The 'codswallop' Chancellor enrages small companies

Alistair Darling's new capital gains tax regime was supposed to simplify the system and haul private equity into the net. But the buyout barons have got off lightly and everyone else – from unions to entrepreneurs to the CBI – is on the warpath. Simon Evans reports

It should have marked the high point of the relentless campaign by unions to get the Government to clamp down on the masters of the private equity universe and their huge pay.

A flat rate for capital gains tax (CGT) of 18 per cent and the abolition of the contentious taper-relief rules seemed just the medicine sought by unions and other critics of private equity, described as more secretive than the Cosa Nostra earlier this year by Jack Dromey (pictured below), the deputy general secretary of Unite and the former Labour treasurer.

But the unions aren't happy. In fact, apart from the buyout bosses – some of whom will be able to dodge the tax bullet fired by Alistair Darling – it's difficult to find many people who are jumping for joy at the Chancellor's surprise move.

"I think it's fair to say that many in the private equity world were expecting much worse," says Ernst & Young tax partner, Patrick Stevens. "Most will think the 18 per cent level is not wholly unreasonable."

Buyout chiefs may be breathing a collective sigh of relief, but for the rest of British business, the initial shock is turning to palpable anger.

An unholy alliance has been formed between unions, venture capitalists, small firms, Labour politicians, Tory politicians, the CBI and the life insurance sector. The list goes on and on.

One by one, leading figures came out last week to criticise Mr Darling's "simplification" of the tax system as a misguided fudge that has fallen so wide of the mark as to be almost embarrassing.

Paul Kenny, the general secretary of the GMB, described the introduction of a flat-rate CGT as "a disaster" and urged the Chancellor to "look again at the effect of this change".

At the opposite end of the political spectrum, Richard Lambert, the director-general of the CBI, said the measures unveiled in the Chancellor's pre-Budget report last Tuesday undermined a "10-year effort by this Government to promote enterprise and risk-taking within the UK".

For those risk-taking financiers and entrepreneurs, personified by the dream chasers on the BBC television programme Dragons' Den, 2007 has certainly turned out to be a year to forget.

In his last Budget before becoming Prime Minister, Gordon Brown cut the symbolic headline rate of corporation tax from 30 to 28 per cent, which masked a jump in the level payable by smaller companies from 19 to 22 per cent by 2009.

For many, it all rather makes a mockery of the claims of Mr Brown that New Labour is a friend of the small businessman – with the courting of big business and the City a more plausible tactic.

"My message to business is – when you are ready to start out, start up, start investing or start hiring – this Government is on your side," said the then Chancellor amid the post-election hype of 1997.

The message that most businesses are now receiving from Number 11 seems quite the opposite. "How much do big companies have to be handed before smaller firms are given a slice of the pie?" asks an exasperated Matt Hardman, campaigns manager for the Forum of Private Business, adding that smaller firms were likely to get whacked further in order to subsidise the payment of London's controversial Crossrail project.

"This is the thin edge of the wedge, as the Government looks to make smaller businesses pay yet more," he says. "Our members already pay enough tax. If the principle of a supplementary business rate is not opposed, where will it stop? In a year's time, when local authorities need more money, will the threshold come down? We must not open the door to more levies on smaller companies."

The issue of a supplementary business rate has caused huge consternation, with the Federation of Small Business, the British Chambers of Commerce and the Institute of Directors (IoD) all up in arms.

"The proposed introduction of an SBR will rock UK businesses, not least because such a move increases costs without any correlation to a business's profits or their ability to pay," said the IoD.

Business might be squealing, but given the Government's previous form, all hope may not be lost yet. A couple of years ago it was forced into an embarrassing volte face over self-invested personal pensions, closing a 40 per cent tax break on second homes that millions had planned for to safeguard their retirement.

The switch on inheritance tax, seemingly motivated by political rather than economic reasoning, also shows that this Government might be for turning if the mood music is right.

"The whole statement from Darling was a load of codswallop," says Paul Maloney, campaign organiser for the GMB. "We urge him to go back to the drawing board and rethink things because his measures simply won't work.

"I think he's had a sneak peak at the Walker report [comm- issioned by the British Venture Capital Association to examine self-regulation and due later this autumn] and swallowed it whole.

"Why didn't he just wait until the elected officials on the Treasury Select Committee published their report first? It seems madness. And at the end of it the poor old small business entrepreneur gets hit the hardest."