Mike Cherry has spent 37 years working for his family business, Just Wood,
which was founded by his great-grandfather, Wil-liam Henry Mason, in 1897.
Cherry toils for up to 70 hours a week at the small company, based just
outside Burton-on-Trent, which supplies cask closures to the brewing
industry and runs a separate division selling personalised wooden giftware.
It is a successful enterprise, but Cherry is facing a dilemma that will be
familiar to many entrepreneurs – his children have no desire to carry on the
family tradition. They have mapped out an alternative career working as
senior managers for Tesco, the supermar-ket chain.
Cherry, 53, hoped eventually to sell the business to pay for his retirement.
But Alistair Darling’s decision to raise capital-gains tax for small
companies from 10% to 18% has blown a hole in his plans, leaving him shocked
and angry.
“They have taken a sledgehammer to crack a nut,” said Cherry. “Most small
businesses don’t provide a pension, so many owners use the sale to provide
for their old age.
“This will put off an awful lot of people from becoming entrepreneurs and it
will hit those who want to diversify.”
The tax hike, he believes, is particularly unfair on small businesses because
they cannot easily relocate overseas or minimise tax payments.
“We are very much part of our local community,” he said. “We can’t just up
sticks and move location.”
Cherry is not alone. On Tuesday, Darling delivered his first big statement as
chancellor, the prebudget report and comprehensive spending review.
Those watching in the House of Commons noted that he offered even fewer
rhetorical flourishes than his predecessor, who was smirking on the bench
behind him as Darling announced a series of measures first proposed by the
Tories a week earlier, including a doubling of the inheritance-tax threshold
for husbands and wives from £300,000 to £600,000.
Darling could be forgiven for looking less than effusive. By the time the
prebudget report documents went off to the printers on Monday, he had
endured a yo-yo ride of not knowing whether his announcements were meant to
kick-start Labour’s autumn general election campaign or establish himself as
his own man in the job after Brown’s 10-year stint.
In the event he did neither, falling between two stools. Not only was his
theft of Tory ideas widely seen as crass politically, but it was plain that
Brown was still running the show as puppet master.
But even Darling’s low-key delivery could not conceal his bombshell
announcement on capital-gains tax.
Within minutes of him sitting down after his half-hour speech, the phones were
red hot at the Federation of Small Businesses and other organisations, as
members rang in their thousands to express their disbelief and anger.
The owner of a health spa in Scotland for 24 years, who is considering
retiring, will see his capital-gains tax bill rise from £19,000 to more than
£54,000 if he cannot sell up before April, when the new rules come in.
Chris Twistleton of Kettering, has put his motor garage on the market and been
told by his accountants that his tax bill on the sale will jump from £30,000
to £72,000.
“It’s an immense amount when you want to retire,” he said. “It’s disgraceful.”
Throughout the business community, the anger has been mounting since Darling’s
announcement. Amid all the earlier disquiet among firms about rising taxes
and red tape under new Labour, one bright shining star stood out. Gordon
Brown’s reform of capital-gains tax, the so-called taper relief system,
recognised the contribution of entrepreneurs to Britain’s economy.
Those who had built up a business and sold it on, either because they were
serial entrepreneurs who wanted a new challenge or, more usually, to retire,
would face a capital-gains tax of only 10%. It was a genuinely
pro-enterprise policy. Now, without warning, it is being scrapped.
“Taper relief has been the best thing since sliced bread,” said Chris Lane,
one of The Sunday Times Business Doctors and director of Kingston Smith, a
firm that advises small businesses. “Now the chancellor has pulled the rug
out. The government doesn’t seem to care about the small-business community.
It is ignoring the engine room of the British economy.”
He predicts a rush of owners trying to sell their businesses before the new
regime comes in next April. “There is going to be a panic,” he said.
FUELLING the anger among small and medium-sized firms is the belief that
they are paying the price of the excesses of a small number of
private-equity bosses, who were criticised by the unions for paying tax of
only 10% on the “carried interest” that makes up much of their income.
The Treasury denies this, insisting that the reform was driven by the new
chancellor’s desire to simplify the tax system, rather than by the political
imperative of clamping down on private equity.
That cuts little ice with small firms and their advisers.
“In trying to make the tax regime of private-equity company bosses fairer, the
chancellor has penalised successful businesses that have been built up over
many years,” said Peter Done, managing director of Peninsula, a consultancy.
“This was one of the biggest initiatives for businesses to grow, expand and
employ more people, and quite frankly it’s a kick in the teeth for small
businesses.”
Terry Smith, chairman of Collins Stewart, put it more colour-fully: “The idea
this is going to stop the tax avoidance in private equity is preposterous.
It is not so much a case of using a sledgehammer to crack a nut – he’s
missed the nut and hit everybody else.”
Even one of the unions that had campaigned hardest for a clampdown on private
equity, disowned Darling’s changes.
In a letter to Darling, Paul Kenny, GMB general secretary, said the union
welcomed the fact that the government recognised the need to close the
private-equity industry’s tax loopholes but it disagreed strongly with the
way the chancellor had chosen to go about it.
“The chancellor needs to go back to the drawing board because the proposals do
not close the loopholes but do have adverse effects elsewhere,” Kenny wrote.
“The GMB has always stated that it welcomed the use of the taper tax in its
fundamental and intended role of helping new businesses to grow and develop.
“The introduction of the flat rate 18% is a disaster for these same new
businesses and the chancellor should look again at the effect of this
change.” ON Friday, above the bustle of London’s Tottenham Court Road,
leaders and representatives of Britain’s main business organisations met at
the CBI’s Centre Point headquarters to devise a coordinated response to the
tax change.
