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CBI Director-General Richard Lambert has sent an open letter to the Chancellor, setting out the business group's deep concerns over changes to the Capital Gains Tax regime announced in the Pre-Budget Report.

The letter says the move "undermines the 10 year effort by this government to promote enterprise and risk-taking within the UK."

Under the Chancellor's proposals, the so-called taper relief, meaning that people who hold on to shares for longer pay a lower rate of capital gains tax than those who are chasing quick profits, would be replaced with a flat rate of 18 per cent capital gains tax on all capital gains. The CBI said that abolition of taper relief provides for some simplification of the capital gains tax 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 employment and wealth.

"In addition to those small business owners who have expended a good deal of “sweat equity” - foregoing income and putting their homes on the line in order to build up their business - these changes will hit other investors, from external venture capital to employees who take a stake in their company’s future," it said.

Blunt instrument 

Such a move was clearly designed to tackle a perceived problem relating to a few wealthy individuals operating in private equity., according to the CBI, who said that it is "by no means clear" that the regime of capital taxes that this government previously agreed should apply to the sector was inappropriate for their level of risk-taking.

"By removing taper relief you have deployed an extremely blunt instrument that will deeply damage a much wider community, and in so doing, risk the medium-term health of our economy," it concluded.

The CBI claimed that the Pre-Budget Report represented a further increase in the overall business tax burden of £900million.

"This at a time when many businesses are already considering the international location of their future investment, and the government’s own forecasts point to a more uncertain economic climate."

The letter is co-signed by Steve Sharratt, Chairman of the CBI's SME (Small & Medium Sized Enterprises) Council, and a further 12 members of the Council who run their own small or medium-sized companies.

Simplification 

Other organisations gave a mixed response to the government's tax proposals.

John Barnett, Chairman of the The Chartered Institute of Taxation's (CIOT) Capital Gains Tax and Investment Income Sub-Committee, says: "The proposed 18 per cent flat-rate of CGT will in the longer term represent a significant simplification of Capital Gains Tax. Simplification of the tax system is something the CIOT has long called for and to this extent we give a guarded welcome to the proposals.  We also welcome the opportunity to consult on the draft legislation later in the year."

The CIOT called for tax changes to be fair and to give certainty to taxpayers. The CIOT said it believes that the proposals fail in this respect. In particular, there are no transitional provisions and the CIOT anticipates significant market distortions over the next 6-12 months as some transactions are brought forward and others may be delayed.

John Barnett adds:  "All those who are in the process of making disposals, or who are likely to do so in the near future need to consider whether their tax position might be significantly different if the transaction were delayed until after 6 April 2008."

Incentive to sell

Chris Sanger, Head of Tax Policy at Ernst & Young said: "Entrepreneurs who have built up their businesses over more than two years will be very tempted to hoist a For Sale sign over their business before next April. If they sell their business before then, they will pay 10 per cent capital gains tax, the current effective rate with full taper relief after an asset has been held for more than two years."

"But if they leave it until after next April, they’ll pay capital gains tax at 18 per cent after the changes announced by the Chancellor in the Pre-Budget Report. That creates a big incentive for every entrepreneur-owned private business to sell, creating an enormous buying opportunity for Britain’s corporate raiders and private equity firms."

Share plan 

ifs ProShare, a not for profit organisation established in 1992 by the Treasury, London Stock Exchange and a number of major companies to promote employee share ownership, expressed concern at the potentially unintended consequences of the capital gains tax simplification.

“The majority of employees participating in their employers’ share plan are doing so via a SIP (Share Incentive Plan) which shield employees from any capital gains. The new CGT arrangements will only have an impact on these employees in very limited circumstances," said Fiona Downes, ifs ProShare's Head of Employee Share Ownership.

"However, ifs Proshare approximately 1.7 million UK employees are making monthly savings through a Sharesave Save As You Earn scheme and many of these could now be subject to an 18 per cent CGT charge from April 2008, regardless of how long they have held shares in their employer."

The new rate of 18 per cent applies equally to basic rate and higher rate taxpayers and to business and non-business assets. Downes said she feared that higher rate taxpayers participating in a SAYE scheme could  be 8 per cent worse off than before and basic rate taxpayers could be 13 per cent worse off. In contrast, non-employee shareholders could be up to 22 per cent better off.

Downes concluded, “Whilst the Treasury may have sound reasons for simplifying CGT, it would appear the consequences for employees saving through employee share plans had not been fully assessed. These apparently unintended consequences contradict Governments oft stated commitment to encouraging long term saving and to their support for wider share ownership."

"As a result, we will be consulting with our members over the next few days and will then be seeking a meeting with Treasury officials to express the views of the share plans industry, provide evidence of the negative impact these changes may have on many hardworking employees and to discuss possible solutions.”

Related links

• CBI
• CIOT
• Ernst & Young
• ifs ProShare