The Fizz! Blog

U-Turn on new CGT rules

The government has already backtracked on the changes they are planning to make to CGT.  The proposed change to CGT to a flat rate of 18%, with taper relief being abolished, was widely criticised (including by me, before they even did it!) for removing a valuable incentive to entrepreneurship.  They have announced that, as a response, they are going to reintroduce retirement relief.

Three things immediately spring to mind.

Firstly, as is so often the case, the government are reintroducing something that they themselves abolished in the first place.

Secondly, many people don't start a business with the intention of working in/on it for the remainder of their working lives.  They have the intention of building it up and selling it on.  That's fine, and represents entrepreneurship, and is to be encouraged.  Retirement relief (at least if it's similar to the old version that Gordon abolished, which kicked in when you were 50 years old) will be of little use to those people.  The prospect that I may get a tax break in 17 years time is unlikely to incentivise me very much!  So this is another ill thought out response that doesn't actually address the problem once you scratch the surface of it.

Thirdly, I can't agree with the Telegraph's assertion that the government's ability to make a u-turn when a policy isn't properly thought through is a welcome thing.  If there had been any consultation on this with taxpayers and advisers - any at all - then the unfairness of the changes would have been apparent.  But time and time again, changes are brought in, conceived and drafted by people who have absolutely no practical experience in business whatsoever, without the slightest consultation with people who might be able to point out the practical difficulties that the proposed changes might present.  That's not good enough, not only because it sends out a message that the government is indifferent to the taxpayer, but also because it's just inefficient - why not get things right first time rather than adding layer after layer of amendments down the line?

Does the Chancellor know what "loophole" actually means?

No.  He just announced in the PBR that he is closing the "loophole" by which the private equity bosses discussed below pay only 10% tax on much of their income - by increasing the rate of CGT for everyone, not just for the private equity bosses.  So, just to be clear, the entire concept of Capital Gains Tax Business Taper Relief was therefore a loophole!  And who introduced that I wonder?  One G.Brown Esq.

From the two options I set out in the final paragraph of my previous post, Mr Darling opted for number two - increase CGT for everyone.

I find the whole thing amazing on two counts.  Firstly that the Chancellor can use the sloppy word "loophole" to describe something that he is abolishing in its entirety.  Secondly that an entire raft of legislation that has generally been seen as positive - BATR is well regarded generally - can be removed in what appears to be a headline-driven panic.  It's desparate, short-termist stuff.  Although after many years of observing this sort of behaviour by politicians of all shades, I accept that I should probably cease to be surprised.

Does anyone in the media know what "loophole" actually means?

A way of escaping a difficulty, especially an omission or ambiguity in the wording of a contract or law that provides a means of evading compliance.

The word loophole is being thrown around in the print and broadcast media a lot at present to describe the ability of private equity bosses to pay tax at a rate of 10% on some of their income.  In fact, it appears to be compulsory to describe this as a loophole.

It's nothing of the sort.  The taxpayers in question are buying businesses, increasing their value and then selling them on at a profit.  The tax system in this country says that if an individual sells a trading company after owning it for two or more years they need only pay tax on 25% of the profit.  That means that a 40% taxpayer effectively pays tax at 10% - of a million pound profit, only £250,000 is taxable, and tax at 40% is £100,000.  This is not a loophole, it's exactly how the system is supposed to work.  If you or I build up and sell on a business, we would certainly expect to take advantage of that rule.

When he introduced the rule, Gordon Brown trumpeted it as an incentive for enterprise.  In this case that appears to be exactly what it's doing.  Admittedly, some people believe that the private equity owners are doing little to improve the condition of the businesses they are buying and selling.  However, the market disagrees.  If someone can buy a business for £50 million and sell it on for £150 million then the market clearly thinks that the business is in a better state than it was.  If part of that process has been job losses then that's clearly sad for the people involved.  But private businesses aren't charities. 

If the government was to cave into pressure and change the rules - surely not, Gordon Brown would never change his mind on something, would he? - then they would appear to have two broad principles they could go with.  Option one, force the private equity owners of businesses to work under a different set of tax rules than the rest of us, because the numbers are bigger in their case.  That doesn't seem very fair to me.  Two, amend the rules so that we all pay more tax, private equity business owners and smaller scale entrepreneurs alike.  That seems unreasonable too.  We will see what the Pre-Budget Review brings this afternoon.