Bosses’ tax disaster

Oct 15 2007 by Chloe Griffiths, The Journal

TAX changes announced by Chancellor Alistair Darling could devastate the region’s economy, business leaders in the North will say today.

The North East Chamber of Commerce (NECC) says Mr Darling’s efforts to close a loophole on private equity will leave entrepreneurs in the region facing an 80% tax hike, a rise that will have a huge impact on small businesses.

In the Pre-Budget report last week, the new Chancellor announced that from April 2008 all capital gains will be subject to a flat 18% charge.

The proposals will withdraw the capital gains tax taper relief – replacing a more complex system in which the rate could vary between 10% and 40% – a move the Government heralded as ensuring private equity chiefs pay fairer taxes.

But the NECC say it is the third inadvertent tax raid by the Treasury on small businesses following Gordon Brown’s rise in corporation tax in the Budget and the Rating Bill introduced to the House of Commons in May.

It has warned the move will endanger small businesses and could de-stabilise the economy by deterring entrepreneurs from selling a stake in their business.

NECC director of membership and policy Andrew Sugden said: “Thousands of entrepreneurs in the North-East who have built up small businesses over many years will now face an effective 80% tax rise on the money they will receive by selling a stake in their companies. This will have a serious impact on motivation for small businesses, which the North-East needs to play a significant role in driving economic growth.”

The move has alarmed business leaders so significantly that the UK’s four main business groups yesterday united to urge Mr Darling to suspend the changes.

The British Chambers of Commerce, the Confederation of British Industry (CBI), the Federation of Small Businesses and the Institute of Directors have collectively written an open letter to the Chancellor asking him to rethink the surprise proposals.

Their action comes after the industry bodies said the reaction of their members had been so “universally strong” following the announcement which came as “bolt out of the blue”.

The taper was introduced by Gordon Brown in 1998 in an attempt to encourage enterprise in the UK.

While last Tuesday’s announcement has been viewed largely as an attempt to rein in the earnings of private equity firms, business leaders argue it will be small businesses that will end up paying the cost.

The groups’ letter slams the decision, saying it “will be felt throughout the economy” and will “discourage business angels and venture capitalists from investing for the long term”.

Mr Sugden added: “These reforms come at a particularly unhelpful time for the North-East economy, which has enjoyed unprecedented growth in recent years.”

He added: “The impact of these tax increases only serves to seriously reduce the incentives for enterprise and puts both existing growth levels and the intended surge in new start-ups at risk.”

Representatives of the four industry bodies plan to meet with the Chancellor in a bid to make him resolve the situation.

No-one from the Treasury was available for comment yesterday.

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Union fury at reports of £50m pay-outs

A TRADE union has accused bosses in the private equity industry of being “rotten to the core“ after reports that five top partners have received record breaking pay-outs of £50m each.

Bosses in CVC Capital were reported to have received the money, sparking a fresh row over the huge sums earned by private equity leaders.

It is believed the five will pay tax at the current rate of 10% on the pay-outs rather than the new higher rate of 18% announced by Chancellor Alistair Darling last week.

The GMB union, which has strongly criticised the private equity industry, reacted with fury to the reports.

General Secretary Paul Kenny said: “The fact that they each only pay 10% tax on this £50m pay-out shows how the Government have failed completely to deal with the abuse of the financial and tax systems by the private equity elite and shows that the system is rotten to its core.”

Mr Kenny accused private equity firms of destroying jobs.