CandidCapital

Simplifying taxation is all very well, but are the changes to capital gains tax announced by the UK's finance minister going to achieve what he intended - and, by the way, what did he intend?

On Tuesday, Chancellor Alistair Darling announced a simplification of capital gains tax in his 2007 Pre-Budget Report and Comprehensive Spending Review. The reform is to sweep away all allowances and variations in the rate of capital gains tax (bar the £9,200 annual personal allowance) replacing them with a single rate of 18% from April 2008.

Some investment managers in the private equity equity industry are undoubtedly relieved that the change wasn't worse, but only 30 - 40 people annually were likely to pay the tax on carried interest gains, even in a good year, according to Robert Peston, BBC business editor, in his blog. Even the BVCA points out, as Peston does, that the change will be felt most heavily by thousands of small business owners as they sell out on retirement - which hardly advances the enterprise agenda set out by Gordon Brown when he announced the introduction of the effective 10% rate on the disposal of business assets in 1999.

At least the change has got rid of one of the government's bugbears over the tax treatment of the private equity industry. Unite (the union formed from the merger of the Transport & General and Amicus earlier this year) commented "Tax reforms on private equity are just and overdue ..." in its reaction to the Pre-Budget Report. Furthermore, according to the BBC, the Treasury stands to gain £350M of additional taxes in the next financial year.

So was simplification the real reason for the changes? As Robert Peston comments, "when John Major was prime minister in the 1990s, that would have been seen as the very epitome of a pro-capitalist reform". Yet the change furthers none of the objectives that capital gains tax regimes are meant to promote: encouraging enterprise and discouraging speculation. The status quo ante Tuesday was better in every respect, bar relieving immediate political and fiscal pressure.

11 October 2007

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