Business tax reform being considered by Chancellor

Alistair Darling, the Chancellor of the Exchequer, has been at the centre of concern over business taxes, following the furore over the generous tax breaks given to Private Equity Partnerships and the recent revelation, in a National Audit Office report, that a third of the UK's biggest businesses paid no corporation tax in the last financial year.

It is the taxes on the Private Equity industry that look most likely to face reform since the huge deals hit the headlines earlier in the summer and it was revealed that many top executives at Private Equity firms paid very little personal tax. They achieved this mainly by using capital gains tax relief to maximum advantage and the use of debt (for more detailed analysis of this please refer to our July issue).

However, Mr Darling has soothed the fears of buyout executives, by speaking out about his reluctance to make any swift or drastic changes in a "knee-jerk" reaction. The Chancellor of the Exchequer has discussed his intention to explore possible outcomes for the economy, saying "When or if we make any changes, they must be made at the proper time". Given the turmoil in the debt markets then this is perhaps not the proper time!

The treasury is considering a number of possible reforms, including extending the taper relief on capital gains tax on business assets period from two to five years, which would hopefully result in promoting the government's original drive to encourage longer-term investing.

A distinction may also be made between "mega deals", which will be taxed more heavily than smaller venture capitalists or entrepreneurs selling their businesses. The treasury aims to ensure tax cuts are available to those who need them most, rather than property tycoons or wealthy private equity executives.

The treasury is also considering raising the base rate of capital gains tax from 10 per cent to 20 per cent, for investments classed as business assets. Although this has raised concerns that it will make the US or parts of continental Europe more attractive than the UK capital gains system, there are thought to be growing calls for a similar move in the US.

Remaining concerns are the effects the suggested reforms may have on employee shareholders, entrepreneurs and individual Aim-market investors. A possible solution for employee shareholders could be to make the lowest capital gains rate available to only those who own shares in their main employer. However, it has been estimated that in particular lengthening the taper relief period could cost individual Aim-listed share investors up to £1.42bn over three years.

Tax accountants are warning that reforms could result in pushing entrepreneurs out of the UK.

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