Inside Track by Mark Stretton
Scotland’s emphatic victory over Ukraine in the weekend European football qualifiers must have been a rare high point for Gordon Brown in what was a disastrous week. After the egg-on-face general election farce, the newly appointed Prime Minister has, damagingly, allowed the conservatives to look like they are setting the political agenda, and appears to have blundered quite dramatically with the abolition of taper relief and the 10% capital gains tax (CGT) rate. In a pre-budget report last Tuesday, the government announced a series of measures first proposed by the Tories a week earlier, such as moving the inheritance threshold for married couples from £300,000 to £600,000. Then Alistair Darling, making his debut as Chancellor, made what seemed like a rare departure from Conservative policy to announce the sweeping reforms to CGT, that would see the tax bill of Britain’s entrepreneurs rise 80% on exit from a company. The move has been widely derided. The business community has accused this government of ignoring the engine room of the British economy, with Richard Lambert, director general of the CBI, saying the move undermined a 10-year effort to promote enterprise and risk-taking. It also means that buy-to-let property investors will pay the same rate as genuine entrepreneurs, and employees who buy into their company’s share investment schemes will have no incentive to hold the shares long-term. Although the government denies it, the move was motivated in part by a desire to clamp down on a clutch of private equity bosses who have in recent years used the system to pay 10% on ever-increasing multi-million pound paydays. There is also the £900m that the move will add to the public coffers. Terry Smith, the colourful chairman of broker Collins Stewart, told The Sunday Times: “The idea that 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.” How it will impact the leisure sector is unclear: will an 18% CGT rate really blunt or stifle the entrepreneurial spirit that is the lifeblood of the sector? It will certainly not stifle private equity-backed deals, which despite the crunching credit, continue a pace. For example, in the eating-out market Pret A Manger is poised to go to Bridgepoint while Wagamama, which was thought to be planning an IPO, looks set to be the subject of a tertiary buyout, with several private equity groups having approached current owner Lion Capital. Advisers and tax experts have suggested the move may accelerate deals at the smaller end of the M&A market, as entrepreneurs and family-owned businesses look to sell before the new CGT rate comes into force next March. What grates most is that the business community was not in anyway consulted about this before it was announced last week. In a rare show of unity for rival industry bodies, the CBI, The British Chambers of Commerce, the Institute of Directors and the Federation of Small Businesses are collaborating to jointly lobby the government to rethink the move. Mark Derry, the managing director of Loch Fyne, the restaurant-with-rooms operator, recently sold the business to Greene King, rolling over some of his investment. He said: “In the last few years we have created 1,500 jobs and almost £70m of value – if we are not the type of people that the government wants to incentivise, then who is? “It has all kinds of impact. Having a catchall is not the solution. This was all about public perceptions of private equity and fat cats – I cannot believe that ministers cannot write a piece of legislation that targets this very small group of people. “My biggest gripe is that you don’t join a game of football and then change the rules halfway through. As a management team you draft a plan and then the game changes. At 18% you are paying a smidgen below base-rate tax.” This tax increase fortifies the belief among business leaders that, after years of masterly misdirection and stealth-tax rises as Chancellor, Brown is not their man. As for Darling, those that have met him speak of someone who is acutely aware of business and the issues, and comes across far better in the flesh than on screen. But in the blink of an eye he has torn up a saving grace in Labour’s rampant tax-raising agenda. It is probably just as well that Brown scrapped his plan for an early election.