CAN THE GOVERNMENT AFFORD TO MAKE THE NECESSARY CAPITAL GAINS TAX CHANGES?
13/12/07 | 12:16
David Frost, Director General of the British Chambers of Commerce, said:
“As the Chancellor said that an announcement on Capital Gains Tax was going to be made before Christmas, today’s statement has come as a surprise. There appears to be confusion in the Treasury about the reforms that they are planning to make, leaving businesses in a state of flux over their taxes.
“The reforms to CGT announced earlier this year are set to raise an extra £900 million in tax from businesses, money that has already been earmarked for public expenditure. We are beginning to wonder if the Treasury can afford to make the necessary changes.”
ENDS
MEDIA CONTACT:NOTES TO EDITORS:The BCC presented a number of proposals to the Treasury for reform of Capital Gains Tax
The proposals that were presented to the Treasury were given with two caveats:
1) All of the proposals should be viewed as measures which would not have been necessary had the decision on taper relief been subject to proper consultation and scrutiny
2) Any alternatives produced at this stage will inevitably be detrimental to the long-term aim of simplifying the tax system to enhance UK business competitiveness.
The proposals presented were:
Restore reinvestment relief
Reinvestment roll-over relief (as broadly existed prior to 1998) should be reintroduced for all investments in unquoted trading companies to encourage an entrepreneur to start new companies once they have disposed of an old trading company or trading group. In turn the new owners of existing companies may then benefit from roll-over relief in relation to their past disposals of trading companies (or business assets). This has the very great merit of encouraging new businesses to be created and existing companies to expand and grow.
Re-basing the value of assets to March 2002 On two occasions re-basing has taken place for CGT. Re-basing the value of an asset to a particular point in time essentially exempts from tax any capital gain in the asset to that point in time. There have been two previous re-basing’s: 1965 and 1982. It is regrettable that a relief for inflation is not included within the new regime as from an economic perspective no gain relating to a general increase in the price level should be taxed.
Retaining Indexation from March 1982 to April 1998
Indexation, along with the re-basing in 1982, is the means by which the effects of inflation on asset values are eliminated for calculation of CGT liabilities. Almost 38 per cent of the chargeable gain value of assets disposed of in 2004-05 was of assets held for 10 years or more and likely to be attracting some form of indexation allowance. Introducing indexation for individuals and trusts in the same way as the indexation allowance works for companies would protect capital gains from the effects of inflation.
Retaining the current rate of CGT taper relief but increase the length of time an asset has to be held to claim it from 2 to 5 years
The current system of CGT taper relief is simple to understand and is an entrepreneur friendly measure. If the Government is concerned to ensure that entrepreneurs who invest and grow their business are rewarded, a better approach than changing the level of the taper relief would be to increase the length of time a business asset has to be held to benefit from it. This would also retain the distinction between business and non-business assets.
No further rise in the small companies corporation Tax Rate
In the March 2007 Budget Report, the then Chancellor Gordon Brown announced a three year plan to increase the small companies’ corporation tax rate from 19 per cent in 2006-07 to 22 per cent by 2009-10. When the 22 per cent rate is introduced all small companies with profits of less than £576,925 will face higher tax liabilities compared to their 2006-07 position. The rate should not rise above the current 20 per cent rate.
The British Chambers of Commerce (BCC) is the National Voice of Local Business.
The BCC sits at the heart of a powerful nationwide network of Accredited Chambers of Commerce serving business across the UK, which employ over five million people.