Richard Lambert, its director-general and sometime adviser to Brown, warned
that the change would undermine “the 10-year effort by this government to
promote enterprise and risk-taking”.
At the meeting were the CBI, its traditional deadly rival the Institute of
Directors and the Federation of Small Businesses. On the phone from Glasgow
was David Frost, director-general of the British Chambers of Commerce (BCC).
Other business bodies have lent their support.
The question was asked: had anybody an inkling this change was going to
happen? There was a collective shaking of heads around the table, even from
those who had met the chancellor only days earlier to present their
submissions for the prebudget report. The tax change came out of the blue.
John Cridland, the CBI’s deputy director-general, led the discussion. “We are
all equally concerned about what the government did on CGT,” he said. “All
of us have had our e-mail inboxes full and our phones red hot as a result of
this. It doesn’t happen often, but that’s why we have got together.
“Our new message is that, given the strength of business views on this, we
urge the chancellor to pause, to consult, and find an appropriate solution.”
The BCC’s Frost agreed, saying his phone had not stopped ringing. “We
represent small and medium-sized entrepreneurs who have built up their
businesses. They are shaking their heads in disbelief.
“People who buy and sell property will gain at the expense of genuine
entrepreneurs. I have never known a reaction like this from the small and
medium-sized business community.”
Stephen Alambritis of the Federation of Small Businesses agreed. “We are
talking about people who have built up businesses for 20 or 30 years and
this is their pension,” he said. “This really is of great concern to
family-owned businesses.”
Richard Baron, head of taxation at the Institute of Directors, pointed out
that many businesses face a double whammy. Not only will their capital-gains
bill go up by at least 80% because of the rise in tax from 10% to 18%, but
they will also lose the benefits of indexation on long-held assets. Some of
the extra tax they pay, in other words, will be purely as a result of
inflation in the 1970s and 1980s.
“Gordon Brown has always talked about the importance of business entry and
exits in improving Britain’s productivity,” said Graeme Leach, the chief
economist at the Institute of Directors. “The Treasury has to realise that
behind our protests about this there is a real wall of anger.” As the
meeting went on, others pointed out the wider implications.
Ian McCafferty, the CBI’s chief economic adviser, said that the hit on
business from the tax rise could be as much as £2 billion a year because the
Treasury’s figure of £900m was a net figure and there would be significant
nonbusiness gainers from the change.
He also pointed out that 1.7m people in company share schemes would be hit.
Nor was this the first hit for smaller businesses. In his final budget in
March, Brown announced with a flourish that he was cutting the main rate of
corporation tax from 30% to 28%. But this was balanced by a rise in the
smaller companies’ rate from 19% to 22%, raising £600m a year extra from
small firms by 2011. If smaller businesses felt slighted then, they feel
betrayed now.
“We need to talk to the Treasury to find out what the logic trail was behind
this change,” said Cridland. “And this also means saying to the chancellor
suspend what you were going ot do next April.”
The fight is on.
BUSINESS will hope that the bashing the government is getting on CGT will
bring a change of heart between now and April. Economists, however, warn
that in what now looks like a two-year run-up to the next election, public
spending is likely to drift above the 2.1% annual real increase announced by
Darling, and the pressure for further tax rises on business will persist.
The prebudget report announced significant upward revisions to public
borrowing.
“These medium-term fiscal plans are as credible as the prime minister’s claim
that his decision not to call a near-term election did not depend on the
opinion polls,” said Michael Saunders, an economist with Citigroup. “If the
economy slows sharply in coming years, the government will face a painful
choice between ugly fiscal deficits and sharp fiscal cut-backs.”
The Institute for Fiscal Studies says the risk of the Treasury breaking one of
its fiscal rules – keeping government debt below 40% of gross domestic
product – has grown significantly.
Robert Chote, its director, said: “Remind yourself why the Treasury is having
to squeeze public spending and push up the tax burden over the next few
years: it is because a blow to revenues from problems in the financial
sector early in Labour’s second term turned out year-after-year to be much
deeper and longer-lasting than the Treasury thought. The government must be
hoping devoutly history is not about to repeat itself.”
The Treasury, meanwhile, is offering little comfort that it will bend on the
new regime for CGT. The £900m annually that the government will eventually
raise from the change has been “scored” in the public finances, and will not
easily be replaced from elsewhere.
The Treasury rejects suggestions it should have consulted on the change. The
reaction from business was anticipated, say insiders, and in any
consultation “the chorus from the losers” would always have drowned out
those who back the change.
“When people have settled down, they will see it is still a very competitive
rate,” a senior Treasury official said. “Has it really blunted the
entrepreneur-ial incentive at 18%?”
Many in business believe it has, and that Labour has at a stroke destroyed its
reputation for supporting Britain’s entrepreneurs.
There are rumours that the tax change did not go through the normal rigorous
process of analysis within the Treasury and the Revenue & Customs
department, possibly because it was a very late addition to the government’s
plans.
But perhaps the biggest puzzle is the attitude of Brown himself. Having worked
hard over 10 years at the Treasury to have shown he was enterprise-friendly,
he boasted publicly and privately of the success of the taper relief system
for CGT.
When business people challenged him privately on Labour’s tax-raising agenda,
he always pointed to the 10% CGT rate as an example of what the government
was doing to encourage entrepreneurs.
Now, in the first important Treasury announcement since his move to Downing
Street, his capital-gains tax legacy has been torn up, with his clear
connivance.
Even more puzzling is that Darling’s tax manoeuvres risk alienating a
community that Brown has worked hard to keep on side.
They may have to wait two years to exercise it, but the business vote is
tipping fast back in the Tories’ direction.
