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Changes to capital gains tax ‘will not deter enterprise’ says Financial Times commentator

08 November 2007
Despite the chancellor Alistair Darling’s recent proposal to enforce a blanket rate of 18 per cent capital gains tax, entrepreneurs would still prevail, and it would “not deter enterprise”, according to Financial Times commentator John Kay.

The number of successful new businesses is determined by other factors, he said, with the main influence being the “general economic cycle”. He also said that the majority of new business owners have little ambition or capacity to employ more than one or two people and are therefore unlikely to ever encounter capital gains tax.

The new legislation would prevent private equity groups from cashing in on a loophole which currently allows them to declare bonuses as capital gains, and they are therefore only subject to the current level of tax, which is 10 per cent.

The chancellor’s decision to subject all businesses to the same level of tax has been met with much criticism, with lobbyists believing that such a hike in tax would damage new businesses and hinder start-ups.

Mr Kay has noted that since capital gains tax was introduced to Britain in 1965 it has been subject to much modification, but that very little research has been conducted to monitor the effects and consequences of these changes – research which could help now in guiding the way to new reform.

In light of the level of resistance to the proposed reform, Mr Darling has considered making a complete U turn; he is now contemplating changing the tax status of certain investments, such as enterprise investment schemes, so that small and start-up companies would get tax breaks.

It is not capital gains tax that determines a business’s success or failure, states Mr Kay, “The people who succeed are fired by enthusiasm for business in general and for their own in particular. The capital gains tax on eventual sale is rarely at the front of their minds.”

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