BRITAIN’s small businesses have reacted with a mixture of relief, disbelief and disappointment after the chancellor made a u-turn in his plans for capital-gains tax.

Last October Alistair Darling announced that he was scrapping business asset taper relief, a move that would increase effective capital-gains tax from 10% to 18% for businesses being sold. Small firms were furious and lobbied against the move.

Under his revised proposals unveiled last week, all businesses will now pay 10% capital-gains tax on profits of up to £1m and then 18% on any profits above £1m.

Announcing the reforms, Darling said: “The proposal remains in line with the government’s objective of keeping the tax system as simple as possible.”

He estimated that 80,000 small-business owners and investors would benefit from his reforms, saying that 90% of them would have their entire gain taxed at 10%.

Small-business owners expressed relief that they had been spared an 80% rise in capital-gains tax from April, but larger-scale entrepreneurs were dismayed that they will not escape the rise, which should bring in £700m for the government.

However, everyone was furious at the way the government had handled the whole saga, pointing out that the chancellor had left them in a state of uncertainty for almost four months.

Simon Briault, a spokesman for the Federation of Small Businesses, said: “A lot of damage has been done to the relationship between small businesses and the government over the way this whole thing was handled. Four months of not knowing whether they should sell their businesses has been a nightmare for small-firm owners.”

Richard Lambert, director-general of the CBI employers’ body, said: “This tax hike has been badly handled from start to finish. It was rushed out without consultation and there has been precious little since, despite the interminable wait for these revised plans. The relationship between government and business has been damaged by this affair and will take time and effort to rebuild.”

Lambert also attacked the decision to limit the relief to a profit of £1m, saying: “These revised measures will do nothing to help the real business powerhouses of this country. Although £1m might sound a lot, it could have been built up over 20 or 30 years. It is clear that the real wealth and job creators of the UK’s economy, selling assets for a lot more, will be seriously clobbered. Today’s changes still discriminate against the long-term holding of assets, in favour of short-termism.”

Under the revised proposals, capital gains from the sale of businesses made on different occasions will qualify for the 10% rate up to a cumulative lifetime total of £1m profit. The 10% rate will also apply to business angels and investors who take a stake of at least 5% in a company. The changes will come into effect in April.

One person who is extremely relieved by the chancellor’s latest reforms is Richard Drew, who owns the Arches Guest House in Whitby, North Yorkshire, with his wife Ruth. He had been hoping to sell his business to fund his retirement but had been thrown into uncertainty by the chancellor’s original announcement, which would have meant that his capital-gains tax bill would rise by 80% from April.

“We had been looking to sell up and retire and the chancellor’s original statement in October was a bombshell,” he said. “The increase would have meant that we would have had to pay an extra £40,000 in capital-gains tax, which is a huge amount of money to us. We were having to choose between selling the business at a bargain basement price or facing the prospect of having to keep on working. Now we can relax and sell the business for what it is worth.”

However, Drew was deeply critical of the way the government had gone about it, saying: “The past four months have been very stressful. I don’t think the government had thought this through at all.”

But Duncan Cheatle, the founder of the Supper Club, a networking organisation for entrepreneurs with fast-growing businesses that have a turnover of more than £1m, is not at all happy.

“It is very disappointing,” he said. “It is penalising those who are really driving growth and creating new jobs in this country. They have been kicked in the teeth. It is a disincentive to taking on risk because there is now no difference in terms of capital-gains tax between setting up a business and investing in nonbusiness assets.”

Cheatle warned that the chancellor’s hope of raising revenue by increasing capital-gains tax to 18% for profits above £1m would backfire because it would encourage people to look at ways of avoiding tax.

“People will consider setting up a business overseas or will look to offshore ownership through trusts,” he said.

Peter Harrup, tax partner at accountants PKF, warned that the chancellor’s reforms would lead to yet more tax complexity for small-business owners and eventually the new rules would need to be backed up by a raft of antiavoidance legislation.

He said: “Rather than simplify the system, the chancellor is introducing new layers of complexity. In future years, we can look forward to an endless array of new rules to try to shut off all the loopholes that they haven’t even begun to think of.”