Ostensibly business-friendly and designed to simplify the system, the measures announced by Chancellor Alistair Darling in his 9 October Pre-Budget Statement, which should mostly come into force in April 2008, include a cut in the principal corporation tax rate from 30 to 28 per cent and a replacement of the ten, 20 and 40 per cent capital gains tax (CGT) bands with a single rate of 18 per cent.

The tax reliefs available under the Enterprise Investment Scheme (EIS) – 20 per cent of the investment cost deducted from income tax and capital gains tax deferred if the gains are realised after three years and reinvested in EIS-qualifying companies – are to remain. The maximum assets of a company eligible for EIS relief (which must employ fewer than 50 people) are being halved to £7 million, but otherwise the thrust of these changes is welcome.

The same cannot be said of the abolition of CGT taper relief on investments held for the long term, which effectively increases the rate after ten years from ten to 18 per cent. This measure puts short-term individual property speculators and stock market day traders on the same footing as creators of new businesses and their long-term supporters.

Unsurprisingly, taper relief removal has united the British Venture Capital Association, the Confederation of British Industry and other business bodies in condemnation. The move has prompted many thousands of signatures on email petitions to Downing Street.

A hot bed of tax
Gary Robins, chief executive of the Hotbed private investor syndicate, which has so far pumped £122 million into 56 ventures, typifies the reaction to what amounts to an 80 per cent CGT tax hike to a rate higher than the US, France or Italy. ‘This decision by the Government could have dire consequences for small and medium-sized businesses,’ he says. ‘There will no longer be any reason for investors to hold unquoted shares for a longer period.’

Sarah McVittie, founder of fast-growing online information provider Texperts, highlights another cause for concern: ‘We have phenomenally good staff who are always being approached by big companies. We can’t match the salaries they offer, so we try to keep our people with good employee share option schemes.’ The new measures threaten to reduce the tax attractions of such schemes.

These may be unintended consequences of a package designed to simplify the tax system and crack down on some of the tax perks enjoyed by high-profile private equity practitioners and ‘non-dom’ overseas residents operating in the UK financial markets. Ironically, many private equity practitioners have expressed relief that the Chancellor has not sought to treat their profit-sharing payouts as income and tax them at 40 per cent, as many had feared.

Plans to impose an extra £30,000 flat-rate tax on wealthy foreigners living in the UK for at least seven years seem to reflect a political consensus, despite suggestions that such measures could reduce London’s attractions as an international financial centre. In common with moves to curb ‘tax shifting’ between spouses and partners, they will probably generate handsome fees for tax accountants and lawyers.

No relief for family businesses
Fledgling entrepreneurs, especially those running family businesses, may be up in arms over the prospective ending of CGT taper relief. But individuals with non-business assets (such as properties), buy-to-let property investors or even stock market day traders now have the prospect of tax cuts from 20 or 40 per cent to 18 per cent.

If there is a rush to sell investments ahead of the ending of taper relief in April, not everyone will be displeased. David Thorp, fund manager of F&C’s Baronsmead venture capital trusts, says, ‘There could be a bonanza if those who are thinking of selling accelerate their plans and stimulate deal flow.’

He argues that the CGT changes will ‘impact both ways’. Entrepreneurs who are highly motivated to make money will want to act by next April. And third parties, such as business angels backing young private companies, will be less keen to shelter an 18 per cent CGT rate.

Neil Pamplin, tax director at accountant Grant Thornton, suggests the changes could cause at least a short-term ‘bubble in the market’, especially if there is ‘more cash chasing fewer companies eligible for EIS relief’. By contrast, he says, ‘the big losers will be entrepreneurial companies where owner-managers take big risks with their own money’.

A welcome ‘faux pas’
Some business sectors, however, are cheering. The increase in inheritance tax allowance to £700,000 for a couple is welcomed and Stuart Law, chief executive of property investment specialist Assetz, sees unexpected individual gainers from the CGT changes from what he calls the Chancellor’s ‘faux pas’.

Private investors in buy-to-let property will have their CGT liability cut from 40 to 18 per cent – and many of those who have over-aggressively refinanced these properties at well above their purchase price will no longer face CGT liabilities greater than their remaining equity.

Accountant Baker Tilly says winners from Darling’s proposals include individuals with shares in property investment companies, individuals directly holding properties that are not business assets and UK-resident partners in property investment partnerships. Meanwhile, losers include individuals with shares in property development or property trading companies or individual owners of properties currently qualifying as business assets.

Three cheers for simplicity
One of the Chancellor’s goals has been to simplify the tax system and this has won a welcome even from those squealing about CGT taper relief. ‘Everyone welcomes simplicity,’ declares F&C’s Thorp, who groans at the recollection of when he last grappled with a taper relief table.

A spokesperson for private equity investment group Apax Partners is clear: ‘We are relieved that the rules have been simplified. It was never true that we paid ten per cent CGT on partnership carried interest. In reality, it was a very complicated regime and it was difficult to assess what rate would apply.’

Apax is concerned about the impact the measures will have on ‘management teams and entrepreneurs’, but ‘they will not affect our long-term investment plans’.

Making a point stressed by many others in the investment business, Apax argues that the tax tail should anyway not wag the investment dog. ‘We invest because of underlying business logic,’ says the spokesperson. ‘We have a long-term plan for any company we back and we are unlikely to alter our course because of tax changes.’

And Modwenna Rees-Mogg of Venture Index backs that view: ‘Did you think about CGT when you started your business?’