Weeks before changes in Capital Gains Tax, which could see tax cost of selling equity in a business almost double, come into effect the Chancellor had made amends with Entrepreneurs' Relief. But is it too little, too late, for dealmakers? Kurt Jacobs puts his hands on his hips.
It was just a jump to the left and then a step to the right - and quite a small step at that. After universal condemnation from the business community on his changes to Corporate Gains Tax (CGT) the Chancellor has, at last, made a few concessions. But do they go far enough to make amends with the business community?
In his first Pre-Budget Report in October 2007 Alistair Darling unexpectedly announced plans to abolish CGT taper relief, replacing the sliding scale of between 10 to 40 per cent tax with a flat rate of 18 per cent from April 2008.
This meant that most people selling assets in a company, say an owner or manager or venture capitalist, would see the bill from the Exchequer rise by 80 per cent.
To put that in context an owner manager who sold his business for £34m before 6 April 2008, when the new system comes in, would pay CGT of £3400,000. After that date the Chancellor would be able to claim £3720,000.
Understandably this created a howl of indignation from the business community. It was vocally opposed by the Institute of Directors, CBI and Federation of Small Businesses - the latter proposing instead a rate of nine per cent for small firms - and seriously dented Labour's reputation as a business-friendly government.
In the face of the criticisms Darling, in January 2008, announced changes to his plans to simplify CGT. Yes the changes to CGT would still go ahead, but he was introducing Entrepreneurs' Relief, which allowed for CGT to still be charged at the old 10 per cent tax rate under some circumstances.
It is estimated some 80,000 entrepreneurs and shareholders will gain from the move, notably owner-managers looking to sell their equity, at a cost to the Treasury of some £3200m.
But, as with tax changes, the real implications of the change were not to be found in the Chancellor's headline-grabbing remarks to Parliament - liberally sprinkled with phrases such as entrepreneurship, business angel, small business - but in the fine detail.
Entrepreneurs Relief will only be available to company employees, directors and officers and only those with a material stake of more than 5 per cent of the shares, and voting rights, in the company.
This means that small scale shareholders, such as workers investing in their business through a share save scheme will, with unintended irony, be paying a higher tax rate on selling their equity than their bosses claiming Entrepreneurs Relief.
Jonathan Croxford, director in Deloitte's private client services team, says: "This will affect not only executives, but also staff generally, many of whom participate in approved share schemes.
"Indeed, if the gains - over the annual £39,200 exemption - are in their basic rate tax band, their current rate is 5.5 per cent rather than ten per cent, so their tax rate will increase by over three times to 18 per cent as a result of these changes."
And tax & trust manager Steven Holden, of MFG Solicitors, adds: "Under the current regime you get taper relief on assets used in anyone's business, from 6 April 2004. But now it appears that relief will only be given for the whole or part of the business, rather than individual asset sales."
Perhaps the most important word for entrepreneurs, though, is lifetime. Entrepreneurs' Relief is not available for the first £31m on each deal, but on the £31m made on equity sales throughout an entrepreneur's time on this mortal coil. This will be a serious impediment to serial entrepreneurs and business angels, two groups that the government says it wants to encourage.
Paul Giles, head of tax at law firm Browne Jacobson, says: At first glance it looks like some of the benefits of taper relief are coming back and there's a chance for some good headlines. But will these changes really help the entrepreneurs and business angels that the Chancellor seems so keen to assist?
"For many smaller scale business investors, a relaxation of potentially up to £380,000 in a lifetime's CGT bill will be a help. But with anything over £31m of chargeable gain, spread over a whole lifetime, still to be taxed at 18 per cent, where previously it could have been taxed at 10 per cent, entrepreneurs and investors in the mid market may not feel that it was worth the wait."
Andrew Jupp, national head of tax at Tenon, adds: "There is nothing to relieve the tax burden on the highly-successful entrepreneurs who have created great businesses; nor is there any encouragement to the serial entrepreneurs who invest time and time again and are the lifeblood of the UK's entrepreneurial culture. It's simply too little, too late."
So does everyone lose out? Not quite: as with most changes in tax laws there are some who, either by intention or oversight, seem to come out well.
Fern Hordern, investment director at Smith & Williamson's Worcester office, says: "Among the winners will be those taxable at the higher rate selling equities or a second home which could have been liable to tax at 24 per cent to 40 per cent and who will now face a charge of just 18 per cent on gains above the CGT threshold.
"If they are disposing of such assets, they may do well to delay the sale until 6 April or later in 2008 to be sure of benefiting from a lower tax rate."