, as there will also be winners.
"I do acknowledge that for some people disposing of business assets it may mean they will pay more tax.
"The government doesn't rush in and make blunt and crude assessments of these matters; it has been worked on over a long period of time and I believe we have made the right choice."
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