Will Darling's Tax Reforms Backfire?
The Chancellor's attempt to rein in private equity could have devastating consequences for Britain's entrepreneurs and small businesses.
They kicked and screamed. They threatened to move offshore, taking their millions and their finely attuned capitalist minds with them, but in the end, Britain's buyout barons came off relatively unscathed in the pre-Budget report.
True, they'll no longer be able to pay just 10% on most of their income following the sudden scrapping of taper relief, but the new flat 18% capital gains tax (CGT) is hardly the crackdown many feared and, even as the unions howled, the industry heaved a collective sigh of relief.
Yet this move – which opens up a sizeable gap between the rate charged for capital gains and the top rate of income tax – is bound to have big ramifications. Who knows what behavioural changes it will bring about? Given that the main winners are short-term speculators, it could have an incendiary effect on the property and stock markets when there is arguably already a bubble in both.
There's no doubt who the losers are. Many were worried that in order to crack the nut of extracting more from private equity, the Chancellor would smash fledgling entrepreneurs with higher taxes – and that is exactly what he has done.
Alistair Darling describes his plan as a simplification, but this astonishing abandonment of Labour's pro-enterprise tax agenda has nothing to do with making life easier for business builders: it's a blatant attempt to raise more money.
Previously, if you had an idea you borrowed some cash – perhaps risking the roof over your family's head – started a business and ran it for at least two years, you were rewarded. But the abolition of taper relief has swept away the carrot for all those British risk-takers trying to become the next Bill Gates.
As Chancellor, Gordon Brown shamelessly posed as business's pal. Darling, it seems, has other priorities. Had he applied a little more imagination, the Chancellor could easily have reached a workable compromise. He could, for instance, have extended the qualifying period for 10% CGT from two to five years, which would have excluded the bulk of private equity investors who seek exits after three years, while protecting genuine entrepreneurs.
This move, which follows the higher corporation tax imposed on small business in Brown's last Budget, will only encourage the view that Labour believes in financing reductions for big companies by charging small companies more, even as the UK slips down the competitive rankings. The most pressing priority for many entrepreneurs now will be to sell up before the tax they pay doubles in April.
Prepare for the stampede.
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